Govt clarifies rules on issuing bonus shares to foreign investors in FDI-prohibited sectors

However, this is only permitted if the overall shareholding pattern remains unchanged. The Department for Promotion of Industry and Internal Trade (DPIIT) said that such transactions must follow all relevant laws and regulations.

“The issuance of bonus shares must comply with the applicable rules, laws, regulations and guidelines,” the DPIIT said in a note.

This clarification is now officially part of the FDI policy. With this move, companies in prohibited sectors like lottery, gambling, chit funds, and tobacco product manufacturing can issue bonus shares to non-resident shareholders.

But the key condition is that no fresh foreign investment should be added, and the percentage of ownership by foreign and Indian investors must remain the same.

"An Indian company engaged in a sector/activity prohibited for FDI is permitted to issue bonus shares to its pre-existing non-resident shareholders provided that the shareholding pattern of the non-resident shareholder does not change pursuant to the issuance of bonus shares," the DPIIT mentioned.

“This clarification is with regard to the permissibility of issuance of bonus shares to existing foreign shareholders by Indian companies engaged in sectors prohibited for FDI,” it added.

Most sectors in India allow FDI through the automatic route, where investors are only required to inform the Reserve Bank of India (RBI) after investing.

Under the government approval route, a foreign investor must obtain prior permission from the relevant ministry or department.

However, in certain areas like telecom, media, pharmaceuticals, and insurance, prior government approval is needed.

Some sensitive sectors, such as the ones mentioned above, do not allow any foreign investment. FDI is considered crucial for India's economic growth, especially in infrastructure development.

It also helps in managing the country’s balance of payments and supports the value of the Indian rupee.