Navigating the New FDI Landscape: ITC’s Strategic Advantage

Recent clarification in the FDI policy permits companies in restricted sectors to allot bonus shares to foreign investors, enhancing market confidence for firms such as ITC.

Government Revises FDI Rules for Prohibited Sectors

In a move aimed at offering greater flexibility to companies operating in sectors where Foreign Direct Investment (FDI) is restricted, the Indian government has eased regulations allowing bonus shares to be issued to existing foreign shareholders. This step is expected to benefit entities like ITC Ltd, where British American Tobacco (BAT) holds a significant stake.
The Department for Promotion of Industry and Internal Trade (DPIIT) recently issued a clarification that allows companies in FDI-prohibited industries to issue bonus shares to their foreign stakeholders, provided that such actions do not lead to an increase in the foreign investors’ ownership percentage.

How ITC Could Benefit

ITC Ltd, a major player in India’s tobacco sector, falls under the category of businesses where FDI is not permitted. British American Tobacco (BAT), a prominent international tobacco corporation based in the United Kingdom, holds a 25.5% stake in ITC. With the latest clarification, BAT is now eligible to receive bonus shares from ITC without exceeding the current equity limit, offering ITC greater flexibility in managing capital distribution.
This policy shift may come as a relief to companies with legacy FDI that predates the imposition of sectoral restrictions. ITC, in particular, may find this an efficient way to manage reserves and enhance shareholder value without triggering regulatory concerns.

Legal Perspective on the Clarification

Legal experts are viewing the development as a positive shift in policy interpretation. Vaibhav Kakkar, a senior partner at Saraf and Partners, commented, “The clarification is based on the rationale that issuing bonus shares doesn’t involve any fresh capital inflow. It allows Indian firms to convert their accumulated reserves into equity, benefiting both Indian and foreign shareholders.”
The relaxation essentially enables capital restructuring in a compliant manner, while respecting the existing FDI caps. This facilitates a more balanced shareholder rights framework for companies that had historically attracted foreign investment under now-prohibited categories.

Clarification from DPIIT

According to DPIIT, “An Indian company operating in a sector where FDI is barred is allowed to issue bonus shares to its current foreign shareholders, provided that the foreign ownership percentage remains unchanged following the issuance.”
This measure aligns with the government’s aim to simplify procedures for businesses and eliminate unnecessary regulatory bottlenecks. The clarification ensures that companies with non-resident investors, who were lawfully inducted before regulatory restrictions came into effect, can still maintain equitable shareholder practices.

Sectors That Remain Off-Limits

Although the rules on bonus shares have been relaxed, foreign direct investment continues to be entirely restricted in certain industries. These include:
• Tobacco and related products
• Lottery businesses
• Gambling and betting (including casinos)
• Chit funds
• Real estate activities and farm house construction
• Atomic energy
• Railway operations
FDI is either permitted automatically or with government clearance in every other sector.

Past Approval Process and Bottlenecks

Until now, any move to issue bonus shares in prohibited sectors—even for companies with grandfathered foreign investments—required prior consent from regulatory bodies like the Reserve Bank of India (RBI). This often resulted in lengthy procedural delays.
A notable example was seen in the case of Godfrey Phillips India Limited, where the process of obtaining necessary approvals proved to be time-consuming. This new policy shift will cut down on such bureaucratic delays and improve operational efficiency.
Rudra Kumar Pandey, a partner at Shardul Amarchand Mangaldas & Co., highlighted the importance of this change: “This development will significantly streamline corporate actions for companies operating in sectors with FDI restrictions. It helps in maintaining parity in shareholder rights and boosts investor confidence.”

Final Thoughts

The government’s decision to permit bonus share issuance in FDI-prohibited sectors without altering foreign ownership levels is a significant regulatory improvement. This is particularly impactful for companies like ITC, where foreign ownership already exists within the allowed limit.
By acknowledging that bonus shares do not involve additional capital inflows, the clarification enables better capital management and equity distribution. It also marks a thoughtful step towards harmonizing investor rights while still upholding sector-specific restrictions.
This policy refinement, while seemingly technical, could enhance investor sentiment and provide a template for balanced FDI governance going forward.

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