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Foreign Direct Investments (FDI)– Issue of shares under FDI and refund of advance remittances

In terms of Foreign Exchange Management Regulations, 2000, a person resident outside India can purchase equity shares / compulsorily convertible preference shares and compulsorily convertible debentures (equity instruments) issued by an Indian company under the FDI policy and the Indian company is allowed to receive the amount of consideration in advance towards issue of such equity instruments, subject to the terms and conditions laid down therein.

Reserve Bank of India in consultation with the Government of India has decided that, with effect from November 29, 2007, the equity instruments should be issued within 180 days of the receipt of the inward remittance. In case, the equity instruments are not issued within 180 days from the date of receipt of the inward remittance or date of debit to the NRE/FCNR (B) account, the amount of consideration so received should be refunded immediately to the non-resident investor by outward remittance through normal banking channels or by credit to the NRE/FCNR (B) account, as the case may be. The AD Category – I banks may allow such outward remittances after satisfying themselves with the bonafides of the transactions and that no part of the remittance represents interest on the funds received as advance. Non-compliance with the above provision would be reckoned as a contravention under FEMA and could attract penal provisions.

2. In exceptional cases, refund of the amount of consideration outstanding beyond a period of 180 days from the date of receipt may be considered by the Reserve Bank on the merits of the case. Accordingly, AD Category – I banks may apply to the Regional Office concerned of Foreign Exchange Department of the Reserve Bank for refund of such advance.

3. In all cases where, as on November 28, 2007, 180 days have elapsed since receipt of funds and the equity instruments have not been issued, the companies are required to approach the Foreign Exchange Department of the Regional Office concerned of the Reserve Bank through their AD Category - I bank with a definite action plan either for allotment of equity instruments or for refund of the advance, with full details, for specific approval.

4. It is clarified that the advances against equity instruments may be received only where the FDI is allowed under the automatic route.

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