The Reserve Bank of India (‘RBI’) by its Notification dated October 24, 2016, has amended the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 (‘Regulations’). Now, a wholly owned subsidiary set up in India by a non-resident entity and operating in a sector where 100% foreign investment is allowed under the automatic route and where there are no FDI-linked conditions, may issue equity shares, preference shares, convertible debentures or warrants to the non-resident entity against pre-incorporation/preoperative expenses incurred by such non-resident entity, subject to a limit of 5% of its capital or USD 500,000, whichever is less.
This Notification also clarifies that amounts remitted to the investee company’s account, investor’s account in India or to any consultant, attorney or any material/service provider for expenses relating to incorporation or necessary for commencement of operations of the Indian entity, will qualify as ‘pre-incorporation/pre-operative expenses’.
With respect to reporting compliances, the Indian company is required to report such transaction to RBI within thirty days from the issue of equity shares/preference shares/convertible debentures/warrants but not later than one year from the date of its incorporation or such time as RBI or Government of India permits. Additionally, the Indian company is also required to submit a certificate from its statutory auditor to RBI, declaring that the pre-incorporation/preoperative expenses have been utilized for the purpose for which it was received.