Module: | MODULE A: INTERNATIONAL BANKING
Q154: Consider the following statements regarding the Non-Debt Instruments Rules and foreign shareholding constraints:
Statement 1. The Non-Debt Instruments Rules primarily regulate foreign capital investments in the equity instruments of domestic enterprises.
Statement 2. According to mid 2025 regulatory amendments, domestic companies operating in strictly prohibited sectors are now permitted to issue new equity shares for cash consideration to foreign investors.
Statement 3. Bonus shares can be lawfully issued to existing non-resident shareholders in prohibited sectors, provided the overall percentage of foreign ownership in the company remains completely unaltered.
Which of the above statements is/are correct?
Statement 2. According to mid 2025 regulatory amendments, domestic companies operating in strictly prohibited sectors are now permitted to issue new equity shares for cash consideration to foreign investors.
Statement 3. Bonus shares can be lawfully issued to existing non-resident shareholders in prohibited sectors, provided the overall percentage of foreign ownership in the company remains completely unaltered.
Which of the above statements is/are correct?
✅ Correct Answer: C
The correct combination is Statement 1 and 3. The Foreign Exchange Management Non-Debt Instruments Rules form the legal framework governing how foreign capital enters domestic equity markets.
Structurally, certain sensitive sectors of the economy are entirely prohibited from receiving any foreign direct investment.
However, a significant legal amendment published on 11 June 2025 introduced a vital corporate action exception.
It explicitly allowed domestic companies operating in these prohibited sectors to issue bonus shares to their existing non-resident shareholders.
A bonus share is a free additional share given to current shareholders based upon the number of shares they already own.
The critical legal condition for this issuance is that the corporate action must not alter the shareholding pattern; the foreign ownership percentage must remain exactly the same post-issuance.
Statement 2 is incorrect because prohibited sectors absolutely cannot issue new equity for fresh cash.
Historically, the law was ambiguous, causing companies in prohibited sectors to withhold legitimate bonus issues from legacy foreign investors out of fear of regulatory penalties.
The causal reasoning for this amendment was to protect the economic rights and proportional equity value of legacy foreign investors during standard corporate capitalization events, without actually injecting new foreign cash into restricted domestic sectors.
Structurally, certain sensitive sectors of the economy are entirely prohibited from receiving any foreign direct investment.
However, a significant legal amendment published on 11 June 2025 introduced a vital corporate action exception.
It explicitly allowed domestic companies operating in these prohibited sectors to issue bonus shares to their existing non-resident shareholders.
A bonus share is a free additional share given to current shareholders based upon the number of shares they already own.
The critical legal condition for this issuance is that the corporate action must not alter the shareholding pattern; the foreign ownership percentage must remain exactly the same post-issuance.
Statement 2 is incorrect because prohibited sectors absolutely cannot issue new equity for fresh cash.
Historically, the law was ambiguous, causing companies in prohibited sectors to withhold legitimate bonus issues from legacy foreign investors out of fear of regulatory penalties.
The causal reasoning for this amendment was to protect the economic rights and proportional equity value of legacy foreign investors during standard corporate capitalization events, without actually injecting new foreign cash into restricted domestic sectors.