An Indian listed company’s proposal to issue a single share at a significant premium to its foreign parent in lieu of an unfulfilled export advance by the parent has hit a regulatory hurdle.
E-Land Apparel, a firm listed on the BSE, had an agreement with its parent E-Land Singapore, to supply garments under a long-term contract. The company received an advance payment of $45 million, or ₹289 crore, from E-Land Singapore between 2016 and 2018. However, due to financial struggles, it has failed to fulfil its export obligations, and about $44.89 million remains unpaid.
Since E-Land Apparel cannot supply the goods or repay the advance, it proposed to convert this liability into equity by issuing one share at a significantly high premium to E-Land Singapore.
SEBI guidance
The company sought SEBI’s informal guidance on two key points. First, whether the issuance of equity shares against export advance repayment falls under regulations that deal with preferential allotment. Second, if issuing a single share at a significant premium complies with SEBI norms on pricing.
SEBI opined that this transaction does not fall under Regulation 163(3) because that rule allows issuing shares for “consideration other than cash” only in case of a share swap, while E-Land Apparel was proposing to issue shares in settlement of an outstanding liability.
“SEBI rightly observed that such kind of transaction does not fall under ‘issue of shares for consideration other than cash’. Under existing rules, only share swaps fall under the issue of shares for consideration other than cash. However, the question with respect to the issue of one equity share at an exorbitant premium remains unanswered,” said Gaurav Pingle, a practising Company Secretary.
Under the Companies Act, SEBI ICDR Regulations, and FEMA NDI Rules, issuance of shares to a non-resident on a preferential basis above the floor price is permissible, according to Binoy Parikh, Executive Director, Katalyst Advisors. However, in this case, the issuance of a single share at a significant premium effectively amounts to a write-back of liability without being classified as such.
Concerns
A few key concerns could have arisen had SEBI approved the transaction, said Parikh. First, under FEMA, prior RBI approval may be required, as export advance refunds are permitted only under specific conditions, while conversion into equity is not an automatic route.
Second, from a tax perspective, the absence of commercial substance in issuing shares at such a premium could lead to the transaction being treated as a taxable write-back in the Indian company’s hands. Lastly, given the associated party nature of the transaction, justifying arm’s-length pricing under transfer pricing regulations could be a significant challenge.
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