Note on Payment of dividend to Person outside India

Governing Law:

1. Companies Act, 1956 – Sections 205, 205A, 205C, 206, 206A, 207

2. FDI Policy

3. FEMA (Current Account Transactions) Rules, 2000

4. FEMA (Transfer or Issue of Security by a Person Resident outside India)
Regulations, 2000

Restrictions, if any, on repatriation:

Remittance of dividend is permitted if the foreign investment was as per the approved
scheme.

Dividends are freely repatriable without any restrictions (net after Tax deduction at
source or Dividend Distribution Tax, if any, as the case may be), excepting remittance
of dividend requires permission when investment was allowed subject to *dividend
balancing condition.

So, we need to check whether original investment was subject to dividend
balancing condition, if not, there are no restrictions.

The rate of dividend on preference shares or convertible preference shares issued
under Foreign Exchange Management (Transfer or issue of security by a person
resident outside India) Regulations, 2000 shall not exceed 300 basis points over the
Prime Lending Rate of State Bank of India prevailing as on the date of the Board
meeting of the company in which issue of such shares is recommended.

*Dividend Balancing:

Where a company is engaged in any of the industries in the consumer goods sector,
specified in Annexure E to Foreign Exchange Management (Transfer or issue of
security by a person resident outside India) Regulations, 2000, or in any other activity where the condition of dividend balancing has been stipulated in terms of the
provisions of Industrial Policy and Procedures notified by Secretariat for Industrial
Assistance, the cumulative outflow of foreign exchange on account of payment of
dividend over a period of seven years from the date of commencement of commercial
production to investors outside India shall not exceed cumulative amount of export
earning of the company during those years.

Provided that

(a) the restriction under this paragraph shall not apply

i) in respect of shares held in such a company by International Finance Corporation
(IFC), the Deustche Entwicklungs Gescelschaft (DEG), the Commonwealth
Development Corporation (CDC) and Asian Development Bank (ADB).

ii) to a company that has completed a period of seven years from the date of
commencement of commercial production,

(b) in case of an existing company that has issued fresh equity to persons resident
outside India under FEMA 20 Regulations, the restriction shall apply to the fresh
shares from the date of their issue.

List of 22 Industries in respect of which Dividend Balancing is applicable

1. Manufacture of food and food products
2. Manufacture of dairy products
3. Grain mill products
4. Manufacture of bakery products
5. Manufacture and refining of sugar (vacuum pan sugar factories)
6. Production of common salt
7. Manufacture of Hydrogenated oil (Vanaspati)
8. Tea processing
9. Coffee
10. Manufacture of beverages, tobacco and tobacco products
11. Distilling, rectifying and blending of spirits, wine industries, malt liquors
and malt, production of country liquors and toddy
12. Soft drinks and carbonated water industry
13. Manufacture of cigar, cigarettes, cheroot and cigarette tobacco
14. Manufacture of wood and wood products, furniture and fixtures
15. Manufacture of leather and fur/leather products
16. Tanning, curing, finishing, embossing and japanning of leather
17. Manufacture of footwear (excluding repair) except vulcanised for
moulded rubber or plastic footwear
18. Manufacture of footwear made primarily of vulcanised or moulded
products
19. Prophylactics (rubber contraceptive)
20. Motor cars
21. Entertainment electronics(VCRs, Colour TVs, CD Players, Tape
Recorders)
22. White goods(Domestic Refrigerators, Domestic Dishwashing Machines,
Programmable Domestic Washing Machines, Microwave Ovens,
Airconditioners).

Process of repatriation

Interalia, complying the provisions of Companies Act, 1945, Indian companies
intending to remit dividend to their non-resident shareholders should make an
application to an authorised dealer in Form RCD 1, supported by the particulars of
non-resident shareholding in form RCD 2 and other documents prescribed in the
form. In case of Interim Dividend application may be made by the company in India
to the authorised dealer by letter (in duplicate) enclosing only the form RCD 2 and a
copy of the Board Resolution approving the payment of interim dividend.

Main documents involved are:

• RCD 1
• RCD 2
• A2
• Board Resolution

As Indian companies are required to remit dividend to all their non-resident
shareholders through the normal banking channels, it is not necessary for them to
prepare individual dividend warrants for despatch to such non-resident shareholders.
[However, dividends due to non-resident shareholders who are not eligible for having
the amounts remitted to them abroad or those who wish to have the dividend paid in
India for credit to their non-resident accounts, may be paid by issuing individual
dividend warrants to their mandatee bankers in India for credit to their Ordinary Nonresident
Rupee (NRO) accounts. In cases where dividend is to be credited to NRO
accounts of the non-resident investors, there is no need to follow the procedure in above para.]

Procedure followed by Authorised Dealers

(its important to know so that company submits all the relevant information to
Authorised Dealers).

• Authorised dealers will verify the particulars with reference to the
documents submitted in support of the non-resident shareholding and
satisfy themselves that necessary permission of the Reserve Bank has
been obtained by the non-resident shareholders for purchase/holding of
the shares and/or the company has permission for issue of shares to the
non-residents and that the terms of the permission do not prohibit
remittance of dividend.

• Authorised dealers will also verify that the certificate given in Part ‘B’ of
the form RCD 1 has been properly completed by the company’s auditors
and specifically confirm on form A2 that they have verified the Reserve
Bank’s approval for purchase/holding/issue of the shares held by the nonresident
beneficiary and it does not prohibit the remittance of dividend.

• Authorised dealers will separately forward one copy of the application in
form RCD 1 (without its enclosures) to the office of Reserve Bank within
whose jurisdiction the Head/Registered Office of the company is situated,
after completing the certificate in Part C thereof.

• The Indian company/authorised dealers should ensure that the reference
number, date, etc. of Reserve Bank’s permission and the repatriable/nonrepatriable
nature of the shares/debentures/bonds held by the concerned
non-residents are incorporated on the counterfoil of the dividend warrants.