Capitalization of Businesses:

A.      Equity Shares:

The customary method of capitalization of a business is by the issuance of equity shares.

For the foreign investor it is relevant to note that the equity capital invested by it can be repatriated on transfer of the shares or liquidation of the company.

The number of shares that can be issued is limited to the "authorized capital" stated in the Memorandum of Association. However, this can be increased so long as it is authorized by the Articles of Association.

B.      Preference Shares & Debentures:

Investment may also be made in a corporate entity upon purchase of its preference shares or debentures, subject to certain limitations: (i) The preference shares or debentures must be mandatorily convertible by their terms into equity shares and (ii) rupee denominated. If these conditions are not met, the investment will be treated as an "external commercial borrowing" (commonly referred to as ECB). The importance of convertibility to equity shares is to be treated as foreign direct investment and benefit from the laws relating to such investments.

C.     ADRs & GDRs:

Corporations are allowed to raise equity capital in overseas capital markets by way of issuing American Depository Receipts (ADRs) and Global Depository Receipts (GDRs). So long as the capital does not go beyond the prescribed limits for the specific industry, no prior permission is required for such "investment" and, where approval is required, it is done by the means prescribed for the industry.