The Hindu Business Line : Issue of shares against ‘franchisee rights’ not allowed

New Delhi, April 5 The Foreign Investment Promotion Board (FIPB) has clarified that issue of shares cannot be allowed against ‘rights’, particularly if it is an intangible asset such as ‘franchisee rights’.

The FDI policy currently permits issue of shares for consideration other than cash in case of lump sum fee, royalty and external commercial borrowings (ECBs) in convertible foreign currency under the automatic route subject to sectoral guidelines.

The issue of shares against internal accruals and import of second hand machinery has also been okayed on case-to-case basis.

But FIPB has clarified that it cannot be allowed against an intangible asset – franchisee rights.

The issue was discussed in the last meeting of FIPB in the context of a proposal pertaining to MD Group Inc, Canada. MD Group sought an approval to set up a 50:50 joint venture – Country Hearth Hotels (India) with Riddhi Siddhi Comfort Inn, where equity shares and preference shares would be issued for consideration other than cash (amounting to Rs 5 crore).

“The shares were proposed to be issued against 50 per cent rights of Country Hearth India Master Licence, to MD Group,” a source said.

The proposal does not involve any FDI inflow, as the issue of shares is against a consideration other than cash.

MD Group is a subsidiary of KI Group, operated and owned by same individuals and the company owns 50 per cent of the US-based Country Hearth Hotel Master Franchise for India; the principals plan to deploy their skills, education and experience to expand the Country Hearth Hotel chain in all categories throughout India, according to the proposal.

“The Hotel categories entail budget hotels and resorts, 4/5 star hotels with Country Hearth Plaza name, serviced flats and apartments. The balance 50 per cent of franchise has been purchased by Riddhi Siddhi Comfort Inn by remitting $1 million to KI Group,” the source said.

Riddhi Siddhi Comfort Inn (the Indian promoter) is operated by Mr Vivek Harvyasi.

“The company plans to be a fast growing hotel developer and the master franchisor for the US-based brand in India. Out of the subscribed capital of Rs 10 crore, about 50 per cent was proposed to be issued to MD Group against the rights of the franchise,” the proposal said.

However, during the FIPB the deliberation, the Department of Industrial Policy and Promotion (DIPP) did not support the proposal on the ground that issue of shares against ownership and rights is not permitted under the policy guidelines.

The Department of Economic Affairs conveyed its no-objection to the proposal subject to valuation guidelines and that the preference shares proposed to be issued are fully convertible. “It, however, felt that the valuation of the franchisee rights will be difficult,” sources said, adding that the proposal was rejected by FIPB.

The company officials could not be reached for comments.

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