Now, FDI treatment possible for partly paid-up shares

New RBI rules specify upfront 25% payment, balance within 12 months

In a move to make the investment regime more friendly, the Reserve Bank of India (RBI) has allowed partly paid equity shares and warrants issued by Indian companies to be eligible for being treated as foreign direct investment (FDI) and foreign portfolio investment (FPI).

Earlier, only equity shares and compulsorily convertible preference shares or debentures were recognised as FDI-compliant instruments.

RBI said these equity shares and warrants should be issued in accordance with the new Companies Act and the Securities and Exchange Board of India (Sebi) guidelines.

The price of these partly paid equity shares have to be determined upfront. The investors will have to bring in 25 per cent of the total consideration amount upfront, including the share premium. The balance amount towards fully paid equity shares has to be received within 12 months, said RBI.

RBI said the condition to bring the balance money within 12 months could be relaxed where the equity issue size was above Rs 500 crore and the issuer (listed company) complies with norms pertaining to the monitoring agency. Sebi norms require appointment of an agency to monitor such flows.

Similarly, leeway would be available for an unlisted Indian company. The balance consideration amount could flow in after 12 months where the issue size exceeds Rs 500 crore. However, the company has to appoint a monitoring agency on the same lines as required in the case of a listed Indian company, RBI added.

It is similarly so with warrants, where the pricing and price or conversion formula has to be determined upfront and 25 per cent of the consideration amount shall also be received upfront. The balance consideration towards fully paid-up equity shares shall be received within a period of 18 months, RBI said.

Also, the company while issuing partly paid shares or warrants shall ensure the sectoral caps are not breached even after the shares get fully paid-up or warrants get converted into fully paid equity shares. Beside, the Indian company whose activity or sector falls under the government route would require prior approval of the Foreign Investment Promotion Board for issue of partly paid shares or warrants.

Non-resident Indians shall also be eligible to invest on a non-repatriation basis in partly paid shares and warrants issued by Indian companies, as in the rules of the Companies Act, Sebi and income tax provisions.