Foreign investors could now access partly paid up shares and warrants

Sebi aims to streamline rules for rights and public issue

The Securities and Exchange Board of India (Sebi) issued a discussion paper on Tuesday allowing Indian companies to issue partly paid-up shares and warrants to foreign investors.

The norms are going to be streamlined for all forms of equity capital, including public issue and rights issue. However, the issue of partly paid-up shares will not be allowed via the preferential route.

"While subscribing to shares and warrants, investors would need to make an upfront payment of 25 per cent," the Sebi discussion paper stated.

The paper did not change the period for making the balance payment for issuance of shares. However, the regulator has proposed to change the period of conversion for warrants from the existing 12 months to 18 months.

In case of non-exercise of warrants, the entire upfront payment would need to be forfeited by the issuer.

The move to ease the foreign fund flow is based on a reference from the finance ministry and a notification floated by the Reserve Bank of India (RBI) in July this year.

The RBI had proposed partly paid-up shares and warrants by Indian companies be eligible for foreign direct investment (FDI).

Before the RBI notification, only equity shares, convertible preferential shares and debentures were treated as FDI-compliant instruments.

According to experts, having a time-frame for the subscription of warrants is a move in the right direction to prevent companies from misusing the instrument.

While the investment by foreign investors in public issues and rights issue would be eased, the rules around preferential issues still remain a concern for many.

The RBI notification allows partly paid-up shares even in cases of preferential issue or private placement of shares to a foreign investor, but neither the proposed Sebi regulation nor the new Companies Act, 2013 permits the same.

"The Sebi discussion paper is aligning both the Sebi and RBI regulations. But, with making partly paid-up shares not applicable for preferential allotment, it would nullify the recent liberalisation made by RBI," said Lalit Kumar, Partner, J Sagar Associates.