Sebi to allow partly paid shares to foreign investors

According to sources, while the investment by foreign investors in public issues and rights issues would be eased, the rules around preferential issues would still remain a concern

The Securities and Exchange Board of India (Sebi) could soon allow Indian companies to issue partly paid-up shares and warrants to foreign investors.

According to people in the know, the norms are going to be streamlined for all forms of equity capital, including public issue and rights issue.

"While subscribing to shares and warrants, foreign investors would need to make an upfront payment of 25 per cent and the remaining payment would be made in a staggered fashion in next 18-20 months," said a source privy to the development.

The markets regulator is expected to issue a discussion paper in this regard soon and will likely amend the Issue of Capital Disclosure Regulations (ICDR) after public consultation.

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

Experts believe that having a time-frame for the subscription of warrants is a move in the right direction to prevent companies from misusing the instrument.

"In certain cases, to get voting rights on the board, promoters used to issue warrants to themselves or persons acting in concert which were later subscribed to or never got subscribed. This timely fashion of paying up for warrants in 18-20 months would ensure that the instrument would not be misused. Additionally, before formalising any regulation, Sebi should align it with the provisions of the Companies Act," said Harish H V, partner, Grant Thornton.

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

According to the ICDR, the issuer company can receive subscription money within 12 months of allotment of partly paid-up shares to investors, failing which the shares allotted to investors are forfeited.

Legal experts say the regulations by Sebi and RBI are similar, barring the requirement of 25 per cent upfront payment.

"Such alignment will ensure clarity and certainty in both the Sebi and RBI regulations and will ease foreign investments, particularly at this time when the country is opening for foreign fund flows, with the general outlook that India is becoming a good destination for investment and business," said Lalit Kumar, partner, J Sagar Associates.

According to sources, while the investment by foreign investors in public issues and rights issue would be eased, the rules around preferential issues would remain a concern.

While the RBI circular now allows partly paid-up shares even in cases of preferential issue or private placement of shares to a foreign investor but neither the Sebi regulation nor the new Companies Act, 2013 permits the same. The Companies Act, 1956, permitted the issue of partly paid-up shares on a preferential issue basis.

"This really nullifies the recent liberalisation made by RBI in allowing the issue of partly paid-up shares, while the Sebi regulations and Companies Act, 2013, prohibit the same. So it will really not ease investments for foreign investors. To give a real benefit to foreign investors, Sebi regulations and Companies Act, 2013, need to be amended. And Sebi should consider this aspect before finalising any rules," added Lalit.