Safeguards Exist To Pre-Empt Takeover Via Foreign Equity

Investment bankers advising leading foreign investors also add a new dimension, saying there is an unclear RBI guideline which says global depositary receipts (GDRs) redeemed into underlying shares need to be sold by the foreign investor within six months of conversion and registration, subject to RBI's discretionary extensions. Advisors to FIIs, in fact, say this is a problem since this is not explicitly mentioned in any GDR prospectus.

Technically, a single foreign entity can hold 51 per cent of a company's equity through the GDR route and a maximum of 10 per cent through the foreign institutional investor (FII) route. But as long as he holds it in the form of GDRs, he has no voting rights at all. Besides, a host of factors come into the play once he decides to redeem the GDRs in favour of underlying shares.

According to legal experts, the moment the foreign holder decides to redeem the GDR and take the underlying shares in his own name, RBI permissions become necessary under sections 19 and 21 (1)(b) of Fera. These sections deal with registration, holding and transferring shares of Indian companies by foreign entities. The RBI's six month clause is another problem.

"This also acts as a deterrent. While extensions do come, this is not made very clear in the offer documents," an investment banker said.

The other aspect is that till the foreign investor holds on to the shares, this remains as foreign direct investment (FDI), but once the shares are sold in the Indian market by the foreign investor, an FII can only pick it up keeping in mind the overall 24 per cent FII limit and the new 10 per cent individual FII holding cap.

The takeover regulations of Sebi are also another factor which keeps a check on the foreign stakeholding.