Ministry makes a case for policy to widen FDI ambit

Convertible warrants, partly paid-up shares to carry riders.

The ministry of commerce & Industry has prepared a draft proposal that could help Indian companies attract more foreign direct investment. The note recommends allowing FDI in domestic firms through the issue of partly-paid up shares and convertible warrants, but with certain riders.

Current FDI policy does not allow these forms of participation in Indian companies by foreign entities or non-resident Indians. However, requests for such issuances have been cleared by the Foreign Investment Promotion Board (FIPB) on a case-by-case basis.

The draft note for the Cabinet committee on economic affairs stipulates key conditions before allowing FDI through partly paid-up shares and convertible warrants. For instance, they require a minimum upfront payment of 25 per cent and full payment within 12 months of issue. Pricing would be determined at the time the instrument is issued.

 

Secondly, upon the issue of partly paid-up shares or convertible warrants, the full value represented by such instruments will count towards computation of FDI caps imposed on various industries. Telecom has an FDI cap of 74 per cent.
 

How do these instruments help?
They offer foreign investors opportunity to limit downside risk of their investment

What is the main condition?
Will require minimum upfront payment of 25% & full payment in 1 year of issue

Where do sectoral caps come in?
Full value of instruments will count in the computation of sectoral FDI caps 

In the case of proposals in sectors with additional conditions such as minimum capitalisation or a lock-in period for foreign investment (real estate companies, for instance, must have a minimum capitalisation and the original investment cannot be repatriated before three years), the unpaid part of the warrants or shares will be disregarded when computing minimum capitalisation.

However, the deadline for meeting minimum capitalisation norms will be 12 months from the date an instrument is issued or as indicated in the FDI policy of those sectors. Also, the lock-in period will be applicable to each tranche of investment.

The ministry’s note contends that partly paid-up shares and convertible warrants are common instruments around the world for international funding, as it offers an opportunity to limit the downside risk and has a well-defined upside for the foreign investor.

It argues that warrants, for instance, only confer an option on the subscriber to subscribe to the shares of an Indian company at a later date and until the option is exercised, it has no impact on the Indian assets.

Only after the option to subscribe to the shares is exercised by the warrant holders will the assets in India be altered and the issue of shares by the Indian company is in the nature of a capital account transaction.

The need for a change in policy and greater clarity in the rules emanated from the fact that FIPB has received a large number of requests to issue such instruments. Pending that, an inter-ministerial group decided that FIPB would recommend such cases, provided the warrants were converted within 12 months and partly paid-up shares were fully paid up within 6 months. Up to November 2010, the government has cleared over 60 proposals for the issue of such instruments.