Foreign investment in such issues will be permitted only as Re-denominated instruments
The finance ministry yesterday announced that Indian companies are free to raise foreign capital through preference shares and such investment will be treated as part of share capital and not as debt.
The ministry made it clear that foreign investments in preference shares would fall outside the ambit of external commercial borrowing (ECB) rules.
However, foreign investment in such issues will be permitted only as rupee-denominated instruments in accordance with the Companies Act, 1956.
Since preference shares will be treated as equity, all foreign investments flowing in through this route will be treated as foreign direct investment (FDI).
This implies that companies would either have to seek Reserve Bank clearances under the automatic approval window or apply to the Foreign Investment Promotion Board (FIPB) for a case by case clearance.
Automatic approvals up to 74 per cent are permitted in several sectors but an Foreign Investment Promotion Board clearance is necessary for holding stake above 74 per cent as well as to invest in the 35-odd industries classified under schedule III of the new industrial policy of 1991.
The finance ministry said that a proposal for foreign investment through preferences shares would, however, not require a separate approval from it.
Preference shares will be treated as foreign direct equity for purposes of sectoral caps on foreign equity provided the shares carry a conversion option as in the case of convertible cumulative preference shares (CCPs). However, preference shares can also be redeemable, which means that they are structured similar to debentures and earn the holder dividends till maturity. In this case, the ministry has, however, clarified that the shares would fall outside the foreign direct equity cap.
Foreign investments through preference shares will definitely allow the Indian corporates greater flexibility in using preference shares to seek foreign investment.
According to the finance ministry, the guidelines were being issued following queries from companies whether foreign investments through the preference share route could be made for financing projects and industries and whether preference shares would be treated as debt or equity.A yen for preference shares
Preference shares to be treated as equity
Foreign capital to be treated as FDI
Investment to be outside ECB cap
Only rupee-denominated preference shares allowed
Foreign capital through CCPs subject to sectoral cap
Redeemable preference shares outside FDI cap
