Partly-paid shares and warrants eligible instruments for FII investment: RBI

The Reserve Bank of India (RBI) has approved partly-paid equity shares and warrants issued by Indian companies as eligible instruments for foreign direct investment (FDI) and foreign portfolio investment (FPI).

Earlier, only equity shares and compulsorily convertible preference shares or debentures were recognised as FDI-compliant instruments.

''Partly paid equity shares and warrants issued by an Indian company in accordance with the provisions of the Companies Act, 2013 and the SEBI guidelines will be eligible instruments for the purpose of FDI and foreign portfolio investment (FPI) by foreign institutional investors (FIIs) and registered foreign portfolio investors (RFPIs) subject to compliance with FDI and FPI schemes'', RBI said in a notification on Monday.

For being eligible for FDI, the pricing of the share has to be made upfront and 25 per cent of the partly-paid equity shares should be realised upfront; the balance consideration towards fully-paid equity shares should be received within a period of 12 months.

However, the 12-month time period for receipt of the balance consideration may not be insisted upon where the issue size exceeds Rs500 crore and the issuer complies with Regulation 17 of the SEBI (Issue of Capital and Disclosure Requirements (ICDR)) Regulations regarding monitoring agency.

Similarly, in case of an unlisted Indian company, the balance consideration amount can be received after 12 months where the issue size exceeds Rs500 crore.

However, the investee company should appoint a monitoring agency on the same lines as required in case of a listed Indian company under the SEBI (ICDR) Regulations. Such monitoring agency (AD Category -1 bank) shall report to the investee company as prescribed by the SEBI regulations for listed companies.

Warrants
The pricing of the warrants and price / conversion formula should be determined upfront and 25 per cent of the consideration amount shall also be received upfront. The balance consideration towards fully paid-up equity shares should be received within a period of 18 months.

The price at the time of conversion should not in any case be lower than the fair value worked out, at the time of issuance of such warrants, in accordance with the extant FEMA Regulations and pricing guidelines stipulated by RBI from time to time. The investee company will be free to receive consideration more than the pre-agreed price.

The onus of compliance of all the conditions under FEMA as regards entry route, sectoral caps and all other conditions under FDI guidelines shall be on the investee company in case of issue of partly-paid shares / warrants as well as upon resident transferor or transferee in accordance with existing guidelines in case of transfer of partly-paid shares/warrants .

The Indian company whose activity / sector falls under government route would require prior approval of the Foreign Investment Promotion Board (FIPB) for issue of partly-paid shares / warrants.

The forfeiture of the amount paid upfront on non-payment of call money should be in accordance with the provisions of the Companies Act, 2013 and Income tax provisions, as applicable;

The company while issuing partly-paid shares or warrants should ensure that the sectoral caps are not breached even after the shares get fully paid-up or warrants get converted into fully paid equity shares.

Similarly, non-resident investors acquiring partly paid shares or convertible debentures or warrants should ensure that the sectoral caps are not breached even after the shares get fully paid-up or warrants get converted into fully paid equity shares.

The deferment of payment of consideration amount or shortfall in receipt of consideration amount as per applicable pricing guidelines by the foreign investors will not be covered under these guidelines so as to be treated as subscription to partly paid shares and warrants.

Thus, the investee company under these guidelines for issue/transfer of partly-paid shares / warrants, shall require to comply with the requirements under the Companies Act, 2013 for issuance of partly paid shares and warrants;

Non-resident Indians (NRIs) will also be eligible to invest on non-repatriation basis in partly-paid shares and warrants issued by Indian companies in accordance with the provisions of the Companies Act/ SEBI guidelines / Income tax provisions, as applicable.

Investments by NRIs in partly-paid shares and warrants on non-repatriation basis will also be subject to terms and conditions stipulated in amended FEMA rules.