Easier norms to help smaller companies attract FDI flows

Jul 16 2014, 08:37 IST
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SummaryThe Reserve Bank of India’s (RBI) move to allow partly-paid equity shares and warrants issued by Indian companies

The Reserve Bank of India’s (RBI) move to allow partly-paid equity shares and warrants issued by Indian companies as eligible instruments for investments under the foreign direct investment (FDI) route is expected to help smaller Indian firms in reducing administrative hassles and attracting foreign capital more easily.

Till now, FDI was permitted through the government route by seeking Foreign Investment Promotion Board’s (FIPB) approval on a case-to-case basis which used to take a long time.

In partly-paid shares, the investor pays an intial certain minimum amount and promises to pay the remaining sum as an when asked by the company.

Sunil Kumar, senior manager — tax & regulatory services at Ernst & Young, believes that the RBI decision to include partly-paid shares and warrants as an eligible FDI instrument would make FDI investments easier and remove administrative hassles in seeking the FIPB approval.

“The RBI notification also provides clarity with regards to conversion period of such instruments apart from prescribing administrative procure related to reporting requirements,” added Kumar.

Though the foreign exchange management norms till now

allowed equity shares and compulsorily and mandatorily convertible preference shares/debentures — or those including optionality clause but without any option to exit at an assured price — to be recognised as FDI-compliant instrument, warrants and partly-paid shares were also used to attract capital as these allowed investors to defer paying the full amount at the time of investment.

As per the RBI circular on Monday, the pricing of the partly-paid equity shares and warrants shall be determined upfront and 25% of the total consideration shall also be received upfront with the balanceto be received within 12 months to 18 months towards fully-paid equity shares and warrants, respectively.

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