PARTLY PAID EQUITY SHARES AND WARRANTS AS ELIGIBLE CAPITAL
With a view to boost foreign direct investment in the country,
the Department of Industrial Policy and Promotion
(DIPP) has on 15 September 2015 issued a press
note (Press Note 9) amending the existing
Consolidated Foreign Direct Investment Policy (FDI
Policy) in relation to the issuance of partly paid equity
shares and warrants by Indian companies to foreign investors.
In 2014, the Reserve Bank of India (RBI) had
specifically amended its guidelines on foreign investment to
include partly paid equity shares and warrants within the scope of
eligible capital instruments which may be issued by Indian
companies to foreign investors. The RBI had however, clarified that
prior approval of the Foreign Investment Promotion Board
(FIPB) will be required for the issuance of partly
paid equity shares and warrants to foreign investors by those
companies whose activities fall within the government route under
the FDI Policy.
Though the RBI amended its guidelines in 2014, the FDI Policy
continued to provide that warrants and partly paid shares may be
issued to persons resident outside India only after obtaining the
approval of the FIPB, irrespective of whether the investment was
being made under the automatic route or the approval route. This
led to an ambiguity between the RBI guidelines and the FDI Policy,
and the government (under the current FDI Policy) recognized that
there was a need to review its policy to bridge this gap.
Accordingly, Press Note 9 has now amended the current FDI Policy
to allow partly paid equity shares and warrants to be issued to
foreign investors without government approval in those sectors
where FDI is allowed under the automatic route. This amendment now
aligns DIPP's stance on partly paid equity shares and warrants
with the RBI's treatment of such instruments.
The key features of Press Note 9 are set out below.
(a) Partly paid equity shares and warrants (which include share
warrants under the Companies Act 2013) have now been included
within the definition of 'Capital' under the FDI
(b) Press Note 9 specifically provides that preference shares
and convertible debentures must be fully paid up, and must be
mandatorily and fully convertible.
(c) A new paragraph has been added to the FDI Policy which
provides that Indian companies may issue warrants and partly paid
equity shares to persons resident outside India subject to terms
and conditions stipulated by the RBI in this regard.
Some of the key conditions for the issuance of partly
paid equity shares and warrants as per the prevailing RBI
guidelines are summarized below.
- Adherence with sectoral caps: The issuing Indian
company and the non-resident investor need to ensure that sectoral
caps are not breached even after the equity shares get fully
paid-up, or warrants get converted into fully paid equity
- FIPB approval under the government route: For
companies whose activity falls within the government route under
the FDI Policy, prior approval of the FIPB will be required for
issuance of partly paid equity shares and warrants to eligible
foreign investors. This position remains unchanged pursuant to
Press Note 9.
Partly paid equity shares: Pricing has to be determined upfront
and 25% of the total consideration amount (including share premium,
if any), has to be received upfront. The balance consideration
towards fully paid equity shares has to be received within a period
of 12 months.
Warrants: Pricing and price/ conversion formula has to be
determined upfront and 25% of the consideration amount has to be
received upfront. The balance consideration towards fully paid up
equity shares has to be received within a period of 18 months.
The clarity introduced by Press Note 9 is welcome and will
provide much greater flexibility to Indian companies looking to
raise funds from foreign investors by allowing deferred payment
structures, hybrid debt and equity instruments (e.g.
non-convertible debentures coupled with warrants) etc.
Facility sharing agreements between group companies
The DIPP had been receiving requests to clarify whether facility
sharing agreements through leasing/ sub leasing arrangements
between group companies for business activities, would be construed
as 'real estate business' for the purposes of the FDI
In response to such enquiries, the DIPP has on 15 September 2015
clarified that entering into such agreements would not be construed
as 'real estate business' under the FDI Policy, provided
that the following conditions are met:
(a) all such arrangements should be at arm's length price in
accordance with the relevant provisions of the Income Tax Act,
(b) the annual lease rent earned by the lessor company in such
arrangements should not exceed 5% of its total revenue.
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The Ministry of Corporate Affairs notified on June 5, 2015 that certain provisions of the Companies Act, 2013 shall not apply to private limited companies or shall apply with such exceptions or modifications as directed in the notification.
Whilst trade and barter have existed since early times, the modern practice of forming business relationships through the means of contract has come into existence only since the industrial revolution in the West.
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