India: Partly Paid Equity Shares And Warrants As Eligible Capital Instruments

Last Updated: 22 October 2015
Article by Trilegal .


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 Policy.

(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 shares.

- 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.

- Pricing:

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 Policy.

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, 1961; and

(b) the annual lease rent earned by the lessor company in such arrangements should not exceed 5% of its total revenue.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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