A Reserve Bank of India (RBI) circular issued on 14 July provides that warrants and partly paid equity shares issued by an Indian company are now eligible instruments for the purpose of foreign direct investment (FDI) and foreign portfolio investment (FPI) by foreign institutional investors (FIIs) and registered foreign portfolio investors (FPIs) subject to compliance with the FDI and FPI schemes. The instruments must comply with the provisions of the Companies Act, 2013, and Securities and Exchange Board of India guidelines, as applicable.
The circular contains the following additional points:
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- The pricing of partly paid equity shares will be determined upfront and 25% of the total consideration amount (including share premium, if any) must be delivered upfront. The balance consideration towards fully paid equity shares must be paid within 12 months. This 12-month period will not apply where the issue size exceeds ₹5 billion (US$83 million) and the issuer complies with regulation 17 of the Securities and Exchange Board of India (SEBI) (Issue of Capital and Disclosure Requirements) Regulations regarding the appointment of a monitoring agency. Unlisted Indian companies can also pay the balance amount after 12 months where the issue size exceeds ₹5 billion. However, they must appoint a monitoring agency. The monitoring agency (an authorized dealer category-I bank) must report to the investee company in line with the SEBI regulations for listed companies.
- The price at the time of conversion of warrants should not be lower than the fair value worked out, at the time of issuance of such warrants, in accordance with the extant regulations under the Foreign Exchange Management Act, 1999 (FEMA Regulations), and pricing guidelines stipulated by the RBI from time to time. Thus, the investee company will be free to receive consideration that is more than the pre-agreed price.
- The reporting of the purchase or sale of partly paid shares by FIIs or registered FPIs in form LEC by the designated branch of an authorized dealer bank should comply with the FEMA Regulations.
- The identity of non-resident investors must be disclosed for the purpose of compliance with know your customer norms when the warrants are issued.
- Investee companies are responsible for complying with all of the conditions under FEMA with regards to entry route, sectoral caps and all other conditions under FDI guidelines in the case of issues of warrants or partly paid shares. Resident transferor and transferee companies also have the onus to comply with extant guidelines in the case of transfers of warrants or partly paid shares. Investee companies are additionally responsible for giving the notice required under the provisions of the Companies Act, 2013, for the transfer of partly paid shares. The onus of compliance with the individual limit of below 10% of the total paid-up equity capital rests with each FII and registered FPI. The aggregate investments of all FIIs and registered FPIs must not exceed the applicable aggregate limit for each issue of partly paid shares.
Other conditions stipulated by the RBI are:
- An Indian company whose activity/sector falls under government route will require prior Foreign Investment Promotion Board approval for the issue of warrants or partly paid shares.
- The forfeiture of the amount paid upfront on non-payment of call money must be in accordance with the provisions of the Companies Act and income tax provisions, as applicable.
- Companies issuing warrants or partly paid shares and non-resident investors who acquire them must ensure that they do not breach sectoral caps even after the shares are fully paid up or the warrants are converted into fully paid equity shares.
A foreign investor’s deferment of payment of the consideration amount or shortfall in receipt of the consideration amount as per applicable pricing guidelines will not be covered under these guidelines so as to be treated as subscription to warrants and partly paid shares.
Non-resident Indians (NRIs) will also be eligible to invest on a non-repatriation basis in partly paid shares and warrants issued by Indian companies in accordance with the provisions of the Companies Act, SEBI guidelines and income tax provisions, as applicable.
Investments by NRIs in warrants and partly paid sharess on a non-repatriation basis will also be subject to terms and conditions stipulated in schedule 4 to notification FEMA 20/2000-RB dated 3 May 2000, as amended from time to time.
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