The Department of Industry Policy and Promotion (DIPP) released a press note (Press Note 9) on 15th September, 2015 making an amendment in the Consolidated FDI Policy, 2015 in relation to the issuance of partly paid equity shares and warrants by Indian companies to foreign investors.

With this amendment, an Indian company can issue warrants and partly-paid shares to non-residents so long as conditions specified by the Reserve Bank of India (RBI) are met. Prior to this, the Consolidated FDI policy had stipulated that these instruments can be issued to a non-resident only after approval through the government route.

The government’s move comes more than a year after the RBI had notified that partly-paid shares and warrants issued by an Indian company would qualify as eligible instruments for FDI/ Foreign Portfolio Investment. The RBI had however, clarified that prior approval of the Foreign Investment Promotion Board (FIPB) would be necessitated 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. 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.

The salient features of Press Note 9 are set out below:

  1. 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.
  2. Preference shares and debentures must be fully paid up and must be mandatorily and fully convertible.
  3. A new paragraph 3.3.3 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.

  1. The issuing Indian company and the non-resident investor needs 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.
  2. In respect of 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.
  3. 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. The time period for receipt of the balance consideration within 12 months is not required to be complied with in case of a listed entity where the issue size exceeds INR 500 crores and the issuer complies with the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 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 INR 500 crores (Indian Rupees five hundred crores). However, the investee company also has to appoint a monitoring agency on the same lines as required in case of a listed Indian company under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009.

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.

  1. The reporting of issue or transfer of partly paid shares has to be made in form FC-GPR and form FC-TRS respectively, to the extent the equity shares are called up.

VA View

Till now the conflict between the Consolidated FDI Policy and the RBI Circular was creating confusion as regards whether warrants and partly paid shares could be issued to foreign investors only after approval through the government route. The amendment introduced by Press Note 9 aligns the Consolidated FDI Policy with the RBI Circular and will bring greater flexibility to Indian companies looking to raise funds from foreign investors.