RBI allows Indian firms to sell partly paid shares, warrants to foreign investors

The Reserve Bank of India has eased foreign investment norms by allowing domestic companies to sell partly paid equity shares or warrants to foreign investors as part of foreign direct investment (FDI) or foreign portfolio investment (FPI), to expand the fundraising options for local firms, according to a notification.

Partly paid shares and warrants are the securities for which a seller gets a partial payment and agrees to get the remaining at a future date, whenever required.

As of now, only equity shares and compulsorily and mandatorily convertible preference shares and debentures are recognised as eligible instruments for FDI.

The pricing of the partly paid equity shares will be determined upfront and 25 per cent of the total consideration amount (including share premium, if any), shall also be received upfront. The balance consideration towards fully paid equity shares shall be received within 12 months, RBI said in the notification.

However, the monetary authority has provided some leeway for large fundraising transactions by saying that the period for receiving the remaining amount for the partly paid shares shall not be insisted on if the issue size exceeds Rs 500 crore ($84 million). This would be valid for an unlisted Indian company too. But, the investee company, whether listed or private, will have to appoint a monitoring agency under the Securities and Exchange Board of India regulations, it added.

In case of issuance of warrants, the pricing shall be determined upfront and 25 per cent of the amount under consideration has to be given by foreign investors upfront. However, the foreign investor will have an 18-month period for paying the balance amount.

Also, at the time of conversion, the Indian company issuing the warrants will price the shares more than the fair value worked out at the time of issuance of the warrants.

“Thus, investee company shall be free to receive consideration more than the pre-agreed price,” RBI said.

Commenting on the new norms, Siddharth Shah, partner, Khaitan & Co, said: “The new relaxations on warrants are along the lines of the policy being followed by the FIPB before this. Bringing warrants into the automatic route will make them more attractive for investors.”

Meanwhile, RBI reiterated its previous stance which allowed put options for foreign investment agreements provided they do not carry an assured return clause.

“The RBI continues to allow options attached to instruments, although it has specified that the guiding principle of valuation would be no assured exit price,” according to Haigreve Khaitan, senior partner, Khaitan & Co.

(Edited by Joby Puthuparampil Johnson)

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