MUMBAI, Nov 27 (Business Standard): The Securities and Exchange Board of India (Sebi) would soon allow Indian companies to issue partly paid-up shares and warrants to foreign investors.
According to people in the know, the norms are going to be streamlined for all forms of equity capital including public issue and rights issue.
"The foreign investors while subscribing to shares and warrants would need to make an upfront payment of 25 per cent and the remaining payment would be made in a staggered fashion in coming 18-20 months," said a source privy to the development.
The markets regulator is soon likely to issue a discussion paper in this regard and will amend the Issue of Capital Disclosure Regulations (ICDR) post public consultation.
This move to ease the foreign fund flow is based on reference from Finance Ministry and a notification that was floated by the Reserve Bank of India (RBI) in July this year.
RBI had proposed that partly paid up shares and warrants by Indian companies will be eligible for foreign direct investment (FDI).
Experts believe that having a time frame for the subscription of warrants is a move in the right direction to prevent companies from misusing the instrument.
"In certain cases to get voting rights on the board promoters used to issue warrants to themselves or person acting in concert which were later subscribed to or never got subscribed. This timely fashion of paying up for warrants in 18-20 months would ensure that the instrument would not be misused. Additionally Sebi before formalising any regulation should align it with the provisions of Companies Act," said Harish HV, partner, Grant Thornton LLP.
Earlier to the RBI circular only equity shares, convertible preferential shares and debentures were treated as FDI compliant instruments.
Additionally, the RBI circular stated that in order to determine pricing of partly paid up shares it is required that an upfront payment of 25 per cent is made and the balance in a period of 12 months.
Currently, the Sebi ICDR provide that the issuer company can receive subscription money within 12 months of allotment of partly paid up shares to investors, failing which the shares allotted to investors are forfeited.
Legal experts say that the regulations by Sebi and RBI are similar barring the requirement of 25 per cent upfront payment.
"Such alignment will ensure clarity and certainty in both Sebi and RBI regulations and will ease foreign investments particularly at this time when the country is opening up for foreign fund flows with general outlook that India is becoming a good destination for investment and business," said Lalit Kumar, Partner, J Sagar Associates.
Sources privy to the development indicate that while the investment by foreign investors in public issues and rights issue would be eased the rules around preferential issues would still remain a concern.
While the RBI circular now allows partly paid up shares even in cases of preferential issue or private placement of shares to foreign investor but neither the Sebi Regulations nor the new Companies Act, 2013 permit the same. The companies act, 1956 permitted issue of partly paid up shares on preferential issue basis.
