16 September 2015 07:55:18 IST

Govt opens FDI door wider by allowing partly-paid shares

Consolidated FDI Policy circular issued in May amended, says DIPP

The Centre has further eased foreign direct investment (FDI) norms by allowing partly-paid shares and warrants as eligible capital instruments. This means an Indian company looking to bring in funds can now issue such instruments without any approval.

On September 15, the Department of Industrial Policy and Promotion (DIPP) said it has amended the ‘Consolidated FDI Policy circular of 2015’ issued this May.

With this, an Indian company can issue warrants and partly-paid shares to non-residents so long as conditions specified by the Reserve Bank of India 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 Centre’s move comes more than a year after the RBI had said that partly-paid shares and warrants issued by an Indian company would qualify as eligible instruments for FDI/Foreign Portfolio Investment.

The central bank had, however, stipulated that the company issuing paid-up shares/warrants needs to ensure that sectoral caps are not breached even after the shares get fully paid-up or warrants get converted into fully paid equity shares.

In July last year, the RBI stipulated that an Indian company whose activity/sector falls under the government route will require prior approval of the Foreign Investment Promotion Board for issuing partly-paid shares/warrants.

“The latest government move will make both warrants and partly-paid shares more attractive instruments for FDI as they can be issued without prior government approval (in cases of automatic route),” Lalit Kumar, Partner at law firm J Sagar Associates, told BusinessLine.

Facility sharing

The government has also clarified that ‘facility sharing’ agreements between group companies through leasing/sub-leasing arrangements will not be treated as ‘real estate’ business for FDI policy purposes.

The only condition is that the arrangement should be on an arm’s length price and the annual lease rent earned by the lessor company should not exceed 5 per cent of its total revenue.

This clarification could bring relief to multinational firms and foreign-owned companies operating in India, say experts.

The existing FDI policy has several restrictions on foreign companies undertaking ‘real estate’ activities.