Issuance of partly paid shares and warrants by Indian companies – A Brief Discussion on Guidelines Issued by SEBI

The Min­istry of Finance has decid­ed to per­mit issuance of part­ly paid shares and war­rants (“the said instru­ments”) by the Indi­an com­pa­nies to for­eign investors 

In this regard, RBI has noti­fied the For­eign Exchange Man­age­ment (Trans­fer or Issue of Secu­ri­ty by a Per­son Res­i­dent Out­side India) (Ninth Amend­ment) Reg­u­la­tions, 2014 on June 30, 2014. The said amend­ment essen­tial­ly per­mits for­eign invest­ment in part­ly paid-up shares and war­rants issued by Indi­an com­pa­nies. RBI has also issued A.P. (DIR Series) cir­cu­lar No. 3 dat­ed July 14, 2014 (“RBI cir­cu­lar”) declar­ing the said instru­ments as eli­gi­ble for the pur­pose of FDI and FPI sub­ject to com­pli­ance with FDI and FPI schemes. The cir­cu­lar also lays down cer­tain con­di­tions in respect of pric­ing, receipt of bal­ance con­sid­er­a­tion, report­ing, etc.

Part­ly paid equi­ty shares and war­rants issued by an Indi­an com­pa­ny in accor­dance with the pro­vi­sions of the Com­pa­nies Act, 2013 and the SEBI guide­lines, as applic­a­ble, have been made eli­gi­ble instru­ments for the pur­pose of FDI and for­eign port­fo­lio invest­ment (FPI) by For­eign Insti­tu­tion­al Investors (FIIs) / Reg­is­tered For­eign Port­fo­lio Investors (RFPIs) sub­ject to com­pli­ance with FDI and FPI schemes.

1. Part­ly paid equi­ty shares: The pric­ing of part­ly paid equi­ty shares shall be deter­mined upfront and 25% 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 a peri­od of 12 months. The time peri­od for receipt of bal­ance con­sid­er­a­tion with­in 12 months shall not be insist­ed upon where the issue size exceeds INR 500 crores and the issuer com­plies with reg­u­la­tion 17 of SEBI (Issue of Cap­i­tal and Dis­clo­sure Require­ments) Reg­u­la­tions, 2009 (“ICDR”) regard­ing mon­i­tor­ing agency. This exemp­tion of not man­dat­ing receipt of bal­ance con­sid­er­a­tion with­in 12 months peri­od has also been extend­ed to the unlist­ed Indi­an investee companies.
2. War­rants: The pric­ing of the war­rants and price / con­ver­sion for­mu­la shall be deter­mined upfront and 25% of the con­sid­er­a­tion amount shall also be received upfront. The bal­ance con­sid­er­a­tion towards ful­ly paid up equi­ty shares shall be received with­in a peri­od of 18 months. The price at the time of con­ver­sion should not in any case be low­er than the fair val­ue worked out, at the time of issuance of such war­rants, in accor­dance with the extant FEMA reg­u­la­tions and pric­ing guide­lines stip­u­lat­ed by RBI from time to time.

Cer­tain require­ments as regards report­ing under FEMA reg­u­la­tions have been pre­scribed. The onus of com­pli­ance of all the con­di­tions under FEMA as regards entry route, sec­toral caps and all oth­er con­di­tions under FDI guide­lines has been put on the investee com­pa­ny in case of issue of part­ly paid shares / war­rants as well as upon res­i­dent trans­fer­or or trans­fer­ee in accor­dance with extant guide­lines in case of trans­fer of part­ly paid shares / war­rants. Cer­tain oth­er require­ments includ­ing giv­ing notice for trans­fer of part­ly-paid shares, FIIs / FPIs com­ply­ing with the indi­vid­ual lim­it of invest­ment, com­pli­ance with sec­toral caps, pri­or-approval of FIPB for invest­ing under the gov­ern­ment route, for­fei­ture of upfront pay­ment on non­pay­ment of call mon­ey, etc. have also been laid down under the said circular.