NATURE OF INSTRUMENTS ISSUED FOR INVESTMENTS INTO INDIA
As per the FDI policy the Indian companies can issue the following types of instruments to the foreign investors for investments into India:
Equity shares are the ordinary shares in the share capital of the company. It may represent equity share capital with voting rights or with differential rights as to dividend, voting or otherwise in accordance with the Act.
Preference shares are those shares that carry preferential rights as to the payment of dividend at a fixed rate and as to repayment of capital in case of winding up of the company. They carry voting rights only in matters directly affecting their interests. They may be convertible and/or redeemable.
A debenture is an instrument of debt issued by the company acknowledging its obligation to repay the sum at a specified rate with a specified rate of interest. Debentures may be secured or unsecured and may also be convertible. They do not carry any voting rights.
Under the FDI Policy, equity shares, fully and mandatorily convertible preference shares & debentures are to be issued subject to pricing guidelines and valuation norms prescribed under FEMA Regulations. The pricing of such capital instruments is decided upfront at the time of the issue. Issue of other types of preference shares and debentures i.e. non-convertible, optionally convertible or partially convertible etc. require compliance with the guidelines applicable for External Commercial Borrowings (ECBs).
The ECB Guidelines provide that ECB can be accessed under either the automatic route or the approval route subject to certain restrictions provided therein. Under the automatic route, an Indian company may raise ECBs only up to a limit of USD 500 million per company per year. For this purpose, the Indian company must be an eligible borrower and the foreign investor must be a recognized lender. In addition to this, restrictions are also imposed on the end-uses, parking of the proceeds overseas and refinancing.
Indian Companies can also raise foreign currency resource abroad through issuance of Foreign Currency Convertible Bonds(FCCB) or depository receipts such as ADRs and GDRs. The inward remittance received by the Indian company through issuance of such instruments is treated as FDI. The company has to comply with the provisions of the Scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 and guidelines issued by the Government of India thereunder from time to time.
An Indian company can issue ADRs / GDRs if it is eligible to issue shares to persons resident outside India under the FDI Policy. However, an Indian listed company, which is not eligible to raise funds from the Indian Capital Market including a company, which has been restrained from accessing the securities market by the Securities and Exchange Board of India (SEBI), is not eligible to issue ADRs/GDRs.
Unlisted companies, which have not yet accessed the ADR/GDR route for raising capital in the international market, require prior or simultaneous listing in the domestic market, while seeking to issue such overseas instruments. On the other hand unlisted companies, which have already issued ADRs/GDRs in the international market, have to list in the domestic market on making profit or within three years of such issue of ADRs/GDRs, whichever is earlier. ADRs / GDRs are issued on the basis of the ratio worked out by the Indian company in consultation with the Lead Manager to the issue. The proceeds so raised have to be kept abroad till actually required in India. Pending repatriation or utilization of the proceeds, the Indian company can invest the funds in:-
(a) Deposits, Certificate of Deposits or other instruments offered by banks rated by Standard and Poor, Fitch, IBCA ,Moody's, etc. with rating not below the rating stipulated by Reserve Bank from time to time for the purpose;
(b) Deposits with branches of Indian Authorized Dealers outside India; and
(c) Treasury bills and other monetary instruments with a maturity or unexpired maturity of one year or less.
There are no end-use restrictions in such cases except for a ban on deployment / investment of such funds in real estate or the stock market. There is no monetary limit up to which an Indian company can raise ADRs / GDRs. The ADR / GDR proceeds can be utilized for first stage acquisition of shares in the disinvestment process of Public Sector Undertakings / Enterprises and also in the mandatory second stage offer to the public in view of their strategic importance. Voting rights on shares issued under the Scheme are as per the provisions of Companies Act, 1956 and in a manner in which restrictions on voting rights imposed on ADR/GDR issues are consistent with the Company Law provisions. Voting rights in the case of banking companies are in terms of the provisions of the Banking Regulation Act, 1949 and the instructions issued by the Reserve Bank from time to time, as applicable to all shareholders exercising voting rights. The pricing of ADR / GDR issues is made at a price determined under the provisions of the Scheme and guidelines issued by the Government of India and directions issued by the Reserve Bank, from time to time.
A limited two-way Fungibility scheme has been put in place by the Government of India for ADRs / GDRs. Under this Scheme, a stock broker in India, registered with SEBI, can purchase shares of an Indian company from the market for conversion into ADRs/GDRs based on instructions received from overseas investors. Re-issuance of ADRs / GDRs is permitted to the extent of ADRs / GDRs which have been redeemed into underlying shares and sold in the Indian market.
An Indian company can also sponsor an issue of ADR / GDR. Under this mechanism, the company offers its resident shareholders a choice to submit their shares back to the company so that on the basis of such shares, ADRs / GDRs can be issued abroad. The proceeds of the ADR / GDR issue are remitted back to India and distributed among the resident investors who had offered their Rupee denominated shares for conversion. These proceeds can be kept in Resident Foreign Currency (Domestic) accounts in India by the resident shareholders who have tendered such shares for conversion into ADRs / GDRs.
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Symbiosis Law School