The government is planning to tighten norms governing FDI through partly-paid shares, convertible warrants and units issued by venture capital funds (VCFs), as it looks to prevent misuse of these popular instruments. The finance ministry and the department of industrial policy & promotion (DIPP) have decided that the conditions such as sectoral ceilings, minimum-capitalisation and lock-in period governing foreign investment through equity should be applicable to these instruments. The two sides held consultations following an increase in the quantum of FDI flowing through these windows.
The initiative will lay down norms for investment in these instruments, currently cleared by investment regulator, Foreign Investment Promotion Board (FIPB), on a caseto-case basis, two government officials told ET NOW. A large part of the $19-billion FDI into India during the first eight months of the current financial year were routed through these instruments.
The time available for overseas owners of partly-paid shares to convert them into fully-paid shares is proposed to be cut down to six months from 18 months now, said a finance ministry official.
In the case of convertible warrants, the government plans to stipulate that conversion of these warrants into equity shares should happen within 18 months, he said. Currently, foreign investors subscribing to them have three years to convert them into equity shares. Warrants should also be taken into account while calculating total foreign investment in sectors with FDI ceilings, it has been proposed.
DIPP is of the view that units should not be issued by VCFs to foreign investors in the case of sectors with FDI caps, entry restrictions or conditionalities. A detailed proposal to this effect has been forwarded to the department of economic affairs (DEA) in the finance ministry, said a DIPP official, who asked not to be named.
DIPP has indicated that it would send a proposal to the Cabinet Committee on Economic Affairs (CCEA) on the move to streamline FDI through these instruments. After the CCEA clearance, FEMA rules need to be modified to reflect the policy changes. Therefore, the DEA and the DIPP are working together on the issue.
Once the new norms come into effect, the government may put FDI through partlypaid shares and convertible warrants on the automatic route, subject to standard guidelines. The last word on units issued by VCFs to foreign investors, however, is yet to be heard. While DIPP is of the opinion that issue of such units should not be permitted in sectors such as telecom, single-brand retail and defence where FDI is capped, the DEA has not accepted this view. Therefore, the CCEA will take a final view on this issue before the government implements these proposals.
DIPP officials view that VCFs are largely unregulated and many of them are registered as trusts. FIPB has been clearing issue of units to foreign investors only in the case of Sebi-registered VCFs. In terms of ownership rights, these units are not different from equity shares, DIPP said.
