CS Vinita Nair, Debolina Banerjee


An usher of tremendous promotion in Foreign Direct Investment was marked on 10th July, 2014 when our Finance Minister expressly stated the need and want to promote more Foreign Direct Investment in selective sectors where it helps the larger interest of Indian Economy. This was marked by a proposed change in the composite cap of FDI in Defence and Insurance sector which was raised to 49% from the earlier cap being 26% with full Indian Management control via the FIPB route. This was done to infuse some big relief to the capital starved Indian economy.

Present Circular

Another major amendment in the FDI regime has been made by RBI/2014-15/123 A.P.(DIR Series) Circular No.3 dated 14th July, 2014[1] (Present Circular). Capital under FDI only meant fully paid up equity shares, compulsorily convertible preference shares and debentures. However, RBI vide Notification No. FEMA. 308/2014-RB[2]dated 30th June, 2014, which was published in official gazette on 8th July, 2014 vide G.S.R. No. 436(E), amended the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 (Principal Regulations) to the effect that partly paid up equity shares also become eligible instrument for FDI and Foreign Portfolio Investment (FPI) by Foreign Institutional Investors (FIIs)/Registered Foreign Portfolio Investors (RFPIs). Preference shares and debentures are required to be fully paid, mandatorily and fully convertible. Further, warrants issued in accordance with Companies Act and SEBI guidelines have also become eligible instrument for FDI and Foreign Portfolio Investment (FPI) by FIIs and RFPIs

Pricing and other requirement in case of partly paid shares

For being eligible for FDI, the pricing of the equity share has to be made upfront and 25% of the partly-paid equity shares should be realised upfront (including amount of share premium, if any); the balance consideration towards fully-paid equity shares should be received within a period of 12 months.

Further RBI has made an ease out note at this point and provided some leeway for large fund raising transactions. This is to say that the balance consideration towards the fully-paid equity shares to be received within a period of 12 months shall not be mandatory for both listed and unlisted Indian companies when the issue size exceeds Rs 500 crore. But, the investee company, whether listed or unlisted, will have to appoint a monitoring agency under Regulation 16 of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009 (ICDR Regulations).

In this connection the Investee company can appoint a public financial institution or any of the scheduled commercial banks named in the offer documents as bankers to the issue for the purpose of discharging the functions of a monitoring agency and also to report to the investee company in the format specified in Schedule IX of ICDR Regulations on a half yearly basis, till the proceeds of the issue have been fully utilised.

Issue of warrants under SEBI guidelines and under Present circular:

Regulation 4 (3) of ICDR Regulations as amended from time to time permits issue of warrants along with public issue or rights issue of specified securities i.e. equity shares and convertible securities. However, the same is subject to the condition that the tenure of such warrants shall not exceed 12 months from the date of allotment in the public/ rights issue and not more than one warrant shall be attached to one specified security. Further, regulation 77 (2) mandates that an amount equivalent to 25% of the consideration determined in terms of regulation 76 is to be paid against each warrant on the date of allotment of warrants. The balance of the consideration shall be paid at the time of allotment of equity shares pursuant to exercise of option against each such warrant by the warrant holder.

Under the Present Circular, the pricing of the warrants and price/conversion formula needs to be determined upfront. The amount of consideration payable upfront is the same as stipulated under SEBI guidelines i.e. 25% of the consideration. However, the balance consideration towards fully paid equity shares needs to be received within 18 months. Price at the time of conversion shall not be less than fair value at the time of issuance but can surely be more than the pre-agreed price.

Reporting requirements

The Present Circular stipulates that the reporting of receipt of foreign inward remittance towards each upfront and call payment for such transaction shall be made within a period of 30 days from the date of receipt of the amount of consideration received by the Indian company in the RBI prescribed “Advance Reporting Form[3]” along with copies of Foreign Inward Remittance Certificate, Know Your Customer (KYC) report on non-resident investor and details of the Government approval, if any.

Further in case of reporting of issue or transfer of partly paid shares, the same shall be reported in form FC-GPR and Form FC-TRS respectively to the extent the equity shares are called up. In case of issue or transfer of warrants, the reporting shall be alike as that of shares and should reflect the extent up to which the amount in respect of equity shares has been called up by the company.

An additional reporting norm in case of issue of warrants has been specified by RBI which mandates that the identity of non-resident investor shall be disclosed for the purpose of compliance with KYC norms at the time of issuance of warrants.

Onus of compliance with other requirements

Compliance required Onus to ensure compliance is on whom?
Prior approval of the Foreign Investment Promotion Board (FIPB), Government of India for issue of partly-paid shares/ warrants Issuer Company
Sectoral caps are not breached even after the shares get fully paid-up or warrants get converted into fully paid equity shares Issuer Company and Non-resident investors acquiring the same
Requirements under the Companies Act, 2013 for issuance of partly paid shares and warrants Issuer Company
forfeiture of the amount paid upfront on non-payment of call money shall be in accordance with the provisions of the Companies Act, 2013 and Income tax provisions Issuer Company


This move will surely be welcomed by the Indian Company as it enables further attracting FDI investors. The Investors need not make upfront payment of entire amount while investing in warrants or partly paid shares. Conversion period and price of conversion in case of warrants are also duly governed. This is surely the next big change in 2014 subsequent to relaxation of FDI regulations by permitting optionality clause permitted by RBI in January, 2014.

[The above post is contributed by CS Vinita Nair and Debolina Banerjee at Vinod Kothari & Co. They can be contacted at vinita@vinodkothari.com and mt@vinodkothari.com respectively]


[1] http://rbi.org.in/scripts/NotificationUser.aspx?Id=9095&Mode=0

[2] http://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=9094&Mode=0

[3] http://rbidocs.rbi.org.in/rdocs/content/pdfs/03NOAPDIR714_AN.pdf

Read Other Articles from Vinod Kothari & Company

More Under Fema / RBI

Leave a Comment

Your email address will not be published. Required fields are marked *