Conversion terms of convertible instruments

Compulsorily convertible instruments have been the preferred investment route for private equity and strategic investments entering India, as they offer protection from equity risks. In the absence of specific regulatory prohibition and a pro-foreign investor market atmosphere, investors and promoters of Indian companies have so far agreed to determine the conversion price of these instruments at a future date using pre-determined conversion formulae.

Changing sentiments

However, recently there has been a growing regulatory shift against such formula-based conversion terms as they are seen as prejudicial to the interest of resident promoters. It is argued that these instruments favour foreign investors as they have fixed conversion terms and prices.

The Consolidated FDI Policy of 1 April 2010 provided that the pricing of convertible instruments was required to be decided upfront at the time of issue (this requirement continues in the revised consolidated policy of 1 October). As such, foreign direct investment transactions involving compulsorily convertible instruments began to be structured with an upfront determination of the minimum conversion price and the maximum number of shares that the convertible instrument will be converted into.

Jatin Aneja is a partner at Amarchand & Mangaldas & Suresh A Shroff & Co. The views expressed are those of the author and do not reflect the official policy or position of Amarchand Mangaldas.