FDI and convertible instruments: trial and error

The foreign direct investment (FDI) regime relating to convertible instruments has been the changed several times over the years. This almost gives the impression that the regulators are relying on trial and error to fine tune the regulations. For investors in the private equity sector and possibly also the real estate sector this has resulted in a fair amount of uncertainty.

Policy add-ons

Through AP (DIR Series) circulars no 73 and 74, both dated 8 June 2007, read with press note dated 30 April 2007, investments in optionally or partially convertible instruments were placed in the realm of external commercial borrowings as they were considered to be “intrinsically debt like”.

The consolidated FDI circular 1 of 2010 mandated that Indian companies can issue equity shares; fully, compulsorily and mandatorily convertible debentures; and fully, compulsorily and mandatorily convertible preference shares. Companies doing so were to be subject to pricing guidelines and valuation norms prescribed in regulations under the Foreign Exchange Management Act, 1999, (FEMA). However, the pricing of the instruments was to be decided/determined upfront at the time of issue of the instruments.

Inder Mohan Singh is a partner at Amarchand & Mangaldas & Suresh A Shroff & Co, where Mayuri Roy is a senior associate designate. The views expressed in this article are those of the authors and do not reflect the official policy or position of Amarchand Mangaldas.