There are certain issues an overseas investor should take into account when structuring an investment in an unlisted Indian company through instruments that are compulsorily convertible into equity shares of the company.
Foreign direct investment (FDI) in securities of unlisted Indian companies is governed by the Foreign Exchange Management Act, 1999, and the regulations issued under it, including the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 (together, FEMA). FDI also governed by the FDI policy of the Indian government.
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Instruments that are fully and mandatorily convertible into equity securities within a specified time period are treated as FDI under FEMA and the FDI policy. Instruments that are optionally or partially convertible are treated as debt and any foreign investment through such instruments (and other debt instruments, such as non-convertible debentures) must comply with the regulations governing external commercial borrowings, issued by the Reserve Bank of India (RBI).
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Uday Walia is a partner at S&R Associates, a New Delhi-based law firm.
S&R Associates
64 Okhla Industrial Estate Phase III
New Delhi 110 020
India
Tel: +91 11 4069 8000
Fax: +91 11 4069 8001
