With a view to mobilizing foreign investment through issue of preference shares, the Government of India (GOI) had earlier permitted issuance of equity shares, preference shares, convertible preference shares by Indian companies to persons resident outside India in respect of financial projects / industries.
The Reserve Bank of India has on 8th June 2007 amended the guidelines applicable to foreign investment in preference shares. Pursuant to the revised guidelines, foreign investment from the issue of fully convertible preference shares would be treated as part of the share capital, which would be included in computing the sectoral caps on foreign equity.
Foreign investment inflow from the issue of non-convertible, optionally convertible or partially convertible preference shares, would be treated as debt and be required to conform to the guidelines/caps pertaining to External Commercial Borrowings (ECB).
Foreign investment in non-convertible, optionally convertible, partially convertible preference shares as on and upto 30th April 2007 would continue to fall outside the sectoral cap till their current maturity.
Only preference shares, fully and mandatorily convertible into equity, would be treated as part of the share capital and be eligible to be issued to persons resident outside India under the Foreign Direct Investment scheme.
Foreign investments from the issue of non-convertible, optionally convertible or partially convertible preference shares, for which funds have been received on or after 1st May 2007, would be considered as debt and be required to conform with ECB guidelines / caps. Accordingly, all norms applicable to ECBs would apply to such preference shares.
In accordance with the above revision, investments in optionally convertible/ partially convertible or redeemable preference shares, issued by Indian companies on or upto April 30, 2007, would continue till their current maturity.
Further, in lieu of representations received by GOI that the above revised guidelines had adversely affected business plans of entities that were at an advanced stage of issuing preference shares, it has been decided that where verifiable and effective steps had been taken prior to April 30, 2007 in relation to issuance of such shares, exemption could be granted from the purview of the revised guidelines.