Govt wants companies to come clean on FDI
In effect, the proposed investments are actually used as short-term debts, which the Reserve Bank now wants to discourage. Making it by faking it
By Deepshikha Sikarwar, TNN |
NEW DELHI: The government is planning to tighten foreign investment reporting norms to push companies to issue shares to foreign investors within a fixed period after receiving the investments. With no time-frame stipulated, companies often cancel an investment deal and return the fund after using it for several months.
In effect, the proposed investments are actually used as short-term debts, which the Reserve Bank now wants to discourage.
The move is aimed at addressing concerns of the central bank about misuse of foreign investment guidelines. As per the guidelines prescribed under Foreign Exchange Management Act, an Indian company issuing shares or convertible debentures has to submit a report to RBI within 30 days of receipt of money.
The company then has to file another declaration (FC-GPR) after 30 days of issue of shares. These guidelines are applicable for sectors that are on automatic FDI route list.
RBI has upped the ante on this issue after reports of misuse foreign investment norms, particularly by the real estate sector. This is how it works: An Indian company XYZ, which has tied up with a foreign investor, gets funds into India. As per prescribed guidelines under Foreign Exchange Management Act, the company reports to RBI within 30 days of receipt of money.
The company now has to file a declaration with RBI only after the 30 days of issue of shares or convertible debentures to the foreign investor. Since, the money has already come into company’s accounts, it is used and the company after a good 3-6 months cancels the share deal.
“Neither the FEMA, nor company law prescribe a specific time-limit for issue of shares after receiving the share application money. If shares are not proposed to be issued within 30 days of receipt of funds, then a letter can be issued to RBI to this effect. The Form FC-GPR can be filed after actual share issuance,” says Akil Hirani, MD of law firm Majmudar & Co.
Sources said the issue was being examined in detail particularly because it also deals with forex inflows. Also, they feel that such inflows could be responsible for artificially pushing up prices of real estate sector which, in past 18 months, has seen a to tap capital markets.
However, real estate companies present a different point of view.
Ansal API CEO Anil Kumar said that whenever a company raises funds, foreign investor prescribes certain conditions for issue of equity, like purchase of land within a certain time-frame. “If that time-frame gets extended for factors beyond a developer’s control, the deal can still get called off. Also, since equity has not been issued, the FDI guideline of three-years lock-in does not arise,” he said.
Companies facing stringent overseas borrowing norms are resorting to innovative ways to get around the regulations to fulfill their funding requirement.
“It may be appropriate to prescribe regulations for the timely issue of shares in order to bring transparency in the entire process of receiving overseas money and its utilisation in India,” says PricewaterhouseCoopers financial services tax practice head Punit Shah.
Mr Kumar also echoed similar views. “While prescribing a 3-4 months stipulated time-frame for issue of share, the central bank should also make it mandatory that the money be kept in an escrow account so that it cannot be used,” he said.
In effect, the proposed investments are actually used as short-term debts, which the Reserve Bank now wants to discourage.
The move is aimed at addressing concerns of the central bank about misuse of foreign investment guidelines. As per the guidelines prescribed under Foreign Exchange Management Act, an Indian company issuing shares or convertible debentures has to submit a report to RBI within 30 days of receipt of money.
The company then has to file another declaration (FC-GPR) after 30 days of issue of shares. These guidelines are applicable for sectors that are on automatic FDI route list.
RBI has upped the ante on this issue after reports of misuse foreign investment norms, particularly by the real estate sector. This is how it works: An Indian company XYZ, which has tied up with a foreign investor, gets funds into India. As per prescribed guidelines under Foreign Exchange Management Act, the company reports to RBI within 30 days of receipt of money.
The company now has to file a declaration with RBI only after the 30 days of issue of shares or convertible debentures to the foreign investor. Since, the money has already come into company’s accounts, it is used and the company after a good 3-6 months cancels the share deal.
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“Neither the FEMA, nor company law prescribe a specific time-limit for issue of shares after receiving the share application money. If shares are not proposed to be issued within 30 days of receipt of funds, then a letter can be issued to RBI to this effect. The Form FC-GPR can be filed after actual share issuance,” says Akil Hirani, MD of law firm Majmudar & Co.
Sources said the issue was being examined in detail particularly because it also deals with forex inflows. Also, they feel that such inflows could be responsible for artificially pushing up prices of real estate sector which, in past 18 months, has seen a to tap capital markets.
However, real estate companies present a different point of view.
Ansal API CEO Anil Kumar said that whenever a company raises funds, foreign investor prescribes certain conditions for issue of equity, like purchase of land within a certain time-frame. “If that time-frame gets extended for factors beyond a developer’s control, the deal can still get called off. Also, since equity has not been issued, the FDI guideline of three-years lock-in does not arise,” he said.
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Companies facing stringent overseas borrowing norms are resorting to innovative ways to get around the regulations to fulfill their funding requirement.
“It may be appropriate to prescribe regulations for the timely issue of shares in order to bring transparency in the entire process of receiving overseas money and its utilisation in India,” says PricewaterhouseCoopers financial services tax practice head Punit Shah.
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Mr Kumar also echoed similar views. “While prescribing a 3-4 months stipulated time-frame for issue of share, the central bank should also make it mandatory that the money be kept in an escrow account so that it cannot be used,” he said.
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