Warrants to foreign investors only if they pay 25% up front

NEW DELHI: Indian companies will be allowed to issue warrants, or option to buy shares in the company, to foreign investors but under stiff terms including a high 25% up front payment, making the instrument less attractive for the investors.

The department of industrial policy and promotion, or DIPP, the nodal body for foreign direct investment policy, will soon circulate a cabinet note to amend the FDI policy, a senior government official told ET. The proposed move will clear the uncertainty created by the recent change in the FDI policy.

However, issue of warrants to foreign investors will require an approval of Foreign Investment Promotion Board, allowing the government to keep a tab on the funds raised.

Warrants are in the nature of options, instruments that entitles its holder to acquire a specific number of shares in a company at a pre-determined price by an agreed time. A number of mergers and acquisitions and private equity deals are structured using such financial instruments. India saw mergers and acquisitions and private equity deals worth $2.21 billion in April, 2010.

The new norms issued in April had disallowed issuance of warrants and preference shares to foreign investors over concerns on quasi debt instruments masquerading as equity.

Officials of both the finance ministry and DIPP held a meeting to resolve the issue that had turned out to be a big irritant for foreign investors.

However, both sides have veered around to the view to keep the period of conversion at one year as against 18 months prescribed by market regulator Sebi its guidelines on issue of warrants by listed companies.

Experts say the new proposal could be restrictive for foreign investors.

“As per Sebi regulations, a warrant can have a maximum currency period of 18 months. One year restriction under FDI guidelines would have overriding impact on Sebi prescribed period, impacting warrants issue by listed companies,” said Akash Gupt, executive director, PwC.

Though, on the up front payment the provision of 25% is identical to the one prescribed by capital markets regulator Sebi for listed companies, the proposed norm will impact foreign investment in unlisted companies such as private equity.

The earlier norms did not prescribe any limit on the payment terms. The higher up front amount would mean that for a given amount, the foreign investor will be able to buy an option on a fewer number of shares.

Essentially, the high initial payment will reduce the leaverage available to investor and thereby make the instrument less attractive.