Raising FDI Through Hybrid Instruments May Come With Riders

New Delhi: The government may put certain conditions on domestic companies that are keen to bring in foreign investments through optionally- and partially-convertible debentures.

According to a Finance Ministry proposal, domestic companies can issue hybrid instruments like optionally- and partially-convertible debentures to foreign players with the condition that they have to be converted into equity shares based on fair market value within a stipulated time.

Hybrid instruments are intrinsically debt instruments which give the holder an option to convert into equity at a later date.

The notification on hybrid instruments eligible for FDI is likely to be issued by the Reserve Bank of India (RBI) later this month after the Cabinet Committee on Economic Affairs (CCEA) approves it, a Finance Ministry official said.

"Optionally and partially convertible debentures will be construed as hybrid instruments which have to be converted into equity within a specified date at the fair market value," the official told PTI.

Finance Minister Arun Jaitley had in his Budget for 2016-17 announced that a basket of eligible instruments will be brought in to include hybrid ones that will expand the scope of tools that foreigners use to invest in India.

"The basket of eligible FDI instruments will be expanded to include hybrid instruments, subject to certain conditions," Mr Jaitley had said.

As of now, only those which are fully and mandatorily convertible into equity within a specified time is reckoned as part of equity under the FDI policy and eligible to be issued to persons residing outside India.

Besides equity investment, FDI capital means fully, compulsorily and mandatorily convertible preference shares; fully, compulsorily and mandatorily convertible debentures and warrants.

Also, funds raised by issuing foreign currency convertible bonds (FCCBs) subscribed by a non-resident entity in foreign currency and convertible into ordinary shares of the issuing company in any manner, either in whole or part is also construed as FDI, as per the current policy.

"Extending the definition of FDI by including hybrid instruments as part of FDI is a positive step towards further reforms," said Krishan Malhotra, partner, Dhruva Advisors.

In the past two years, the government has taken a series of reforms measures to liberalize the FDI regime. Last month, it announced FDI liberalization in nine sectors such as civil aviation, retail and private security services. This was the current government's second round of relaxation in FDI rules.

Net FDI inflows have increased over the past two years, hitting a record of $36 billion in the last financial year, from $24.2 billion on an average during the preceding three fiscal years, according to Moody's.