RBI BANS HYBRID BOND ISSUED ABROAD

The Ministry of Finance (MoF) had introduced revised guidelines on issue of Prefrence Shares vide a press release dated April 30, 2007 pursuant to which foreign investment in the form of fully convertible preference shares would be treated as part of share capital, while other types of preference shares, optionally convertible preference shares, shall be required to conform to ECB guidelines/ECB caps. The MoF has now issued another press release whereby an exemption could be available from the purview of the revised guidelines to those institutions/corporates which have taken “verifiable and effective steps” prior to April 30, 2007. ‘Verifiable steps” would be actions that have footprints in public domain, and hence, verifiable with reference to these foot prints. “Effective steps” would be actions that go beyond simple intention to act and should be such that they bind the parties conclusively. Parties claiming benefit under the above exemption are required to complete the process of issuing the shares and receipt of money in lieu of such shares by 31.03.2007. Now, RBI has barred companies from raising funds overseas through issue of optionally and partially convertible bonds under foreign direct investment (FDI) regulations. Companies will now be allowed to only sell bonds that compulsorily convert into equity within a specified time frame. The clarification comes after the RBI found that Indian companies were raising funds overseas by selling hybrid instruments, which were essentially debt. Routing of debt flows through the FDI route circumvents the framework in place for regulating debt flows into the country, whether through overseas foreign currency borrowings or through foreign investment in rupee denominated debt. The bank, however, allowed all existing investments in instruments, which are not fully convertible into equity to continue till maturity.