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Our Bureau

Mumbai June 8

The Reserve Bank of India has mandated that only instruments which are fully and mandatorily convertible into equity, within a specified time would be reckoned as equity under the Foreign Direct Investment policy; and reckoned as eligible for issuance to persons resident outside India.

The RBI said in a circular issued today, "It has been noticed that some Indian companies are raising funds under the FDI route through issue of hybrid instruments such as optionally convertible or partially convertible debentures which are intrinsically debt-like instruments. Routing of debt flows through the FDI route circumvents the framework in place for regulating debt flows into the country."

Issuance of such instruments is against both the letter and spirit of the FDI policy, which is aimed essentially to attract investments in the nature of equity capital and not surrogate debt instruments, said the RBI.

The central bank has, however, clarified that companies, which have already received funds from outside India for issue of partially or optionally convertible instruments on or before June 7, 2007, can issue such instruments. The existing investments in instruments, which are not fully and mandatorily convertible into equity, can continue till their current maturity.

More Stories on : Foreign Direct Investment | RBI & Other Central Banks | Financial Policy

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