The Government's decision to permit issue of equity for consideration other than cash, in the liberalised FDI policy released on Thursday, could help companies overcome a liquidity crisis.
It will also facilitate different modes of financing, according to industry watchers.
Among the significant changes in the FDI policy, the Government has allowed conversion of non-cash items such as import of capital goods and equipment including second-hand machinery, pre-operative and pre-incorporation expenses including payment of rent to equity.
Earlier only royalty, lump-sum fee and external commercial borrowings were allowed to be converted into equity.
According to Mr Akash Gupt, Executive Director, PricewaterhouseCoopers, the latest move would help in increasing investors' confidence index. He said, “It creates a bit of ease in the process and helps in managing liquidity aspect. It will provide lot of flexibility to foreign companies to capitalise the Indian wholly owned subsidiaries and joint ventures.”
Further, the leeway provided in pricing of convertible instruments will provide “a lot of breathing space to private equity deals,” Mr Gupt said.
Mr Chandrajit Banerjee, Director-General, CII, said that allowing issue of shares for consideration other than cash addresses a valid business need.
“This would facilitate different modes of financing for companies which have a shortage of funds and also for companies, which despite having sufficient cash balances, would like to allot shares rather than paying cash so as to ensure minimum cash outflow,” he said.
Further, permitting companies to prescribe a conversion formula for pricing of convertible instruments instead of specifying the price of convertible instruments upfront “would allow companies to command a better valuation based on their performance,” Mr Banerjee said.