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The Department of Telecommunications will ask Sistema Shyam to take the approval of the Reserve Bank of India for issuing fresh redeemable preference shares to a Singapore subsidiary.
The department has taken a view that since such instruments are considered debt, it falls under the rules governing external commercial borrowings (ECB) and not the Foreign Direct Investment laws.
Sistema Shyam had sent an application to the Foreign Investment Promotion Board (FIPB) seeking permission to issue an additional 2.1 lakh redeemable preference shares to Singapore-based wholly-owned subsidiary Insitel Services Pvt Ltd.
After the deal, Insitel would own a total of 10 lakh preference shares.
Sistema Shyam had also proposed to change these shares into optionally convertible redeemable preference shares, which will be converted into equity shares in one or more tranches within 10 years.
The company had approached the FIPB because the total FDI will increase if the shares are converted into equity at a later date. However, the DoT has taken a view that according to RBI guidelines, only compulsory convertible shares are considered FDI.
Other types of preference shares and debentures, including optionally convertible preference shares, are considered debt.
According to an internal note seen by Business Line , the DoT has said Sistema Shyam should be told to conform to the ECB guidelines, instead of the FDI rules.
Sistema JSFC owns a 55.88 per cent stake in Sistema Shyam, while the Russian Government has 17.14 per cent. Shyam Group is the Indian partner with a 26.05 per cent stake held through five subsidiaries.
After the Government recently allowed 100 per cent FDI in the telecom sector, a number of players have expressed interest in increasing their stake. Vodafone has already increased its stake in the Indian venture to 100 per cent.
AT&T has also sought to buy out its Indian partner Mahindra's stake.
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