Automatic route window widens

Forget FIPB for hike in foreign equity; transforming preference shares into equity capital.

The government announced the simplification of foreign investment procedures by putting three more categories under the automatic route: a hike in foreign equity in a company, transforming preference shares into equity capital and conversion of foreign loans taken by a company into equity. Of course, there is a caveat: there should not be a breach of the sectoral foreign investment caps.

In addition, the finance ministry also allowed the transfer of shares from resident to non-resident (including transfer of subscribers' shares to non-resident) other than in the financial services sector under the Reserve Bank of India's (RBI's) general permission route.

The measures are part of the government's efforts to make India a more attractive destination for foreign investors and speed up and streamline investment approvals, according to a release.

The announcement came on the eve of Finance Minister P Chidambaram's nine-day visit to attend the annual meeting of the International Monetary Fund and the World Bank. He is also scheduled to meet international investors in New York and London.

The release said there would be no need to obtain clearance from the Foreign Investment Promotion Board (FIPB). Instead they were put under the automatic route (general permission) under the RBI.

According to the release, the automatic route in the case of transfer of shares from resident to non-resident would be subject to compliance with the provisions of the Securities and Exchange Board of India relating to the Substantial Acquisition of Shares and Takeovers Regulation of 1997.

RBI clearance would also be applicable if the transfer of shares fell within the sectoral cap and also complied with the prescribed pricing guidelines.

Similarly, the conversion of external commercial borrowings and loans into equity can also be cleared by the RBI, provided the activity of the company was covered under the automatic route.

The level of foreign equity after such conversion should fall within the sectoral foreign investment limit and the prescribed pricing guidelines.

The onus of complying with the sectoral caps or limits prescribed under the FDI policy as well as other guidelines or regulations would rest with the buyer and seller or issuer, the release said.

It added that the necessary notifications and circulars under the Foreign Exchange Management Act would be brought out by the RBI.