What changed
The RBI clarified that from May 1, 2007, only fully and mandatorily convertible preference shares are considered equity for FDI sectoral caps. All other preference shares (non-convertible, optionally convertible, partially convertible) are now treated as debt and must comply with ECB guidelines, including eligible borrowers, lenders, maturity, and end-use norms. Investments made up to April 30, 2007 in such instruments are grandfathered until their current maturity.
What it means for you
Banks and lenders must now classify foreign investments in non-fully-convertible preference shares as debt, not equity, impacting sectoral cap calculations. This shift requires issuers to adhere to ECB regulations, including interest rate caps based on LIBOR swap equivalents. Existing investments are protected, but new issuances after April 30, 2007 face stricter debt compliance.
What you must do
- Reclassify any new foreign investment in non-fully-convertible preference shares as debt and ensure ECB compliance.
- Verify that fully convertible preference shares issued after May 1, 2007 meet FDI sectoral cap requirements.
- Grandfather existing investments in non-convertible/optionally/partially convertible preference shares made up to April 30, 2007 until maturity.
- Update internal systems to distinguish between equity and debt treatment for preference shares based on conversion features.
Who it affects
Category-I Authorised Dealer banks, Indian companies issuing preference shares to foreign investors, Foreign investors in Indian preference shares, Compliance and legal teams handling FDI and ECB transactions
What types of preference shares are now treated as equity?
Only preference shares that are fully and mandatorily convertible into equity within a specified time are treated as equity and count toward FDI sectoral caps.
What happens to existing investments in non-convertible preference shares?
Investments made up to April 30, 2007 in non-convertible, optionally convertible, or partially convertible preference shares are grandfathered and continue until their current maturity without being subject to the new rules.
How should banks handle new issuances of optionally convertible preference shares?
For funds received on or after May 1, 2007, such instruments are considered debt and must comply with all ECB guidelines, including eligible borrowers, lenders, maturity, end-use, and interest rate norms.