What changed
RBI issued a circular on June 8, 2007, stating that only instruments fully and mandatorily convertible into equity within a specified time will be considered equity under FDI. Optionally or partially convertible debentures, which are debt-like, can no longer be issued to foreign investors under the FDI scheme. Existing investments in such instruments can continue until maturity, and funds received before June 7, 2007, can still be used to issue these instruments.
What it means for you
Banks must ensure that any foreign investment routed through debentures under FDI complies with the new equity-only rule. This prevents companies from bypassing debt regulations by using hybrid instruments. FIIs can still invest in listed non-convertible debentures as per existing norms. Banks should update their compliance checks for foreign inward remittances and advise clients accordingly.
What you must do
- Review all pending FDI applications involving debentures to ensure they are fully and mandatorily convertible into equity.
- Advise corporate clients that only fully convertible instruments qualify as equity under FDI from June 8, 2007.
- Update internal systems to flag optionally or partially convertible debentures as debt, not equity, for regulatory reporting.
- Ensure FII investments in non-convertible debentures follow RBI/SEBI debt investment norms and ceilings.
Who it affects
Category-I Authorised Dealer banks, Indian companies raising foreign funds via debentures, Foreign investors under FDI route, FIIs investing in rupee debt instruments
What types of debentures are now allowed under FDI?
Only debentures that are fully and mandatorily convertible into equity within a specified time are allowed as equity under FDI. Optionally or partially convertible debentures are not permitted.
Can existing investments in partially convertible debentures continue?
Yes, investments made before June 8, 2007, can continue until their current maturity. Companies that received funds before June 7, 2007, can still issue such instruments.
Are FIIs affected by this circular?
No, FIIs can continue to invest in listed non-convertible debentures and bonds as per existing RBI/SEBI norms, subject to prescribed ceilings.