Following the decision of the Ministry of Finance to permit the issuance of partly paid shares and warrants by Indian companies to foreign investors, RBI has now classified partly paid shares and warrants of Indian companies as eligible instruments for the purpose of FDI and FPI. Towards this objective, SEBI released a Discussion Paper on “Issuance of partly paid shares and warrants by Indian companies” on December 2, 2014, harmonizing the requirements relating to a) upfront payment of consideration, and b) tenure of partly paid shares and warrants, for different modes of issuance of these instruments under the ICDR Regulations, 2009 and FEMA.

The Discussion paper proposes the upfront payment of 25% of the total consideration at the time of issuance of partly paid shares and warrants, with the balance consideration being payable within 12 and 18 months, respectively. Prescribing a minimum upfront payment will ensure certainty regarding the receipt of funds by the issuer company. In certain instances, companies issued warrants to promoter groups to give them voting rights, which were not subscribed to later. Keeping a time-frame for making the payment, even if in a staggered manner, will help prevent misuse of the instrument. However, concerns have been raised regarding issuance through preferential allotment. Although the RBI does not prohibit the issuance of these instruments through preferential allotment, the proposed SEBI amendments do not provide for the same. Further clarity in this regard would benefit issuers willing to raise capital through these instruments.