Foreign capital deals using warrants to need mandatory equity conversion within a year

Companies that have brought in foreign capital by forging deals through warrants have come under the government's scanner.

Written by Rajat Guha

August 23, 2010 21:41 IST

Companies that have brought in foreign capital by forging deals through warrants have come under the government?s scanner. Only deals that take place through issue of warrants and carrying an upfront payment of 25% and mandatory conversion within 12 months will be approved by the government.

All other deals would be deemed null and void by the government and would have to be wound up.

The Foreign Investment Promotion Board (FIPB) has decided that companies bringing in foreign direct investment by issuing warrants will have to convert them into fully paid-up equity within 12 months of the date of issue, or face rejection and a subsequent penalty and mandatory winding-up. Many companies convert warrants into equity when they require or feel like. In some cases, these are even allowed to lapse.

The FDI policy does not allow issue of warrants under the automatic route, even if the sector is under the automatic FDI route. A transaction through issue of warrants need clearance from FIPB.

Warrants are financial instruments which allow the holder to buy shares of a company at a pre-determined price and within a specified period. Warrants are popular with Indian companies, as these can be attached to convertible bonds or preferred stock and carry lower interest rates or dividends.

This article was first uploaded on August twenty-three, twenty ten, at forty-one minutes past nine in the night.