The Reserve Bank of India (RBI) has stuck to its view that capital-raising instruments with inbuilt options to exit with assured returns won’t be treated as equity under the foreign direct investment (FDI) policy. The central bank has reiterated its stand, in response to concerns officially expressed by the department of industrial policy and promotion?s (DIPP) that such a policy would hit the flow of foreign funds into the real estate sector at a time when it badly needs low-cost finance.
The RBI said in a recent note: ?Only instruments which are fully and mandatorily convertible into equity within specified time of six months would be reckoned as part of equity under the FDI policy. Foreign investment coming as any other type of preference shares/debentures would be considered as debt and shall require to conform to ECB guidelines.?
Since ECBs are highly restricted in real estate, it is impossible for real estate firms to raise money through this route. FDI is allowed only in real estate projects of specified size and not in real estate business (buying and selling of properties) as such. Billions of dollars in private equity funds and FII money have been flowing to Indian real estate companies through instruments allegedly disguised as equity. The companies have been helped by Indian non-banking financial companies to strike deals with foreign debt providers.
The RBI said that instruments with built-in optionality ? a put option, or facility to buy back shares and assured returns will invariably be treated as debt. Instruments such as compulsorily convertible debentures / preference shares will otherwise be considered as equity and thus FDI. Further, the central bank said payment of interest other than dividend, interest on equity shares or preference shares will not be considered as FDI.
The new directions will also clear the air on what is equity and what constitutes debt in calculating FDI.