Latest Expert Exchange Queries
sitemapHome | Registration | Job Portal for CA's | Expert Exchange | Currency Converter | Post Matrimonial Ads | Post Property Ads
News shortcuts: From the Courts | News Headlines | VAT (Value Added Tax) | Service Tax | Sales Tax | Placements & Empanelment | Various Acts & Rules | Latest Circulars | New Forms | Forex | Auditing | Direct Tax | Customs and Excise | ICAI | Corporate Law | Markets | Students | General | Indirect Tax | Mergers and Acquisitions | Continuing Prof. Edu. | Budget Extravaganza | Transfer Pricing
Popular Search: TAX RATES - GOODS TAXABLE @ 4% :: due date for vat payment :: ICAI offer Get Windows 7,Office 2010 in Rs.799 Taxes :: form 3cd :: Central Excise rule to resale the machines to a new company :: cpt :: list of goods taxed at 4% :: VAT RATES :: TDS :: ARTICLES ON INPUT TAX CREDIT IN VAT :: articles on VAT and GST in India :: VAT Audit :: ACCOUNTING STANDARD :: ACCOUNTING STANDARDS :: empanelment
« News Headlines »
 India is moving towards a flawed GST
 ICAI to organise two-day international conference in Hyderabad
 Here's how to calculate tax payable on your capital gains
 Income Tax calculations for the financial year 2016-17
 CPE Events 17 October - 22 October 2016
 High Court raps I-T Department for wrong tax demand
  CBDT signs 5 advance pricing pacts with Indian taxpayers
 Finance ministry warns tax officials of action against GST protest
 Big changes for small units under GST
 Parliament’s winter session to begin on November 16 to expedite GST rollout
 Income-tax (27th Amendment) Rules, 2016 - 92/2016

The fall from favour of preference shares
June, 07th 2007
A recent amendment treats all preference shares issued to non-residents, other than compulsorily convertible preference shares, as "loan" which requires conformity with the ECB guidelines.

Till recently, Indian companies were permitted to issue preference shares to foreign investors without any significant restrictions. The only major restriction was on the dividend that could be paid on such shares. The dividend rate could not exceed 300 basis points above the SBI Prime Lending Rate on the date of issue of the preference shares.

The preference shares issued to foreign investors were also not considered as part of "foreign equity" for computing the sectoral limits, unless such preference shares were convertible preference shares. Hence, till recently, it was permissible for foreign investors to invest in redeemable/convertible preference shares issued by Indian companies.

Recent Amendment

However, the Finance Ministry notification of April 30 has imposed severe curbs on issue of preference shares by Indian companies to foreign investors. As per the notification, fully convertible preference shares would be treated as part of share capital and taken into account in computing the foreign equity ceiling, where such ceiling has been prescribed. Further, foreign investment in other type of preference shares, such as non-convertible, partly convertible or optionally convertible, would be regarded as "debt" and require confirming with ECB guidelines.

Indian companies had the flexibility of raising preference capital from foreign investors either as a convertible or redeemable instrument. In most cases, these instruments were structured in such a way so as to provide the investors a fixed return by way of dividend with an option to convert the preference shares into equity at a later period, depending on the performance.

The recent amendment treats all preference shares issued to non-residents, other than compulsorily convertible preference shares, as "loan" which requires conformity with the ECB guidelines.

ECB provisions

It may be noted that ECBs are more tightly regulated than foreign direct investments by way of preference capital. Some of the important provisions of the ECB guidelines are:

RBI approval would be required before draw down of the amount as for FDI, intimation is sent to the RBI post-investment.

ECBs can be raised only from internationally recognised lenders. It is debatable whether the RBI will recognise overseas funds (including private equity funds, venture capital funds, etc., which are significant investors in preference shares) as "internationally recognised lenders".

Ceiling on interest rate LIBOR plus 200/350 basis points.

End-use restrictions not permitted for real estate, capital markets or on-lending.

Raising ECBs not permitted for working capital/general corporate purposes; permitted only for import of capital goods, new projects, expansion, etc.

Financial intermediaries such as banks, financial institutions and NBFCs not permitted to access ECBs.

Impact of notification

The effect of this notification would severely impede the structuring options available for corporates in raising resources from foreign investors. If an Indian company is required to ensure compliance with all the guidelines applicable for ECBs, for issuing optionally/partly convertible preference shares, then, effectively, it may not be able to issue such shares at all.

A number of companies, especially those in the services and technology sectors, are dependent on their overseas partners/venture funds for funding. Most of this funding is in the form of long-term preference shares, with a conversion option. Following this amendment, such companies will find it difficult to access funds to meet their requirements.

It needs to be appreciated that there are a number of restrictions/pre-qualifications for an Indian company to access funds from the banking sector. In such a situation, it is not clear as to why the Government should prohibit the flow of funds as redeemable preference shares into such companies. If the Government's intention is to prevent misuse of this facility by certain sectors, probably this amendment could have restricted the issue of such preference shares by those sectors alone, and not a blanket ban as has been imposed now.

Such sudden changes in FDI regulations may not send the right signals to overseas investors. It is hoped that this amendment will be reviewed, covering only certain specific sectors which are of immediate concern to the Government, thereby permitting the other sectors to continue to make use of the facility which has been available to them for long.

V. N. Shiva Shankar
(The author is a Chennai-based advocate.)

Home | About Us | Terms and Conditions | Contact Us
Copyright 2016 CAinINDIA All Right Reserved.
Designed and Developed by Binarysoft Technologies Pvt. Ltd.
Binarysoft Technologies - Our Team

Transfer Pricing | International Taxation | Business Consulting | Corporate Compliance and Consulting | Assurance and Risk Advisory | Indirect Taxes | Direct Taxes | Transaction Advisory | Regular Compliance and Reporting | Tax Assessments | International Taxation Advisory | Capital Structuring | Withholding tax advisory | Expatriate Tax Reporting | Litigation | Badges | Club Badges | Seals | Military Insignias | Emblems | Family Crest | Software Development India | Software Development Company | SEO Company | Web Application Development | MLM Software | MLM Solutions