warrant conversion norm

RBI to ease warrant conversion norm
NEW DELHI: Companies looking to raise funds from foreign investors by way of convertible warrants may soon be allowed to issue shares against these
instruments at any time up to 18 months, under a relaxation of rules being considered by the Reserve Bank of India (RBI). Convertible warrants are loans that are subsequently exchanged for shares on pre-agreed terms. Like an option, a warrant gives its holder or buyer the choice to purchase a fixed quantity of shares of the issuing company at an agreed price at or before a future date. The central bank had, last December, made it mandatory for companies to issue shares within 180 days of receiving money from foreign investors. Its move was aimed at plugging a loophole in foreign exchange regulations which was being misused by mainly real estate companies. RBI’s decision, however, created confusion for companies that planned to issue convertible warrants. This is because the stock market
regulator Sebi’s guidelines allowed warrants to be converted into shares in 18 months. Some companies had requested the finance ministry to clarify the rules following the RBI order. The finance ministry has written to the central bank asking it to make an exception in the case of convertible warrants, a ministry official said, adding the central bank was expected to issue a clarification. “The matter requires clarification. In fact, the government or RBI should come out with separate guidelines dealing with the issue,” said Punit Shah, executive director, tax and regulatory services for PricewaterhouseCoopers’ financial services practice. Mr Shah said clear rules on the conversion of warrants into shares were absent under current foreign direct investment (FDI) regulations or under Foreign Exchange Management Act (FEMA) rules. The RBI move was primarily aimed at plugging a loophole in the FEMA regulations being misused by real estate firms to raise funds abroad when the government’s rules clearly barred real estate companies from raising foreign debt.