About a dozen companies, mostly in the real estate sector, have been told by the Reserve Bank of India (RBI) to restructure the deals they have cut with foreign investors. These local firms have recently brought in foreign direct investment (FDI) by selling convertible papers — notes that will convert into shares after a date — to offshore funds and strategic players.
A customary practice among foreign private equity funds and overseas investors is to link the number of shares on conversion to the performance of companies in which they invest. A company which does well has to convert less shares than one which misses performance milestones. In other words, promoters of firms that have performed badly will suffer a significant dilution in their holdings.
This sliding rule mechanism has now been questioned, thanks to changes in the FDI guidelines and the new method for calculation of floor price at which local companies and existing shareholders can sell their stocks to foreign investors. “In the last three weeks, RBI has written to several companies, asking them to spell out the exact number of shares against convertibles they have issued. These firms are in a spot because the money from foreign investors has already come in. Now, they will try to convince the central bank, failing which they will have to rework the transaction structure,” a senior industry source familiar with the development told ET.
The central bank’s letters are in response to the standard forms submitted by companies a month after issuing securities to non-resident investors. Companies receiving foreign investment have to spell out transaction details like identity of investors, size of the investment, and conversion terms in these forms, known as FC-GPR filings. “Since these investments are in sectors in which FDI is allowed through the automatic route, it’s like a post facto intimation to RBI. “
“I feel RBI may not question those investments in which the FC-GPR forms have already been processed. But in many companies, investments have happened a little before or around May, when the new FDI norms and pricing were announced,” said the investment banker. “Perhaps, they should have been more careful,” he added.
Interestingly, some of the local firms are taking refuge in the new guidelines to avert a significant dilution in the promoter holdings. “These companies, mostly property firms, have not delivered and according to the terms, they have to accept a high conversion ratio in favour of the foreign investors. But they are trying to wriggle out of their commitment by simply citing the new pricing rule,” said a legal advisor to one of the foreign investors.