The Telegraph
Since 1st March, 1999
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Rule tweak to check dollar deluge

New Delhi, April 30: The Centre today said foreign investment in the form of fully convertible preference shares would now be part of a company’s equity.

The move is aimed at checking the flow of dollars which is pushing up the rupee and hurting export earnings.

In its revised guidelines for companies mobilising foreign funds, the finance ministry said such shares would be treated as foreign equity.

The impact of the new norms will be felt on sectors with foreign direct investment (FDI) caps, such as telecom and aviation.

Since preference shares are quasi-debt instruments, promoters prefer them to equity while raising funds since they do not dilute ownership stakes.

Other types of preference shares — non-convertible, optionally convertible or partially convertible instruments — will be treated as debts under the revised guidelines.

The rules for external commercial borrowings (ECBs) will apply to these shares.

The yearly ECB cap is $22 billion, and the limit for a company is $500 million.

However, existing foreign non-convertible, optionally convertible and partially convertible preference shares will be outside the ECB cap till their maturity.

The guidelines said issue of preference shares would follow the RBI and Sebi rules.

Sources said there were several cases before the FIPB of preference shares to foreign investors.

If the fresh norms apply, the board may refuse permission to these proposals.

Some of the cases were in the telecom sector, the sources added.

The finance ministry and the RBI have been weighing options to check the appreciation of the rupee.

Last week, on the eve of its credit policy, the RBI said it would keep in abeyance the new norms for ECBs.

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