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India's FDI Policy—Revising the Revisions
At the beginning of October, the Department of Industrial Policy and Promotion (DIPP) in the Government of India issued a regular update to its policy on foreign direct investment (FDI). One of the changes it introduced at that time precluded instruments with "in-built options of any type" from qualifying as FDI.
For the reasons we previously anticipated, this change caused a fair amount of concern within the investment community—particularly venture capital and private equity investors. However, earlier today, the DIPP allayed those concerns by issuing a "corrigendum." This 'correction' effectively withdraws the earlier change because it deletes, from the current FDI policy, the entire paragraph that contained the change.
Changes in Listing Agreement Financial Reporting Requirements
Last week, the Securities and Exchange Board of India (SEBI) required stock exchanges to change their listing agreements. The changes are intended to improve financial reporting by listed companies in India.
As a result, with effect from the quarter or financial year ending December 31, 2011, when listed companies disclose quarterly results to their stock exchanges, they will now need to provide comparative data from the immediately preceding financial quarter. Listed companies will also need to submit results of their last financial quarter when they submit their annual audited and, if unaudited (interim) financial statements are submitted these submissions will need to be accompanied with a limited review report issued by the auditors.
FDI in Pharmaceuticals
A high level ministerial group chaired by the Prime Minister has set the clock back on foreign direct investment (FDI) in the drugs and pharmaceutical sector. The group included the ministers of finance, health, commerce and industry, and pharmaceuticals and chemicals, as well as the deputy chair of the country's Planning Commission.
The group has reversed India's rules allowing FDI in pharmaceuticals companies and decided that going forward, the country will split its FDI rules for the pharmaceuticals sector into two groups—those that apply to new (greenfield) projects and those that apply to existing (brownfield) projects.
The group has decided that India will continue to allow 100% FDI, without prior government approval, in greenfield projects in the pharma sector. However, FDI in existing (brownfield) ventures in the pharma sector will now be permitted only with the prior approval of the country's Foreign Investment Promotion Board (FIPB).
The FIPB approval requirement is expected to apply for the next six months. During this period, necessary enabling regulations will be put in place by the Competition Commission of India (CCI) to ensure effective oversight of mergers and acquisitions that strikes a balance between public health concerns and attracting FDI in the pharma sector. Once these enabling regulations are in place, the requisite oversight will be done by the CCI entirely in accordance with the competition laws of the country.
The government's press release does not say anything about previous FDI in brownfield projects and one therefore assumes that previous FDI transactions are unaffected by these new rules.
Read the Fine Print in this Biannual FDI Update
Since March 2010, the Department of Industrial Policy and Promotion in the Government of India has issued regular updates to its policy on foreign direct investment (FDI). These updates are issued biannually—on March 31 and September 30. Therefore, and as expected, on September 30, 2011 the Government issued its September update with a press release highlighting key changes.
Six changes were highlighted in this update. These changes related to (i) permitting FDI under controlled conditions in apiculture (beekeeping), (ii) exempting FDI in construction development activities in the education sector and in old-age homes from conditions that apply to FDI in other construction activities, (iii) broadening the definition of industrial parks (where 100% FDI is permitted) to cover facilities that conduct research and development in bio-technology, pharmaceuticals and life-sciences), (iv) allowing up to 26% FDI in terrestrial FM radio (up from 20%), (v) clarifying the rules that apply when converting pre-incorporation and other expenses into equity; and (vi) permitting residents to pledge shares to non-residents in connection with external commercial borrowings by Indian companies and allowing banks in India to open rupee denominated non-interest bearing escrow accounts, to hold shares acquired from residents or to hold money being paid to purchase shares from residents.
While these changes are welcome, another change—one that was not highlighted in the accompanying press release—is likely to cause a kerfuffle.
Like earlier updates, this September update continues the provision that only three types of instruments can be used for FDI: (i) equity shares, (ii) fully, compulsorily and mandatorily convertible debentures, and (iii) fully, compulsorily and mandatorily convertible preference shares.
However, this September update then expressly goes on to state that these instruments cannot have "in-built options of any type" to qualify as FDI. "Equity instruments issued/transferred to non-residents having in-built options or supported by options sold by third parties would lose their equity character and such instruments would have to comply with the [current rules applicable to external commercial borrowings]."
This new language is likely to cause a lot of confusion on two counts. First, there is little clarity on the types of transactions that will be affected by the phrase "options of any type." For instance, would a common restriction on transfer of the shares (such as a right of first refusal or a drag along right) amount to a prohibited option. Second, there is also little clarity on the period to which the restriction relates. In other words, is this restriction a 'clarification' of an old rule that applied to instruments issued before October 1, 2011 or is this a new restriction that will only apply to instruments that are issued after October 1, 2011?
Given the common use of such shareholding-related restrictions in FDI transactions, one can only hope that the Government of India or the Reserve Bank of India issues prompt clarifications on the scope and effect of this latest "update."