New preference share norms set

NEW DELHI, July 31: The government will allow domestic companies to mobilise foreign investments through preference shares for financing pr...

NEW DELHI, July 31: The government will allow domestic companies to mobilise foreign investments through preference shares for financing projects. The inflow of capital, however, will remain limited to sectoral caps on foreign equity.

The Finance Ministry, while announcing the guidelines, has clarified that preference shares should be treated as equity under the Companies Law. Which is why the procedure for approval of investment through preference shares will be guided by the foreign investment policy. The clarification was issued by the ministry in response to a spate of queries on whether preference shares should be treated as equity under the Companies Law.The guidelines, which comes into effect immediately, stipulate that foreign investments in preference shares will be considered as part of the share capital, but will fall outside the external commercial borrowings ECBs norms/cap. Issue of preference shares will only be allowed as rupee- denominated instruments in accordance with the Companies Act, 1956. It, acccording to the finance ministry, will provide domestic corporates greater flexibility in using preference shares as a form of financing.

The guidelines say requests for issue of preference shares to foreign investors will be treated as proposals for foreign equity induction. It will be processed either through the automatic approval window or the Foreign Investment Promotion Board FIPB. They will not require finance ministry8217;s approval.

Preference shares will be included as foreign direct equity for purposes of sectoral caps on foreign equity, where they are prescribed, provided they carry a conversion option. The foreign equity cap on telecom, banking and air tax are 49 per cent, 20 per cent and 40 per cent respectively.

If preference shares are structured without conversion options, they will fall outside the foreign direct equity cap. The guidelines also clarify that the issue of preference shares by domestic companies will continue to conform to Sebi, RBI guidelines and other statutory requirements.

Preference shares are neither equity nor debt and are considered as quasi-debt. The phrase used in the guidelines for computing the ceiling for FII investments in companies is quot;issued share capitalquot;. This term, prima facie, includes preference shares as well, but, as a matter of abundant caution, companies have so far interpreted it as equity capital. The finance ministry has now clarified that preference shares are being classified as equity and not as debt.