NEW DELHI: India will soon unveil a wide array of hybrid instruments on the lines of those available in developed markets that will allow promoters to retain control of an entity even with a minority stake, a move that will make fundraising easier, particularly for startups, senior officials said.
The government has scrapped the earlier draft that was proposed to be sent to cabinet for approval that included four instruments — optionally convertible preference shares, partially convertible preference shares and optionally and partially convertible debentures.
It was felt these were restrictive and not reflective of innovations in finance. A new policy framework may be put in place as there is a growing view within the government that these instruments need a fresh look and should not be clubbed with debt or equity.
The government has been keen to attract foreign investment to spur job generation and economic growth, taking various steps to liberalise the framework, including the fungibility of all forms of overseas capital within sectoral caps. “There is a need to have a wider choice of hybrid instruments that would provide flexibility in terms of control and holding,” a senior government official told ET.
The idea is to give companies, particularly startups, the option to raise funds without the fear of losing control, the official said.
Globally, such funding options have caught on with private equity and venture capital funds, a key source of funding for startups.
“The policy should address the requirements of industry now and reflect the innovations in finance,” said another official.
Hybrid instruments have the characteristics of debt and equity and come with differential voting rights. In a number of IT companies overseas, promoters hold less than 15% equity but exercise full control.
The US has different classes of shares with differential control. China has a variable interest instrument that allows foreign investors to have only an economic interest in companies in restricted sectors.
Instruments that are fully and mandatorily convertible into equity within a specified period are regarded as equity under the FDI policy and eligible to be issued to persons residing outside India.
Any instrument that is not mandatorily converted is considered debt and governed by external commercial borrowing rules. The proposed policy is expected to go beyond this categorisation with built-in pricing freedom. Experts agree with the need for such instruments but say changes will be required in various laws and regulations.
“Amendments would be required in exchange control regulations, FDI policy and the Companies Act,” said Akash Gupt, partner and leader, regulatory, PwC. The current policy allows Indian-owned and Indian-controlled companies (with less than 50% foreign holding) to invest in any activity, without being subjected to FDI policy conditions.
“The window is not available if economic interest to foreign investors goes beyond 49%,” Gupt said. “Company law provisions make it further complex and limit the ability to decide and negotiate commercial returns, priority distribution, optionality etc. on investment, which is important for high-risk capital.”