DIPP introduces new consolidated investment policy

The Department of Industrial Policy and Promotion (DIPP) has released its revised consolidated foreign direct investment policy (FDI policy 2011), effective from 1 April as part of a bi-annual update.

A snapshot of the key modifications is provided below.

Pricing of convertible instruments

Previously, the conversion price for the issue of equity-linked compulsorily convertible instruments was to be determined upfront at the time of issue. The new policy returns to the pre-2010 position, stating that only a formula-based price discovery mechanism should be determined upfront, subject to the general condition that the final conversion price cannot be lower than the fair value computed (under the minimum pricing norms at the time of issuance). This would typically afford parties the necessary commercial freedom to determine the conversion price after factoring in a premium, depending on potential business valuations.

New items under the approval route

Issuing shares against the import of capital goods, machinery and equipment and against pre-operative and pre-incorporation expenses (including payments of rent) is now permitted under the government approval route. This move provides greater certainty for common commercial arrangements, allowing newly incorporated companies, or companies in need of capital expansion, to issue shares to investors in lieu of pre-incorporation expenses, or import capital goods without paying cash. However, the requirement of routing all such payments through the Indian company’s bank account restricts the ability of investors to incur any expenditure on the Indian company’s behalf, unless the latter is incorporated and has an operational bank account.

The legislative and regulatory update is compiled by Nishith Desai Associates, a Mumbai-based law firm. The authors can be contacted at nishith@nishithdesai.com. Readers should not act on the basis of this information without seeking professional legal advice.