The exchangeable bonds proposed by the government as an additional instrument for fund-raising by companies overseas may again be put on the backburner. While the government has already issued the required notification to make the scheme operational, the Reserve Bank of India is still not in favour of the instrument.
Exchangeable bonds are instruments that allow a holding company or the parent company of a group to raise funds from the overseas market for use by any of the group companies. The bonds will then be converted into shares of the company for which funds were raised.
In response to the Budget announcement on exchangeable bonds in 2007-08, RBI has sent a cautionary note to the government stating that the rules for exchangeable bonds will have to be aligned with the norms for external commercial borrowings.
It had specifically raised issues on transparency on the end use of such funds, which will be raised by one entity and used by another. The guidelines issued by the government are silent on the monitoring of the end use of funds, said a source.
According to sources, RBI is still not sure how the product will work within
the existing policy framework of external commercial borrowings.
Sources said as a result the central bank was taking time in issuing final guidelines even as the government has notified the product. There were also issues on monitoring of the foreign direct investment cap on companies when bonds raised by one company got converted into another.
While monitoring of the FDI cap is done by RBI, in case of exchangeable bonds, RBI had suggested a framework through which the cap could be monitored automatically if an investor converted the shares.
In the notification issued by the government, foreign currency exchangeable bonds are defined as a security offered by an issuing company and subscribed to by investors living outside India and exchangeable into equity shares of another
company, which is called the offered company.
The issuing company has to be a part of the promoter group and has to hold the equity shares being offered at the time of issuing exchangeable bonds. The offered company has to be a listed company, which is engaged in a sector eligible to receive FDI and eligible for external commercial borrowings.