Rights issue pricing norms for NRIs tightened

Experts said the rules will help curb market manipulation and money laundering, which could take place during the transfer of shares between residents and NRIs.

The government has tightened the rights issue pricing norms for non-resident Indians (NRIs) by disallowing acquisition of renounced shares below the fair market value.

In a notification issued under the Foreign Exchange Management Act (Fema) regulations, the Centre said: “A person resident outside India who has acquired a right from a person resident in India who has renounced it may acquire equity instruments (other than share warrants) against the said rights as per pricing guidelines.”

Experts said the notification provides much-needed clarity on the “acquisition after renunciation of rights” by NRIs.

They said the rules will help curb market manipulation and money laundering, which could take place during the transfer of shares between residents and NRIs.

“The government has clarified that NRIs acquiring renounced shares cannot take the benefit of the free-pricing regime applicable to rights issue.

"While this is an important fix, Sebi should consider relaxing the floor-pricing regime for all companies and only in distress situations.

"It should move away from a 26-week look back and keep it only a 2-week look back test,” said Atul Pandey, partner, Khiatan & Co.

The Fema notification has also provided some leeway to foreign portfolio investors (FPIs) in case of a breach in shareholding limits.

The Centre has said overseas investors who breach prescribed limits will have the option of divesting their stake in five trading sessions or categorising their investment as foreign direct investment (FDI).

Following the breach, such foreign portfolio investors (FPIs) will be barred from making fresh portfolio investments in a stock.

At present, any additional investment beyond 10 per cent in a company is treated as FDI.

“This is a welcome move and has opened an avenue for many unsolved legal battles.

"This also tried to make the position of FPI investments made in breach of the debt instrument rules under Fema.

"The new insertion in the rule clarifies that if the investment happened in breach of the limit, there would be an option of divesting their holdings within five trading days from the date of settlement of the trades causing the breach.

"And in case an FPI chooses not to divest, the entire investment in the company by such an FPI and its investor group shall be considered as an investment in FDI,” said Kapil Rana, founder & chairman, HostBooks, a cloud-based platform for accounting.

The breach of limits will not be considered to be in contravention to the sectoral caps until they are converted to FDIs, or are divested.

“The clarifications now make it clear that such divestment shall be subject to further conditions, if any, specified by Sebi and the RBI,” Pandey said.

The government has also notified certain provisions in terms of which 100 per cent FDI is now allowed in insurance intermediaries.

The latest changes in the foreign investment rules come after India’s move to screen FDI from China and other neighbouring countries.

Earlier this month, the government had made prior government clearance mandatory for investments coming from countries which have a land border with India, even if they were otherwise permitted under the automatic route.

Photograph: Joshua Loff/Reuters