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The Finance Ministry has recently revised its policy relating to the issue of Foreign Currency Convertible Bonds (FCCBs) and ordinary shares (through the Depositary Receipt mechanism). It has substantially relaxed its policy on Euro-issues including clearance to non-bank finance companies to access the European market. Under the revised guidelines, non-bank financial companies registered with the Reserve Bank of India have been permitted to float Euro-issues. The new guidelines are expected to promote greater flexibility.

An important change in the revised policy is the withdrawal of restrictions on the number Euro-issues a company can float in a financial year and the relaxation of the rules on the use of proceeds. The portion of funds that can be brought into India immediately after the issue of corporate restructuring has been raised from 15% to 25%.

To become eligible to raise foreign funds through Euro-issues, the issuing company must have a consistent track record of good performance for a period of three years. However, the three-year track record review could be relaxed for companies which seek GDR/FCCB issues to finance investments in infrastructure industries such as power generation, telecommunications, petroleum exploration, refining, ports, airports and roads.

Euro-issues will continue to be treated as direct foreign investment in the issuing company and as such a company implementing projects not predominantly contained in Annex III of the New Industrial Policy of 1991 or whose direct foreign investment after the proposed Euro-issue is likely to exceed 51% of the post-issue subscribed capital will need to obtain prior clearance for the Euro-issue from the Ministry of Finance.

Under the revised guidelines, funds raised through the depositary receipt mechanism can be used for financing capital goods imports, capital expenditures (including domestic purchase/installation of plant, equipment and buildings), software development, prepayment or scheduled repayment of earlier external borrowings, investment outside India provided such investments have been approved by competent authorities and equity investment in joint ventures or projects in India. However, investment of the proceeds of Euro-issues is not permitted in stock markets and real estate projects. A company proposing to raise capital through Euro-issues will be required to specify the proposed end-uses of the issue proceeds at the time of making the application and will be required to submit quarterly statements on the use of funds for the approved end-uses, duly certified by the auditors.

Vinay K Jalan

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