New Delhi, August 28, 2017

Startups can issue equity or equity linked instruments or debt instruments to foreign VC investors

In a further boost to the startup ecosystem in the country, the consolidated Foreign Direct Investment (FDI) policy, released by the government on Monday mentioned start-ups for the first time.

It also effectively squashed chances of Air India being sold to a foreign carrier by saying that the rule allowing foreign airlines to own up to 49 per cent in Indian carriers do not apply to Air India.

Effective immediately, the updated version of the consolidated policy simply lists out all changes in rules and guidelines regarding FDI that have been in effect since the last policy was released by the government back in June 2016.

Startups can issue equity or equity linked instruments or debt instruments to foreign venture capital investors against receipt of foreign remittance, in accordance with FEMA Regulation, the policy said.

Moreover, startups can issue convertible notes to person residing outside India under certain conditions. The policy also stated that convertible notes to non-resident investors will have to be issued with government's permission in sectors where government approval is required for foreign investment.

For Pakistani and Bangladeshi investors, convertible notes issued by an Indian startup may bought beyond an amount of Rs 25 lakh or more in a single tranche, it also stated.

Convertible Note is an instrument issued by a start-up company establishing that it has received money as debt, which will be repaid at the discretion of the holder or will be converted into specified number of shares of the start-up.

The government is planning to bring in further amendments to Foreign Direct Investments (FDI) norms soon.

This includes allowing FDI in multi-brand retail beyond only food items as is currently allowed as well as pushing up the cap for foreign investment in print media to a higher figure.

A senior government official said inter-ministerial consultations between the Finance Ministry, Department of Industrial Policy and Promotion and various line ministries have been completed. A cabinet note in this regard may be taken up the cabinet as early as this week, another official said.

Air India to remain with Indian carriers

No change in policy for Foreign Direct Investment (FDI) norms in aviation means the universe of bidders for sale of national carrier Air India has narrowed down to only domestic airlines.

The new policy released today says that the rule allowing foreign carriers to own up to 49% in Indian carriers do not apply to Air India. "The policy mentioned at para for above (foreign carriers allowed to own 49 percent in Indian carriers) is not applicable to M/s Air India Limited," the government clarified in consolidated FDI policy released today.

Experts favoured that foreign carriers should be allowed to bid for Air India to increase the prospect of success for the PSU's disinvestment. "Foreign airline equity participation up to 49% in AI's divestment will be critical to achieve a successful outcome for the government," said Kapil Kaul, CEO, South Asia of aviation consultancy firm CAPA.

"Restricting foreign airlines will send a wrong signal globally and significantly constrain the number of interested bidders. Focus needs to be on selecting the right suitor, which can turn AI into a truly global airline and help in maximising the economic benefits including developing a large airport hub in India," he added. Domestic major IndiGo has shown interest to bid for Air India's international operations.

About the airline's interest in Air India, IndiGo president Aditya Ghosh said the specific interest is in acquiring international operations."We will wait to see how the government will undertake this divestment of Air India and till such time that clarity is available, it does not help to speculate on all different scenarios that are possible," he said.

During the last one year, the government has liberalised FDI policy in over a dozen sectors, including defence, civil aviation, construction and development, private security agencies and news broadcasting.

[The Business Standard]