Can Zomato's foreign investors get in on IPO?

Mumbai: In the run-up to the Zomato IPO, several banks have approached Reserve Bank of India (RBI) and Securities and Exchange Board of India (Sebi) to figure out whether existing foreign investors in the company can participate in the maiden equity offering.Multiple overseas investors in Zomato, who are keen to subscribe to the Rs 8,250 crore IPO, are grappling with a regulatory question — thanks to a 2019 rule which on a plain reading means that a foreign investor cannot invest in shares of the same company through both the foreign direct investment (FDI) and foreign portfolio investment (FPI) routes. A foreign investor buying shares of an unlisted company brings in funds under FDI regulations; but while subscribing to an IPO it has to take the FPI route. The question is: can it do both?“Many foreign investors in Zomato are enquiring with banks. They want to put money in the IPO. It will make things easier if the regulators clarify (on whether a foreign investor must stick to one route) before the IPO opens,” a person familiar with the subject told ET.The ambiguity stems from the Foreign Exchange Management (Non-debt Instruments) Rules of October 2019, which among other things states: "A person resident outside India may hold foreign investment either as FDI or as FPI in any particular Indian company."The online food delivery and restaurant discovery platform is yet to announce the IPO launch date, but there have been media speculations that the company may hit the market this month.“We understand that the intent of the law may not be to discourage FPI investments. But FEMA is a prescriptive law and few multinational banks would interpret it beyond a point due to compliance,” said a senior banker who is not connected with the IPO.Current Regulations“And, now having written to RBI, they would await the regulator’s response," said the banker."This is the first time we have to deal with such a situation of letting FDI investors buy shares as FPI. Some of the law firms we spoke to are interpreting that an FDI investor can subscribe to IPO of the same company..It’s possible that the regulation was poorly drafted. But we think there is ambiguity and some clarity is needed," said an official with a market intermediary. 84107117The subject is significant for many offshore shareholders in startups that are planning to list.Under the current regulations, a foreign investor buying shares in a domestic company under the FPI rule must hold less than 10% of the company’s equity. If the holding exceeds 10% — to, say 11% — then, the entire stake (i.e, 11%) is considered as FDI.Logically, an FDI investor with 7% stake in an unlisted should be allowed to subscribe to the company’s IPO as long as it invests in the IPO after registering itself (or its arm) as an FPI with Sebi and parks the shares received under IPO in a separate demat account with a custodian bank.Richie Sancheti, partner at law firm Algo Legal, said if the investment in an unlisted company is less than 9.99%, such an investor may further invest at IPO or post IPO as an FPI till it holds 9.99% aggregate investment in such company. "Till such stage, the same entity could potentially hold both FDI as well as FPI (via custodian) stake. However, if the original FDI investment exceeds 9.99% stake, then such investor may not be capable to hold FPI stake in the company post its IPO) and accordingly, there is an ambiguity to such participations," said Sancheti.According to another person, since FPIs can buy depository receipts listed abroad under the FDI regime and later convert these receipts into shares, it shows regulations allow the dual route for a foreign investor. "Also the very fact that holding can cross 10% is an indication that a foreigner can step in as FDI and later buy more shares as FPI that takes the combined holding beyond 10%," he said.According to the draft prospectus filed by the online food delivery and restaurant discovery platform, the proposed offer would comprise of Rs 7,500 crore fresh stock issue and Rs 750 crore worth of share sale by one of the existing investors.Also Read: Zomato may invest $100 million in Grofers as e-grocer shelves US IPO plan

from Economic Times https://ift.tt/3hhqcVy