The Foreign Investment Promotion Board (FIPB) has rejected a proposal by Tata Investment Corporation [Get Quote] (TIC) to issue zero coupon convertible bonds (ZCCBs) with detachable warrants to its shareholders.

TIC, which invests in companies, mutual funds and venture capital funds, was issued a certificate of registration by the Reserve Bank of India [Get Quote] (RBI) under the "investment company" category to carry on business as a non-deposit taking non-banking finance company. FIPB has contended that FDI under the "investment company" category is not permitted under the existing rules for NBFCs.

While Tata Sons has a 54.98 per cent stake in the company, non-resident Indians have 0.46 per cent equity and foreign institutional investors have 3.51 per cent. The rest is with various Tata companies, mutual funds, corporate bodies and trusts.

TIC had proposed to issue 6.89 million ZCCBs for Rs 650 at par aggregating Rs 448 crore (Rs 4.48 billion) to the equity shareholders of the company on a rights basis in the ratio of one ZCCB with detachable warrant for every five equity shares held. The ZCCB bonds were proposed to be offered for subscription for cash to existing equity shareholders, including foreign institutional investors and non-resident Indians.

In a recent FIPB meeting, the Department of Industrial Policy and Promotion had asked for deferment of the proposal as it felt that allowing FDI in the NBFC activity of "investment companies" needed wider consultation. FIPB also asked for more clarification from the RBI on the issue.

Though there are 18 NBFC activities where FDI up to 100 per cent is allowed under the automatic route subject to minimum capital norms, the list does not include "investment" or "holding companies engaged in investment." Some experts said that 100 per cent FDI should be allowed subject to minimum capital norms because the activity of holding companies or investment companies is defined as NBFC activity and requires registration with the RBI.