The Reserve Bank of India [Get Quote] has barred companies from raising funds overseas through issue of optionally and partially convertible bonds under foreign direct investment regulations.

Companies will now be allowed to only sell bonds that compulsorily convert into equity within a specified timeframe, an RBI statement said today.

The clarification comes after the RBI found that Indian companies were raising funds overseas by selling hybrid instruments, which were essentially debt.

"Routing of debt flows through the FDI route circumvents the framework in place for regulating debt flows into the country, whether through overseas foreign currency borrowings or through foreign investment in rupee denominated debt," the RBI said.

The bank, however, allowed all existing investments in instruments which are not fully convertible into equity to continue till maturity.

The RBI said some Indian companies had been raising funds under the FDI route from overseas markets in the form of optionally or partially convertible debentures and other hybrid instruments, which are intrinsically debt-like in nature.

"Issuance of such instruments is against both letter and spirit of the FDI policy, which is aimed essentially to attract investments in the nature of equity capital and not surrogate debt instruments," it said.