Foreign investors to see more change on options

The regulatory regime governing optionality clauses in India has seen a history of restrictions and uncertainties, leading to ambiguities on their enforceability. A notification issued by the Securities and Exchange Board of India (SEBI) in October 2013, recognizing the validity of such options, albeit with conditions attached, signalled a regulatory overhaul.

The Reserve Bank of India (RBI) followed through and in November 2013 amended the regulations under the Foreign Exchange Management Act (FEMA) to give legitimacy to optionality clauses in foreign direct investment (FDI) instruments. However, the RBI imposed conditions for exercise of a put option, which included pricing restrictions on transfer.

So far as a put or call being exercised by a resident or a call being exercised by a non-resident, the standard RBI pricing guidelines for transfer of shares were applicable. However, for a put option to be exercised by a foreign investor, the exercise price could not exceed the price of securities on the floor of the stock exchange (for listed entities) and for unlisted companies, it could not exceed the price arrived at on the basis of return on equity.

Sourav Kanti De Biswas is a partner and Maneka Khanna is an associate at Shardul Amarchand Mangaldas & Co. The views expressed in this article are those of the authors and do not reflect the position of the firm.