History provides clues to attack on options in FDI

The recent decision of the Department of Industrial Policy and Promotion (DIPP) to classify all equity shares with in-built options or supported by options sold by third parties to non-resident investors as debt, and no longer as foreign direct investment (FDI), appeared at first glance to be rather surprising, and seemingly without precedent.

However, a closer look at previous policy changes and informal advice of regulators reveals various attempts to ensure that non-resident investors could not use price adjustments to avoid the inherent risk in equity investment.

Since 2007 the Reserve Bank of India (RBI) has maintained that any security or instrument, issued to a non-resident entity, permitting parties to predetermine a guaranteed return on the investment, or internal rate of return (IRR), would not be classified as FDI, being more in the nature of debt, that is, an external commercial borrowing (ECB).

Jatin Aneja (jatin.aneja@amarchand.com) is a partner, Vidyut Gulati (vidyut.gulati@amarchand.com) is a principal associate and Varun Nair (varun.nair@amarchand.com) is an associate at Amarchand & Mangaldas & Suresh A Shroff & Co. The views expressed in this article are those of the authors and do not reflect the view of the firm.