The Department of Industrial Policy and Promotion (DIPP) has on September 30, 2011 come out with new Foreign Direct Investment (FDI) Policy effective from October 1, 2011. Under the new consolidated FDI Policy, DIPP states that instruments with in-built option of any type would not qualify as a eligible instrument of FDI.

The new FDI policy states in Section 3.3.2.1 “Only equity shares, fully, compulsorily and mandatorily convertible debentures and fully, compulsorily and mandatorily convertible preference shares, with no in-built options of any type, would qualify as eligible instruments for FDI.   Equity instruments issued/transferred to non-residents having in-built options or supported by options sold by third parties would lose their equity character and such instruments would have to comply with the extant ECB guidelines.”

It is interesting to note that while DIPP has included this language in the FDI Policy there is no specific definition or explanation provided for the term “options”.

This development needs to be viewed in context of the concerns raised by the Reserve Bank of India (RBI) on put options. Of late the RBI had started raising questions on many deals where the foreign investors were trying to exit through the put option route. RBI was proactively sending notices to such companies since it was of the view that such pre-agreed put options are foreign 'loans' and not 'equity'.  In the early month of September, Bar & Bench had spoken to Gautam Saha of AZB & Partners in detail on the RBI’s stand.

In the new FDI Policy, it seems that the DIPP has taken the same stance as the RBI and included a specific provision on the issue of optionality. This provision could have an adverse impact on foreign investors as put option is one of the most widely adopted mode of exit.

We will need to wait and watch how the new FDI Policy will affect the investors exit right and the inflow of FDI in the country.

FDI Press Release

FDI Circular 2011