DIPP deletes the controversial in-built option clause

The Department of Industrial Policy and Promotion (DIPP) has today issued a press release deleting the controversial paragraph 3.3.2.1 from the semi-annual circular on foreign direct investment policy..The Department of Industrial Policy and Promotion (DIPP) has today issued a press release deleting the controversial paragraph 3.3.2.1 from the semi-annual circular on foreign direct investment policy..The DIPP had on September 30, 2011 come out with the new FDI Policy effective from October 1, 2011, which stated that instruments with in-built option of any type would not qualify as an eligible instrument of FDI. This particular clause had generated a huge debate creating lot of uncertainty for exit of foreign investors and private equity players..The Paragraph 3.3.2.1 stated as follows: “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.”.Based on representations from the various stakeholders and lawyers, DIPP has finally deleted this clause from the circular..Bar & Bench had earlier spoken to Trilegal Founding Partner Anand Prasad and AZB Partner Gautam Saha on the implications of this clause on the private equity transactions..Interestingly, the press release has deleted the provision completely. However, it is not clear if the same has been done in consultation with the Reserve Bank of India (RBI). Historically, RBI had been 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’..Based on this rational of RBI, the particular clause was inserted in the FDI Policy. Therefore, it is not clear where the RBI rationale stands now. Despite this deletion, there continues to be some lack of clarity on options as mode of exit and one has to wait and observe how RBI will treat transactions with put and buy-back options.