RBI relaxes FDI regulations by permitting optionality clause to support FDI

The Reserve Bank of India on January 9, 2014 announced that optionality clauses may henceforth be allowed in Foreign Direct Investments (FDI), to facilitate investors to exit, subject to the conditions of minimum lock-in period and without any assured return.

Till now only equity shares or compulsorily and mandatorily convertible preference shares/debentures were eligible instruments to be issued to person’s resident outside India under the FDI policy and these instruments were not allowed to have any optionality clause.

The optionality clause will make the buy-back of securities from the investor at the price prevailing determined at the time of exercise of the optionality so as to allow the investor to exit without any assured return.

This step taken by RBI is in the expectation that this relaxation will help attract larger FDI inflows in the country.

In the clause, minimum lock-in period of one year or as prescribed under FDI Regulations, whichever is higher need to be followed. After the lock-in period, as applicable, the non-resident investor exercising option/right shall be eligible to exit without any assured return.

In case of a listed company, the non-resident investor shall be eligible to exit at the market price prevailing at the recognised stock exchanges.

In case of unlisted company, the non-resident investor shall be eligible to exit from the investment in equity shares of the investee company at a price not exceeding that arrived at on the basis of Return on Equity (RoE) as per the latest audited balance sheet.

RBI also notifies that any agreement permitting return linked to equity as above shall not be treated as violation of FDI policy/FEMA Regulations.

Even though after opening of FDI to new sectors last year, India’s FDI inflows has fallen by 15% from April to October in 2013 on yearly basis and stood at USD 10.96 billion for April-October 2013. We believe that, the easing of norms may help to attract more FDI flows.