Indian authorities reverse decision on options

The Department of Industrial Policy and Promotion (DIPP) had ruled that any investment instruments with built-in options could not be used as part of FDI. Only equity shares that are fully, compulsorily and mandatorily convertible preference shares would qualify. The policy, which was issued on September 30 and came into effect on October 1, covered all transactions between Indian and foreign entities, including joint ventures.

Investments made by offshore private equity funds often include a provision that allows the fund to exit through a buyback or a put and call option. Under the new interpretation, such equity instruments were considered external commercial borrowing (ECB), which is subject to caps and limits.

The DIPP's principal target was real estate transactions that met FDI requirements but were in fact ECBs, but the policy met with considerable opposition from all those caught in the crossfire.

"We have received feedback from a number of stakeholders stating it could have negative fallout, particularly for the SME sector," the DIPP said in a letter to the Finance Ministry earlier this month, LiveMint reported. It added that the rules had been tightened following a request from the Reserve Bank of India.

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• Topics
• South Asia
• Regulation
• Exits
• India
• regulation
• Exit
• Structured finance