Having made it difficult for foreign investors to exit from an investment and having been greeted by a chorus of protest, the Government has now dropped the controversial provision that put all the instruments with inbuilt options outside the ambit of Foreign Direct Investment (FDI).
With the removal of the clause, foreign investors' exit rights have been restored to what they were before October 1.
The Department of Industrial Policy and Promotion (DIPP), on September 30, issued a circular putting all the instruments with inbuilt options outside the ambit of FDI. According to the clause, “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.”
The policy came under attack from foreign investors, particularly private equity players, as eight out of 10 FDI deals have underlying options. Classifying them as ‘debt' would mean the deals would have to fulfil stringent rules that apply to foreign debt.
To allay RBI's fears
The DIPP had said that the provision was inserted to allay the apprehensions of the Reserve Bank, which feels that the practice by Indian promoters of selling ‘put options' to attract foreign strategic investors might increase the country's short-term debt.
Now, even if there is an inbuilt option, the investment will continue to be treated as equity not debt, as required by the September 30 circular.
Industry had also feared that placing all instruments with inbuilt options outside the ambit of FDI would have proved to be a big impediment to joint ventures as well as private equity investment.