Foreign private equity (PE) investors will not be able to demand an exit price with an assured return at the time of investing or signing a deal involving ‘optionality’ clauses.
The central bank has now prescribed a formula to work out the exit price.
While validating shares and convertible debentures having an optionality clause, the RBI has now amended FEMA (Foreign Exchange Management Act) regulations to ensure that an exit price with an assured return is not possible in these instruments. It has also set a one-year lock-in period before the options can be exercised.
Many experts see the latest RBI move as “sensible regulation” but feel that it could hold back foreign private equity investors.
However, the jury is still out on whether the RBI’s latest regulatory change will have a retrospective effect and compel all existing PE agreements to be reworked.
Expert view Some experts feel that agreements signed earlier with a specific exit price and an assured return for PE investors will become illegal after the modification in the FEMA regulations.
The RBI’s move will address its concerns about debt flowing into the country in the form of such options, disguised as equity, say experts. It will also completely take away the opportunity for foreign PE investors to demand a king’s ransom from investee Indian companies, they added.
“It will not be possible to provide for an exit price with an assured return that is different from the formula provided by the RBI.
“This can affect foreign PE investors investing through the FDI route as they will not be able to get assured returns,” Lalit Kumar, Partner, J. Sagar Associates, told Business Line .
Kumar said that the RBI move will remove all ambiguities over the options (call or put) vested with foreign investors.
Different take However, Raja Lahiri, Partner, Transaction Advisory Services, Grant Thornton, had a slightly different take on the matter. “Fundamentally, I don’t think the RBI regulation will impact PE investments. Practically, such issues of call and put are commercial decisions and are not determined by explicitly spelt out exit prices,” said Lahiri. “One needs to review this regulation in more detail.”
After the Centre (through the new company law) and SEBI (in October 2013), it is now the turn of the RBI to give its stamp of approval to the enforceability of shares or debentures containing options (call or put).
The earlier Companies Act, 1956, did not specifically validate call or put options in public companies.
srivats.kr@thehindu.co.in