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RBI allows optionality clause for buy-back of stake held by foreign investors

09 January, 2014

Reserve Bank of India has allowed foreign investors picking stake in Indian companies either through equity shares or preference shares/debentures to include an option for buy-back of such securities by local shareholders through what is commonly known as a ‘put’ option. However, it has added that such investments would be subject to a lock-in period and should not incorporate an assured return.

This has been a bone of contention specifically in real estate investments where foreign investors had brought in private equity funding for projects through such investment structures providing an assured return. RBI had objected to such deals as it felt such deals were in effect debt transactions.

RBI said the optionality clause will oblige the buy-back of securities from the investor at the price prevailing/value determined at the time of exercise of the optionality so as to enable the investor to exit without any assured return.

It, however, added some clauses for such transactions including a minimum lock-in of one year or a period as prescribed under FDI regulations, whichever is higher. For instance, in defence and construction development sector, the lock-in period is three years. The lock-in period shall be effective from the date of allotment of such shares or convertible debentures.

RBI said that after the lock-in period, the foreign investor can exit at the price prevailing in the market for firms listed on an exchange and in case of unlisted companies the exit would be at a price not exceeding the valuation based on the Return on Equity (RoE) as per the latest audited balance sheet. It added that RoE shall mean profit after tax/net worth with net worth including all free reserves and paid up capital.

The monetary authority said any agreement permitting return linked to equity as mentioned above shall not be treated as violation of FDI policy/FEMA regulations.

For investments in Compulsorily Convertible Debentures (CCDs) and Compulsorily Convertible Preference Shares (CCPS) it said such securities may be transferred at a price worked out as per any internationally accepted pricing methodology at the time of exit duly certified by a chartered accountant or a SEBI registered merchant banker. But it said the guiding principle would be that the foreign investor is not guaranteed any assured exit price at the time of making such investment/agreement and shall exit at the price prevailing at the time of exit, subject to lock-in period requirement, as applicable.

(Edited by Joby Puthuparampil Johnson)


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RBI allows optionality clause for buy-back of stake held by foreign investors

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