Monday, October 31, 2011

Reversal of FDI Policy on Options


Exactly a month ago, the Government announced its updated FDI policy which treated foreign investments in Indian securities as external commercial borrowings (ECB) in case such investments conferred options on the foreign investors. The wide amplitude of the restriction on options gave rise to significant concern among the corporate and investment community, and it has been the subject matter of criticism among practitioners and commentators alike.
However, this concern has been assuaged by a clarification issued by the Department of Industrial Policy and Promotion (DIPP) today which deletes the relevant clause (para 3.3.2.1) of the Consolidated FDI Policy that outlaws options in securities. While this new pronouncement seems unequivocal and the alacrity with which the Government reacted is indeed remarkable, it remains to be seen whether the Reserve Bank of India (RBI) will also now adopt a more liberal approach to options and modify their prevailing position (that the existence of options in securities will convert investments into those under the ECB policy rather than the FDI policy). Moreover, it is certainly not the end of the debate regarding the enforceability of options in securities of Indian companies which continue to encounter issues under companies and securities legislation, namely the Companies Act and Securities Contracts (Regulation) Act respectively.

2 comments:

vswami said...

http://www.thehindubusinessline.com/todays-paper/article2586750.ece#.Tq-UWawEFgQ.email

Refer the above article in BL.

In particular,the underlying perception in- "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."

Do you think that this has anything to do with but serves aS A commentary on the sentiment aired by you in re. the RBI's possible reaction to the subject reversal of FDI policy on options?

vswami said...

Rider>
May be, for a better understanding of the purport or import of my poser, a somewhat detailed one may help since posted in the blog:
http://vswaminathan-vswaminathan-swamilook.blogspot.com/2011/11/bl-1st-nov-httpwww.html