The last few weeks have witnessed some activity from the Reserve Bank of India (RBI), which is indicative of a more liberalized approach towards the pricing at which foreign investors are able to sell their shares upon exercise of options (such as put options) made available to them under contractual documentation. Most of the indications came from the RBI in relation to a specific case involving Tata-Docomo wherein the RBI seemed willing to permit the exercise of options at the agreed price (although that was different from the price permitted by the regulations). Further discussion and analysis about this can be found on The Firm and Ajay Shah’s Blog.
While the earlier scenario was limited to a specific case, RBI’s announcement in its recent monetary policy is more broad-based and likely to have a wider impact when implemented. The relevant extract is as follows:
20. With a view to meeting the emerging needs of foreign direct investment in various sectors with different financing needs and varying risk perceptions as also to offer the investor some protection against downside risks, it has been decided in consultation with the Government of India to introduce greater flexibility in the pricing of instruments/securities, including an assured return at an appropriate discount over the sovereign yield curve through an embedded optionality clause or in any other manner. Guidelines in this regard will be issued separately.
While this represents a broader policy pronouncement towards relaxation of the rules on options and similar instruments available to foreign investors, the exact mechanisms are yet unclear (as this discussion also suggests). The nature and extent of the flexibility to be introduced can be garnered only for the fine print of the guidelines, which are awaited.