Monday, February 9, 2015

Pricing of Options To Foreign Investors

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.


Anonymous said...

Regarding the article the relaxation which was given by which RBI circular number? All i have seen is the Sixth bi monthly statement of the RBI dated 03 Feb 2015. Has the transfer gone ahead by which circular ? or has it been referred to a government division?

Umakanth Varottil said...

@Anonymous. As far as I know, what is currently available is the Sixth bi-monthly statement of 3 Feb 2015. There does not appear to be a circular yet with the details.

Anonymous said...

Thank you for your reply. So it would be right to say that the permission has been granted to Tata to purchse dococmo shares? Or is still pending and after formal permission is granted? and that no circular is out which would apply from now on.

Anonymous said...

I wish to know if RBI has come out with any circular articulating on the proposed changes to bring about price flexibility, as mentioned in the Sixth Bi-Monthly Monetary Policy Statement, 2014-15 of 3 Feb 2015. What is the current pricing requirement for a foreign investor's exit? Is the requirement of "No Assured Return" still applicable?