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RBI recognises put & call options on instruments held by non-residents
In line with changes introduced by Securities and Exchange Board of India (SEBI), the Reserve Bank of India (RBI) amended the Foreign Exchange Management Regulations to permit Indian companies to issue shares and debentures with call and put conditions to persons resident outside India. Taxand India discusses the key changes introduced by RBI and the related impact on taxpayers.
Prior to this amend, under the Foreign Direct Investment Policy, an Indian company could issue only equity instruments or instruments compulsorily convertible into equity to a person resident outside India. RBI has now recognised shares or convertible debentures, containing optionality clauses, issued by an Indian company to a person resident outside India, as an eligible instrument under exchange control regulations. This recognition by RBI is, however, subject to the condition that exit cannot be provided at an assured price and the same will be subject to specified pricing norms.
Conditions for the exit:
- Lock-in period: RBI has prescribed a minimum lock-in period of 1 year for such shares and debentures that have call and put options attached to them
- Listed company - such call and put option can be exercised at the market price determined on the floor of the recognised stock exchanges
- Equity shares of an unlisted company - such call and put option can be exercised at a price not exceeding the price arrived on the basis of the Return on Equity (RoE) as per latest audited balance sheet
- Preference shares and debentures - the price for exit is required to be determined as per an internationally acceptable pricing methodology at the time of exit
Also published in Thomson Reuters' Taxnet Pro, 16 January 2014
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Over the course of time, the issue regarding validity of call and put options has been debated by various regulatory authorities. While SEBI and MCA had made necessary amendments to ensure the validity of such call and put options, necessary changes were required to be made to the exchange control regulations. Therefore in this regard the recent changes made by RBI are welcome, as it will put an end to the ambiguity surrounding the validity of instruments with such options. The amends will come as a relief to private equity investors in the sense that options have now formally been accorded statutory recognition.