RBI Notification with respect to put and call options

We are pleased to release an alert which summarizes the notification issued by the Reserve Bank of India (RBI) with respect to “put and call options” associated with the Equity shares and Compulsorily Convertible Debentures treated as instruments of Foreign Direct Investments (FDI) in India. This notification is in line with the notification issued by the Securities Exchange Board of India (SEBI) on 3 October 2013 whereby it legitimised the instruments issued with “put and call options”.It is a positive step to streamline the SEBI notification, the intent as captured in the Companies Act 1956 and the Foreign Exchange Management Act 1999 along with the FDI policy.

The RBI has put an end to long pending controversy with regard to its position on Put/Call Options focusing on non-residents. However, in the process of legalising Put/Call Options, it has put in conditionalities which could be perceived negatively by the long term foreign investors as RoE may not be the appropriate mechanism to determine fair value of shares particularly when they are required to invest using DCF valuations as the floor price. We shall wait for the A.P DIR Circular to provide further clarity on this issue. The positive development is a fair degree of flexibility introduced by RBI, of investing via compulsorily convertible preference shares or debentures, accepting the present business environment.