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REVISION TO FDI POLICY ON IN-BUILT OPTIONS

The Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India (“DIPP”) had on September 30, 2011 released the fourth edition of the consolidated FDI Policy of India vide Circular 2 of 2011 (“New FDI Policy”).

Section 3.3.2.1 of the New FDI Policy prescribed that only:

i.    equity shares;

ii.   fully, compulsorily and mandatorily convertible debentures; and

iii.  fully, compulsorily and mandatorily convertible preference shares,

in each case with no in-built options of any type, would qualify as eligible instruments for FDI. Equity instruments issued/transferred to non-residents having in-built options or supported by options sold by third parties would lose their equity character and such instruments would have to comply with the extant external commercial borrowing (“ECB”) guidelines.

The impact of inclusion of section 3.3.2.1 in the New FDI Policy has been discussed in detail in “LexAnalysis – FDI Policy of India” of October 5, 2011. In our analysis, we had mentioned that the inclusion of the aforesaid section 3.3.2.1 in the New FDI Policy was not welcomed by corporates and investors. This was primarily because of the reason that the New FDI Policy did not define what constitutes “in-built options”. This led to confusion amongst the corporates and their advisors who could only surmise that the new section 3.3.2.1 is related to the recent stance of the Reserve Bank of India on put option and pre-agreed buy back arrangements as futures or derivatives transactions. The new FDI Policy thus had an adverse impact on the investment agreements entered into by venture capital funds, private equity players and strategic investors. We had surmised that the Government would need to revisit this issue.

On October 31, 2011, the DIPP has issued a press release in terms of which section 3.3.2.1 of the New FDI Policy has been deleted. This decision of the DIPP would be a great relief for corporates, especially venture capital funds, private equity players and other strategic investors.

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