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Tuesday 8 November 2011

Call, put options back in FDI

Call, put options back in FDI
Norm tweak
New Delhi, Oct. 31: The government has jettisoned a controversial rule that restricted the scope of foreign direct investment.
Just a month ago, the industry ministry had ruled that put and call options in equity should be treated as foreign debt and not FDI. A put option gives buyers of a security the right to sell back at an agreed price and in a pre-determined time frame; a call option gives the sellers of a security the right to buy back the security under similar terms.
The ministry today dropped the provision in the face of stiff opposition from foreign investors, particularly private equity players. The Department of Industrial Policy and Promotion of the industry ministry today said “the paragraph stands deleted from the policy”.
If put and call options in equity were treated as debt, they would have to meet the tougher norms for external commercial borrowings.
When it initially brought about the rule change last month, the industry ministry was swayed by arguments that foreign securities with an option to exit with assured returns were more in the nature of debt because the investor was not taking any risk, which should be present in all equity instruments.
The decision today flies in the face of opinions expressed by the Securities and Exchange Board of India, the attorney general and the Reserve Bank of India. In fact, it was at the Reserve Bank’s behest that the industry ministry had changed the rules in the first place.
“However, the feedback received from a number of stakeholders stated it (the rule change) could have negative fallout, particularly for the SME (small and medium enterprises) sector, so the DIPP decided to delete it,” officials said.
They said the government deleted the rule as it wanted to “reverse the mood and send a positive signal among the global investors”.
According to Bobby Parikh, an analyst with BMR Advisors, “The FDI norms would have created huge hindrance for investment had it continued. The RBI had been raising questions on many deals where the foreign investors were trying to exit through the put option route without any legal basis. Now, that it has been deleted from the FDI policy, the stance of the RBI should not stand.”
Meanwhile, commerce minister Anand Sharma said the government was “seriously considering” to raise the 51 per cent foreign direct investment (FDI) cap in single brand retail.
“We have 51 per cent (FDI cap) in single brand retail and we are seriously considering how to raise it to a higher level,” Sharma said.

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