In a
significant move the RBI has proposed relaxation of rules on Call and Put options last week when it
allowed buyback of DoCoMo’s shares by Tata-Teleservices in their telecom joint
venture. This decision of the central bank reflects a paradigm shift because the
last notification by it on “Pricing Guidelines for FDI instruments with
optionality clauses”[1]
in January 2014, specifically mentioned that the right to exit to a foreign
investor will be without any assured
return. And in this case the buyback of the shares has been at a “previously
assured price” which is allegedly much higher than the independently
ascertained value.
It is
important to note that the last amendment by RBI on option clauses remained fraught
with contentions of having a number of practical challenges in implementing it
but that would not be a point of discussion in this post.
Analysis
The
RBI has reportedly asked the Finance ministry for downside protection to
foreign investors upon their exit and extending the same option to the industry
in general. This is thought provoking because one would have expected such a
request to come from the ministry to the RBI and not the other way around. Taking
such an approach would increase the capital flows in the country and would be
in consonance with the government’s current policy of attracting foreign capital.
This move will also affect the contracts that the private equity has with
Indian companies and where such matters are in arbitrations and where major
defence taken by Indian corporates is the fact that Indian law restricts payout
at a price based in downside protection.
Assuming
that the Finance Ministry agrees to this proposal this move might have the result
of increasing the inflow of capital but it may also prejudice the interests of the
Indian companies who will at the time of exit of their partners be compelled to
pay an assured price which most of the times will be greater than the fair market
value. This goes against the logic which used to be forwarded by the Indian
regulators prior to 2014 amendment i.e. these protections were necessary owing
to weak leverage position of the Indian companies in such contracts.
Nevertheless
it is suggested that in order to attract more FDI the government needs to
revisit its capital control regime holistically so that once there is more
clarity on all options to foreign investors to exit the foreign investment will
increase.
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