January 16, 2014
Pursuant to a notification dated November 12, 2013 and a subsequent circular dated January 9, 2014 ("RBI Notification"), the Reserve Bank of India ("RBI") has legalized the use of call options and put options as an exit mechanism for foreign investors. RBI’s new policy removes the uncertainty regarding the validity of contracts containing put and call options in relation to the securities of Indian companies held by foreign investors. This is in keeping with the recent notification of the Securities and Exchange Board of India, which removed the uncertainty under Indian securities laws, concerning the enforceability of contracts containing put/call options and other pre-emption rights in relation to the securities of Indian public (listed and unlisted) companies.
While there was no specific restriction under India’s foreign direct investment policy ("FDI Policy") on the ability of a foreign investor to provide for put or call options in relation to securities of an Indian company held by such foreign investor, the RBI had consistently taken the view that any kind of built in optionality in relation to such securities was in violation of India’s FDI Policy. Accordingly, where investments were made in such securities with exit options through put and call options, the RBI had questioned such investments and treated the definite exit mechanism provided to foreign investors through put/ call options as being analogous to a fixed return on capital (similar to a loan). Consequently, the RBI treated all foreign investor-held securities coupled with an option as ‘debt’, and not as ‘foreign direct investment’, in an Indian company.
Under the RBI Notification, an exit through put and call options in relation to the securities of Indian companies held by foreign investors are now specifically treated by the RBI as foreign direct investment consistent with India’s FDI Policy, subject to the following key conditions:
(a) No assurance can be given to the foreign investor with respect to the exit price. The exit price must be determined in accordance with prescribed pricing requirements (discussed below).
(b) A foreign investor holding securities (coupled with a put or call option) cannot transfer such securities for at least one year from the date of allotment of such securities.
(c) The following pricing requirements must be followed in relation to the exercise of the put or call option at the time of exit:
(d) The amendments promulgated by the RBI Notification are retrospective in effect, and all existing contracts which provide for put/call options are required to comply with the aforementioned provisions of the RBI Notification.
 A.P. (DIR Series) Circular No. 86, Reserve Bank of India.
 Notification No. LAD-NRO/GN/2013-14/26/6667 dated October 3, 2013 of the Securities and Exchange Board of India.
Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. For further details, please contact the Gibson Dunn lawyer with whom you usually work or the following lawyers in the firm’s Singapore office:
Jai S. Pathak (+65 6507 3683, [email protected])
Priya Mehra (+65 6507 3671, [email protected])
Bharat Bahadur (+65 6507 3634, [email protected])
Karthik Ashwin Thiagarajan (+65 6507 3636, [email protected])
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