Exactly a month ago, the Government announced its updated FDI policy which treated foreign investments in Indian securities as external commercial borrowings (ECB) in case such investments conferred options on the foreign investors. The wide amplitude of the restriction on options gave rise to significant concern among the corporate and investment community, and it has been the subject matter of criticism among practitioners and commentators alike.
However, this concern has been assuaged by a clarification issued by the Department of Industrial Policy and Promotion (DIPP) today which deletes the relevant clause (para 18.104.22.168) of the Consolidated FDI Policy that outlaws options in securities. While this new pronouncement seems unequivocal and the alacrity with which the Government reacted is indeed remarkable, it remains to be seen whether the Reserve Bank of India (RBI) will also now adopt a more liberal approach to options and modify their prevailing position (that the existence of options in securities will convert investments into those under the ECB policy rather than the FDI policy). Moreover, it is certainly not the end of the debate regarding the enforceability of options in securities of Indian companies which continue to encounter issues under companies and securities legislation, namely the Companies Act and Securities Contracts (Regulation) Act respectively.
Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.