IndiaCorpLaw

Pricing of Options To Foreign Investors

The last few weeks have witnessed
some activity from the Reserve Bank of India (RBI), which is indicative of a
more liberalized approach towards the pricing at which foreign investors are
able to sell their shares upon exercise of options (such as put options) made
available to them under contractual documentation. Most of the indications came
from the RBI in relation to a specific case involving Tata-Docomo wherein the
RBI seemed willing to permit the exercise of options at the agreed price
(although that was different from the price permitted by the regulations).
Further discussion and analysis about this can be found on The
Firm
and Ajay
Shah’s Blog
.

While the earlier scenario was
limited to a specific case, RBI’s announcement in its recent monetary policy is
more broad-based and likely to have a wider impact when implemented. The
relevant extract is as follows:

20. With a view to
meeting the emerging needs of foreign direct investment in various sectors with
different financing needs and varying risk perceptions as also to offer the
investor some protection against downside risks, it has been decided in
consultation with the Government of India to introduce greater flexibility in
the pricing of instruments/securities, including an assured return at an
appropriate discount over the sovereign yield curve through an embedded optionality
clause or in any other manner. Guidelines in this regard will be issued
separately.

While this represents a broader
policy pronouncement towards relaxation of the rules on options and similar
instruments available to foreign investors, the exact mechanisms are yet
unclear (as this discussion
also suggests). The nature and extent of the flexibility to be introduced can
be garnered only for the fine print of the guidelines, which are awaited.