What changed
Previously, only plain equity or preference shares/debentures were allowed under FDI. Now, optionality clauses are permitted in equity shares and compulsorily convertible preference shares/debentures, allowing investors to exit via buy-back at prevailing or determined prices without assured returns. Conditions include a minimum lock-in period of one year (or higher sector-specific period) and exit pricing rules: listed at market price, unlisted equity based on RoE, and CCDs/CCPS per internationally accepted methodology certified by a CA or SEBI merchant banker.
What it means for you
Banks and lenders must ensure that any FDI instrument with optionality clauses complies with the new lock-in and pricing conditions to remain FDI-compliant. Existing contracts need to be reviewed and amended if necessary. The circular provides clarity on exit mechanisms, reducing ambiguity for foreign investors and AD banks handling such transactions.
What you must do
- Review all existing FDI contracts with optionality clauses to ensure they meet the lock-in and pricing conditions.
- Update internal procedures to verify that new FDI instruments with optionality comply with the circular's requirements.
- Train staff on the revised exit pricing rules for listed, unlisted, and convertible instruments.
- Advise clients (investee companies and foreign investors) on the need for CA or SEBI merchant banker certification for CCD/CCPS exits.
Who it affects
Category-I Authorised Dealer banks, Foreign investors making FDI with optionality clauses, Investee companies issuing equity or convertible instruments to non-residents, Chartered Accountants and SEBI registered Merchant Bankers involved in exit pricing
What is the minimum lock-in period for FDI instruments with optionality clauses?
The minimum lock-in period is one year from the date of allotment, or a higher period as prescribed under FDI regulations for specific sectors (e.g., three years for defence and construction development).
How is the exit price determined for unlisted equity shares under the new rules?
For unlisted companies, the exit price for equity shares must not exceed the value arrived at based on Return on Equity (RoE) as per the latest audited balance sheet. RoE is defined as Profit After Tax divided by Net Worth (paid-up capital plus free reserves).
Do existing FDI contracts with optionality clauses need to be updated?
Yes, all existing contracts must comply with the conditions in this circular to remain FDI-compliant. Banks should review and amend such contracts accordingly.