Enforceability of put options

By Sandip Bhagat and Jabarati Chandra, S&R Associates
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Foreign investors typically include exit options in transaction agreements that govern their investment in Indian companies. One such exit option is a put option. By this a foreign investor retains the right, but is not under an obligation, to sell the shares it holds to another person in India, usually the Indian promoter (the controlling shareholder), at a price that gives it an internal rate of return on the investment. The government of India no longer views such options favorably. There are also other company law issues to consider.

Equity or debt?

In its foreign direct investment (FDI) policy update effective 1 October, the government has stated that “only equity shares …. with no in-built options of any type, would qualify as eligible instruments for FDI” and that “equity instruments issued/transferred to non-residents having in-built options or supported by options sold by third parties would lose their equity character and have to comply with the external commercial borrowing guidelines”.

Sandip Bhagat Partner S&R Associates
Sandip Bhagat
S&R Associates

The Reserve Bank of India (RBI) had raised objections to a put option being included in an agreement for an equity investment – whether or not the option has actually been exercised – as it gives a guaranteed rate of return that the RBI considered inappropriate for equity investments permitted under the “automatic route” of the foreign investment regulations. The RBI’s view was that if an investment includes a put option it should be considered similar to a debt investment and subject to more stringent regulation.

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Sandip Bhagat is a partner and Jabarati Chandra is an associate at S&R Associates, a law firm based in New Delhi and Mumbai. The views expressed above are those of the authors and not a substitute for legal advice.


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