DIPP amends foreign investment policy to allow smooth PE exits

PE investors will take up the matter with DEA, finance ministry, RBI.

Bringing relief to the country’s private equity investors, the government has amended the foreign direct investment policy by removing a new clause that did not consider any investment with in-built options such as put options or call options as FDI transaction. Put and call options are the most common route for any PE investor to exit from his portfolio companies.

According to the new paragraph (no. 3.3.2.1) that the Department of Industrial Policy and Promotion (DIPP) added in the FDI policy and released on September 30, only equity shares, fully, compulsorily and mandatorily convertible debentures and preference shares, with no in-built options of any type, would qualify as eligible instruments for FDI.

According to PE investors, the new clause was detrimental to the future PE investments in India.

The PE investors had met officials of DIPP last week and received a positive nod regarding the removal of the clause. Indian Private Equity & Venture Capital Association (IVCA) said it would continue to follow up the matter with the Department of Economic Affairs (DEA), finance ministry and the RBI. “After all, the insertion has been made primarily at the behest of the RBI,” said IVCA president Mahendra Swarup.

Following IVCA’s meeting, officials of DEA also agreed that while a decision on this matter was under consideration, any insertion in the policy must only be prospective and not made in retrospective effect applicable to already valid transactions, according to PE investors who are involved in the discussion.

The CEO of an Indian PE fund said put option is one of the safe exit options available for PE investor. “If the investor is left with no choice as far as exit is concerned, he can use the put option as a final choice,” he said. “In case the defined parameters promised by promoters are not met or if the IPO does not happen, PE investors will be stuck with illiquid shares.”

KPMG partner Bhavin Shah noted that put options are exercised at the fair market value in accordance with the exchange control guidelines for transfer of shares. “So, it was not appropriate to put blanket restriction on all options.” Globally, call/put options are an integral part of any PE deal. An embargo on such options would slow down the quantum of FDI investments in the country, he added.

Another PE veteran opined that inaccurate representation and warranties provided by promoters of unlisted could have a material impact on the investment by the PE investor. “Such situations are generally protected by a default put option,” he added.