Reserve Bank of India eases FDI exit rules

Exits subject to lock-ins without assured returns

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The Reserve Bank of India has eased rules for foreign direct investment (FDI), allowing exits subject to a lock-in period and without an assured return. This is expected to facilitate greater FDI flow.

Till now, a company could only issue equity shares or compulsorily and mandatorily convertible preference shares or debentures as eligible instruments under FDI policy. These instruments were not allowed any optionality clause, obliging a buyback of securities from the investor.

The permission to allow exit is subject to certain conditions. The lock-in period will be at least a year. If FDI regulations prescribe a higher lock-in, as the three-year norm in the defence and construction sectors, the higher duration applies. The lock-in shall be effective from the date on which shares or convertible debentures were allotted, RBI said.

After the lock-in period, a non-resident investor can exit without any assured return. For a listed company, the non-resident investor can get out at the market price prevailing at the stock exchanges. In the case of an unlisted company, an investor can exit in equity shares at a price not exceeding that arrived at on the basis of return on equity. Any agreement permitting a return linked to equity as explained shall not be treated as violation of FDI policy and the foreign exchange laws.

Asia's third-largest economy saw FDI inflow from April to October in 2013 drop 15 per cent from a year earlier, to $12.6 billion (Rs 78,400 crore), despite the opening of new sectors.