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RBI On Call/Put Options: Assured Returns? Yes!

Published on Fri, Feb 06,2015 | 22:40, Updated at Sat, Feb 07 at 17:04Source : CNBC-TV18 |   Watch Video :

The RBI sprung a big surprise this week when it suddenly came out in favor of assured returns via call and put options in FDI agreements. Yes you heard that right! First call & put options themselves were disallowed. Then they were allowed but their pricing linked to return on equity and the RBI warned – no assured returns. Then internationally accepted pricing methods were allowed but the RBI reiterated – no assured returns. Then last month the RBI spoke in favor of allowing Docomo to get capital protection, but that was the regulator speaking in favor of downside protection, not assured returns. But this week the RBI did a full 180 degrees and said yes to assured returns! Menaka Doshi speaks to Trilegal’s Sridhar Gorthi & Veritas Legal’s Abhijit Joshi for their views.
Doshi In this week’s monetary policy statement, the regulator said and I quote, ‘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 or 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.’
So, that is the regulator clearly batting in favor of assured returns. However, RBI Governor Raghuram Rajan still seems to be focused only on downside protection.
Raghuram Rajan, Governor, RBI on 2nd Feb’15
“These put call options which were embedded in various investments, we have said we are not against them, we just want to make sure it is not hidden debt. So, if you have a put option but the put option is at a price which is lower than what you invested, so you don’t get a guaranteed debt return, we are okay with that.”
Doshi: So what exactly is the RBI okay with, downside protection or assured returns?
Abhijit Joshi
Founder, Veritas Legal
“It is confusing- on one hand it talks about assured returns and on other hand it talks about downside protection, it talks about instruments, any other manner, it talks about discount over the sovereign yield so a bit confusing. We will have to wait till it evolves. However, if you read it narrowly it is a policy towards options. If you read it broadly it could also pave way for redeemable preference shares because if it is assured return and downside protection- is it from only investor to investor, is it between the company and the investor; so there can be more hope than only options.”
Doshi: The RBI’s new stance seems to apply to future foreign direct investment shareholder agreements but RBI also wants the Docomo deal- which is an existing agreement- to be honored. So, is this new policy position retroactive or prospective?
Sridhar Gorthi
Partner, Trilegal
“In my view it should not make a distinction between put and call options written before and after the regulations came out. We will have to see the wording of the regulation. Ideally it should just be universally applicable irrespective of when the actual contract was written. As far as Tata Docomo is concerned, it is a specific approval case. Again, it is a very positive and welcome development but it is a one-off. We must understand that it is a special approval granted in that instance and that may have led to this policy. However, if the policy is going to be that under automatic approval you can do a put and call up to a particular price and over that price you will have to get RBI specific approval as was done in Tata Docomo then that would be also a very welcome regime.”
Doshi: Finally, what impact will this new policy position have on on-going disputes regarding whether call and put options should be honored or not?
Sridhar Gorthi,
Partner, Trilegal
“There have been a number of recent arbitrations, many of which are on-going. Few of them have been decided and interestingly at least one has been decided in favor of the investor where the argument has been upheld that at the time when the put and call option was written there was no restriction on agreed returns. There were a number of allied arguments but that was basically the point on which the arbitral tribunal was convinced and ruled in favor of the foreign investor. Now, if that award does come to an Indian court for enforcement we will have to see how that plays out.”
Doshi: It is all very confusing but let us hope the guidelines are out quickly.


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