RBI to Sun, Rustomjee: End PE pact or resort to compounding

There is a new twist in the ongoing battle between Mumbai-based developer Rustomjee and private equity player Sun Apollo. According to sources, the RBI has intervened in the case and stated that both parties have violated ECB guidelines. For the first time in a real estate transaction, the central bank has opened the option of compounding or paying a fine for the violation. CNBC-TV18's Priyanka Ghosh reports.

Both companies have gotten this letter from the RBI stating that they should windup their agreement or come in for compounding.
So far Rs 235 crore has been deployed into this company by Sun Apollo and that is the kind of liability that might fall on both parties because that is the transacted amount even though the actual deal size was Rs 300 crore. The deal happened in 2009, so the three year lock-in period is over.
The deal violates the guidelines on two accounts: 1) it has a put and call option. It basically means that the company is putting an equity structure to something that is pretty much a debt issuance and it is treated as debt in the books of the companies. 2) It has a fixed internal rate of return (IRR) clause.
Now putting that clause really violates that regulation that the exit must be linked to market valuation at the time of the exit.
There is already an ongoing battle between these two companies on the issue of corporate governance. That case is being fought in the Supreme Court.
How this intervention might impact that case is something one needs to wait and watch out for. But sources say that this might actually lead up to terminating this entire agreement.