In a significant departure from its notification issued in 2014, the Reserve Bank of India has proposed relaxation to the rules on Call and Put Options.
In a letter to the finance ministry, RBI has asked the government for downside protection to foreign investors upon their exit- the move comes after Tata Sons moved the Central Bank in the Docomo natter.
Commenting on the above possibility, Vivek Gupta, Partner at BMR Advisors says if the ministry actually gives a nod to RBI for this then it will certainly be good news for capital flows.
This proposal by RBI could create a new hybrid capital class because so far its view has always been to have pure debt or pure equity. Below is the transcript of Vivek Gupta's interview with CNBC-TV18's Shereen Bhan and Nayantara Rai.Shereen: We are given to understand that the Reserve Bank of India (RBI) has reached out to the finance ministry seeking the finance ministries views on a possible relaxation as far as the RBIs notification pertaining to assured returns are concerned. This representation comes on the back of a proposal made by the Tata\\'s. What do you make of this because this is a significant departure from the RBIs stated position, is it not?A: Absolutely it is. If what you are saying and what you are breaking as news is true and the ministry of finance actually gives a nod to the RBI for this then it will certainly be good news for capital flows.
Until now there have been two sets of views. One is that you should have either pure equity or pure debt and equity should not be allowed to have any protection because then it starts behaving like debt.The second view has been that world over hybrid form of capital is recognized. You can have instruments which have elements of fair market value linkage but which have downside protection like debt.The government if it has moved it would fundamentally be moving from view one which it has consistently held over the last many years to view two which will be a very big move by the government. What that will do is at this point in time we don’t even realise the amount of money and the amount of contracts that private equity has had with Indian corporates which would immediately come up and be seen in a completely different light because these are matters which are in arbitration where the primary defence of the Indian corporate is that Indian law restricts a payout based on downside protection. Therefore exits can only be done at equity based fair values. If that law were to be changed it fundamentally transforms the relationship between capital providers and capital seekers in the Indian economy. It impacts a large number of current disputes, it impacts future investments in a big way because a hybrid capital class suddenly gets created, a class which has had to be created structurally through artificial instruments up until now but which can now legitimately directly be created in contracting structures between Indian corporates and foreign investors. So, it will certainly be a very big move.
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