RBI puts foot down on put-and-call options in realty sector

The government's latest move to legalise put-and-call options will clear the way for many M&A deals in India. But real estate deals that guaranteed an assured return are yet to be approved by the RBI, reports CNBC-TV18’s Gopika Gopakumar.

The Reserve Bank of India is yet to change its view that put-and-call options are illegal under Section 20A of the Securities Contracts (Regulation) Act 1956. Based on the contention that these contracts were not spot contracts or exchange-traded contracts,  the Securities and Exchange Board of India (Sebi) delayed approvals to a plethora of deals like the Cairn-Vedanta deal, the stake-sale in Bharat Aluminium Company (Balco) and Hindustan Zinc.
With the law ministry planning to legalise put-and-call options, there is hope that a lot of M&A deals will be cleared by  the government and SEBI. Though the RBI is willing to legalise put-and-call options in other kinds of contracts, it has not changed its view on realty contracts.
Private equity deals in real estate worth USD 5-billion were stranded over the last six years because RBI thought that these contracts with put-and-call options and offering a guaranteed return were considered illegal or considered to be masquerading debt in the form of equity.
RBI still question these deals because it believes that these investments were largely debt used to circumvent external commercial borrowings (ECB) rules, which otherwise are not allowed in the real estate sector.
Also, investors must follow a one year lock-in period before they invoke the exit option and the performance-risk is to be borne by the investor for entry into the sector as a whole. All these details are likely to be announced by the RBI in a circular, but may not clarify on assured returns and other details with regards to investments made by the private equity companies.