FDI Policy: Call & Put Confusion Persists!

In the first part of The Firm's discussion on India's FDI policy, Cyril Shoff, Amarchand Mangaldas; Bharat Vasani, Tata Group and Haigreve Khaitan, Khaitan & Co. discussed the 3Cs- Caps, Control and Confusion. In this part, the guests discuss the lack of clarity on the 4th C- Call and Put options- and its impact on foreign investments.

Doshi: An issue that I had on my list which I thought was probably also holding up investments is this long pending issue of Call and Put Options. I am not going to describe what the history to this is, everybody knows. Last year Securities and Exchange Board (SEBI) told us that they were fully clear with what they wanted, they were just waiting for the ministry to notify it if I may use that word. It has been a year since then; we haven't heard anything. Is that further hurting your ability to close transactions though some lawyers tell me they found ways around it?
Vasani: I can say most of the sectors where there is foreign direct investment (FDI) caps, the foreigners like to have in the shareholders agreement Put and Call Options. Unfortunately a doubt has been created even for unlisted companies. Previously the view was that the Securities Contracts (Regulations) Act (SCRA) applies only to listed companies and there is a doubt about the legal enforceability because of Section 16 of the SCRA. Now, there is a Supreme Court judgment directly on the point that the entire SCRA applies to even unlisted companies. So, the legal enforceability of Put and Call Options today as we speak… (Interrupted)
Doshi: So, you are not able to use them in your agreements?
Vasani: People are using it but with a doubt that suppose if it is tested in court of law which way it will go; nobody knows. They are very basic to any shareholder agreement, any M&A transaction. So, people will still have the Put and Call Options but the enforceability is still in doubt.
Shroff: There is sort of a wrong kind of lawyering that we have to do. All these are grey areas it can go this way…. (Interrupted)
Doshi: Someone mentioned right to refuse as some new clause, am I right? Some news saying that it has replaced Call and Put Options because nobody is sure about whether these…. (Interrupted)
Shroff: Somebody needs to do a cost benefit analysis of… (Interrupted)
Doshi: The reason we are here is because the Mines Ministry is worried about what impact any change in the legal validity situation of call and put will have on Balco and Hindustan Zinc.
 
Shroff: Look at the cost that you are having, the indirect cost across hundreds  of transactions of this issue not being resolved and somebody should just do a five minute exercise of the cost benefit - assuming it is those two or three cases -put that in a box even at its highest number and put the value of the transaction… (Interrupted)
Doshi: But what does it cost them if private sector transactions are being held up?
Shroff: If you start off with a stated policy that we want foreign investment and that is the only way to fix the economy and the rupee and whatever else, can't you fix such a basic thing? It is not that hard.
Khaitan: I think its not public policy that is involved here- this is a pure contract between two parties for purchase or sale of securities. It is similar to just a purchase contract. We are signing purchase agreements or sale agreements for shares to be performed and to consummate it at a later date. What is the difference really? It is a pure contract and we are really going back several decades on a law which had a completely different intent and using it in today's modern world to not enforce a Call and a Put option ….(Interrupted)
Shroff: It is not even like a retail issue or something, there is no political - there might be some ministry sensitivity - but this is not one of those things where the opposition is going to roast you in Parliament; it is a simple straight forward contracting issue.
Vasani: The best part is, even if you assume that your Put and Call Option is valid, the Reserve Bank of India (RBI) DCF pricing restricts them. The non-resident cannot get both in the DCF price. It is an integral part of the FDI policy and so even if it is enforceable what price he will get is subject to again capped by RBI.
Doshi: That is very bad for foreign investors but it is suiting the interests of some Indian companies nicely.
Shroff: Foreigners if they know there is clarity they just price it in. It is not such a big issue for them; the uncertainty is the killer.