Call/Put Options Pricing: Hazy Future?

The year has changed and so has RBI. At least its position on Call & Put options has changed. Well partially! 3 months after SEBI cleared Call & Put options by amending the SCRA, RBI has also made way for their inclusion. The FEMA notification says ‘shares or convertible debentures containing an optionality clause but without any option/right to exit at an assured price shall be reckoned as eligible instruments to be issued to a person resident outside India by an Indian company…’.

But hold the celebrations, because RBI being RBI has also imposed conditions. The notification is prospective - that was expected! No assured price exits – that too was expected!! Exit pricing will be de-linked from DCF – that too was expected!!! ‘The Firm’ broke that story way back in October. But that exit pricing would be linked to return on equity? That was not expected. So now we have two sets of pricing norms when it comes to the sale of shares by a foreign investor to Indian entity. How will this work? To answer that I have with me EY’s Amrish Shah and Ashwath Rau of Amarchand Mangaldas.