Thursday, December 11, 2008

Share options channel to route more FDI traffic to India

11 Dec 2008, The Economic Times

NEW DELHI: The government is considering permitting foreign direct investment (FDI) by way of options contracts, allowing foreign investors to buy equity stakes in companies at a pre-determined price and time.

At present, FDI is allowed only through subscription to equity and convertible warrants and debentures, but not through options. Options are financial instruments that give the right, but not the obligation, to engage in a future transaction on a security.

While the government’s FDI policymaking body, the department of industry policy & promotion (Dipp), has cleared the proposal to treat options as FDI, the Foreign Investment Promotion Board (FIPB) — the highest government body to clear foreign investment into the country — is awaiting clearances from the Reserve Bank of India and the ministry of corporate affairs.

The ministry of corporate affairs is looking into the possibility of making an amendment to the Companies Act to treat options on a par with warrants, a Dipp official, who asked not to be named, told ET. “Share options are not share warrants as provided under the Companies Act (now),” the official said.

Convertible warrants are loans that can be exchanged for shares on pre-agreed terms at a later date. Similarly, companies can issue options, which could be subject to call and put features between the parties.

The options route was considered after an Indian company, GSR, sought FIPB approval for bringing in FDI by issuing share options to Cyprus-based HBP Holdings. Domestic companies often seek FIPB approval for issuing convertible warrants to foreign firms at an agreed date, which is treated as FDI.

Experts feel opening options as another window to attract FDI would benefit non-residents. “They would have more flexibility in structuring the instruments in the investee companies. It would be entirely up to them to decide when to convert their options,” a Delhi-based law firm Fox Mandal Little partner Saroj Jha said.