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New Fdi Policy

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Submitted By ropsrivastava
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The Government of India’s (GOI) new consolidated foreign direct investment (FDI) policy circular effective from 1 October 2011 has de-classified instruments with options from being FDI investments and introduced other significant changes, such as increasing FDI caps in FM Radio and changes in single-brand retail trading norms.
“Only equity shares, fully, compulsorily and mandatorily convertible debentures and fully, compulsorily and mandatorily convertible preference shares, with no in-built options of any type, would qualify as eligible instruments for FDI. Equity instruments issued/transferred to nonresidents having in-built options or supported by options sold by third parties would lose their equity character and such instruments would have to comply with the extant ECB guidelines,” stated clause reflecting the revised FDI policy stance of the government. “The key is to note that shares with in-built options issued/transferred to non-residents or shares supported by options issued/transferred to non-residents will not be recognized as FDI and such instruments would have to comply with the ECB guidelines.”
“In other words, equity shares, fully and compulsory convertible preference shares, fully and compulsory convertible with no in-built options issued to non-residents will be eligible as foreign direct investment.”
The revised guidelines, which have now been formally included in the regulatory framework, had earlier been adopted by the Reserve Bank of India which treated instruments with ‘put options’ as ECB.
“It is bound to curtail investments in certain sectors and by specific types of investors (e.g. financial investors such as private equity funds) who tend to rely upon put options in securities as an essential component of the transaction structure.”
Further, the new FDI policy does not clarify on the retrospective implication for put and...

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