Indian PE will suffer under FDI changes

Author: | Published: 13 Oct 2011

Foreign investment into India will be significantly hampered by revisions to the country’s foreign direct investment (FDI) policy.

The Reserve Bank of India’s (RBI) policy amendments, which became effective on October 1, stipulate that only equity shares and fully, compulsorily and mandatorily convertible debentures or preference shares now qualify as eligible instruments for FDI. It also states that these instruments should have no in-built options of any type.

Equity instruments with in-built options or options support that are sold by third parties to non-residents also lose their equity character and will thereby need to comply with External Commercial Borrowing (ECB) guidelines.

The Indian government has taken strong exception in recent months to the use of put options in equity investments as a method of guaranteeing returns to foreign investors and...