Declining foreign direct investments have prompted the government to consider afresh the proposal to allow foreign investments through options. Currently, FDI is allowed only through subscription to equity, convertible warrants and debentures.
The advantage with the options route is that it gives investors the right to future transaction in shares of a company at a pre-determined price and time, without any kind of obligation to buy those shares. In the past also the department of industrial policy and promotion (DIPP) has proposed to allow FDI via options but the Reserve Bank of India has nixed the proposal on the ground that this basically bypasses the FDI guidelines. If indeed the government finally decides to allow FDI through the options route then the ministry of corporate affairs would have to amend the Companies Act to treat options at part with convertible warrants.
One of the main reasons for the government?s confidence that this time it will sail through with the proposal and not face any objection from the RBI is the dwindling FDI in this fiscal, a fact acknowledged by the central bank also.
During January-November, 2010 FDI declined 26 % to $18.99 billion (Rs 86,921 crore).
The RBI said recently in its macro-economic and monetary policy development report that environment-sensitive policies are hurting FDI in mining, township and ports sector.
?A major reason for the decline in inward FDI is reported to have been the environment-sensitive policies pursued, as manifested in the recent episodes in the mining sector, integrated township projects and construction of ports, which appear to have affected the investors? sentiments,? the RBI noted.
?If the government allows FDI through share options it would provide more flexibility in structuring the instruments in the investee companies. It would be entirely up to them to decide when to convert their options,? Saroj Jha, partner at the Delhi-based law firm SRGR said.
