India: Indian Authorities Limit Exit Mechanisms By Shutting Down Put Options Held By Foreign Investors

Last Updated: 20 October 2011
Article by Yash A. Rana and Brinda Dutta

Twice a year, India's Ministry of Commerce and Industry consolidates and updates the country's foreign direct investment ("FDI") policy framework. Pundits had been expecting the October 2011 update to allow FDI into multi-brand retail and other moves to further deregulate foreign investment into India. The Indian government, however, has surprised the market by moving in the other direction. Not only does multi-brand retail remain off limits to FDI, but the October policy statement has effectively eliminated a common aspect of private equity and venture capital investment in India – the right of foreign investors to force a "redemption" of shares by having the right to put the shares to the issuer or its founder or promoter at a fixed price or internal rate of return ("IRR").


Private equity investments in India are commonly structured as minority investments in closely held companies controlled by a founding family or promoters. Private equity investors, looking for liquidity and to protect against downside risk, often negotiate the right to put their shares to the company or the promoters after a fixed period, if there is not a sale or IPO that occurs before then. The put right is usually at the higher of the purchase price or the fair market value of the company at the time the put right is exercised.

Over the past several years, the Reserve Bank of India (the "RBI") has taken the position that instruments that include a guaranteed return should be treated as debt, not equity, and should be required to comply with the rather onerous regulations that apply to external commercial borrowings (commonly referred to as ECB) in India. For example, in June 2007, the RBI adopted a regulation which made all optionally convertible preference shares equivalent to ECB, and stated that only compulsorily convertible preference shares, convertible into equity within a specified time, and with no redemption option, would be treated as equity for FDI purposes. Over the past several months the RBI has gone further, challenging the validity of preferred equity instruments that contain put options in shareholder agreements with foreign investors and restricting the exercise of existing put options against promoters.

Current Regulation

On October 1, the Indian government modified the FDI policy to provide that equity instruments with "in-built" options or supported by options sold by third parties, if issued or transferred to foreign investors, would lose their equity character and such instruments would have to comply with ECB guidelines. Prior to this change, there had been some question about whether it was permissible to include an option on shares in public companies, because the option could constitute a futures contract, and futures contracts are valid only for exchange traded derivatives. By including a no options clause in the FDI policy, the Indian government has effectively prohibited the inclusion of any form of options in FDI contracts, because doing so would make the investment subject to the ECB guidelines.

The new regulation, which was adopted without the typical comment period, effectively prohibits private equity investors from negotiating redemption or put rights that are typical in other countries. Further, the language of the regulation is broad and vague, and does not expressly grandfather existing instruments, so it could be read to have retrospective effect. Accordingly, the regulation could have significant collateral, and perhaps unintended, consequences for new and existing private equity investments from foreign investors.

Some potential impacts of the change, in addition to the effective elimination of put options as an exit route, could include:

  • Vague, Undefined Concepts. The language of the new regulations is quite broad and vague. Most practitioners believe the intent is to prohibit put options at a fixed price or IRR. However, a literal reading of the language could be seem to apply to all kinds of options, including drag along rights, rights of first offer, qualified IPO provisions with a minimum price threshold and other similar provisions.
  • Joint Venture Structuring. In cases of joint ventures, in the event of breach, change of law or deadlock, the availability of a put or call option on the shares is an essential structuring tool. In many cases, the option attached to the security may be a call held by the foreign investor or a put option held by the Indian counterparty. The new regulations could be read to require such options comply with the ECB guidelines.
  • Retrospective Operation. Though the FDI policy takes effect from the date of its issuance and is applied prospectively, because there is no express grandfathering of existing put rights, it is unclear whether such rights would be enforceable. This has already caused significant uncertainty in the private equity community. In addition, the RBI has been challenging the exercise of existing put rights, further muddying the waters in this area.


Options are investment safeguards traditionally provided to investors across the world. The volatility of the stock markets and the complexity of liquidation in India compromises the ability of foreign investors to easily exit their investments. In the short term, the regulations have already caused significant uncertainty regarding enforceability of existing agreements and for new agreements. In the long term, we believe the government will likely clarify the rules to narrow their scope. In the meantime, we have discussed with clients certain alternative structures to provide foreign investors with a similar economic result.

Yash Rana and Brinda Dutta are based in our Hong Kong office

Goodwin Procter LLP is one of the nation's leading law firms, with a team of 700 attorneys and offices in Boston, Los Angeles, New York, San Diego, San Francisco and Washington, D.C. The firm combines in-depth legal knowledge with practical business experience to deliver innovative solutions to complex legal problems. We provide litigation, corporate law and real estate services to clients ranging from start-up companies to Fortune 500 multinationals, with a focus on matters involving private equity, technology companies, real estate capital markets, financial services, intellectual property and products liability.

This article, which may be considered advertising under the ethical rules of certain jurisdictions, is provided with the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin Procter LLP or its attorneys. © 2011 Goodwin Procter LLP. All rights reserved.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions