Reserve Bank of India has recently clarified its position as to
the options in the shareholders and share subscription entered into
by the Indian Companies allotting instruments to the person
resident outside India. Prior to the August 2013, such options were
illegal in terms of Securities Contracts Regulation Act but in 2013
Securities Exchange Board of India (SEBI) clarified that such
options would be legal prospective to such notification issued by
SEBI subject to the conditionalities issued in such notification
and the regulations issued under Foreign Exchange Management Act,
1999. Reserve Bank (RBI) being the nodal agency for the same has
clarified the said position by issuing the seventeenth amendment to
the Foreign Exchange Management (Transfer or Issue of Security by a
Person Resident Outside India) Regulations, 2000 wherein RBI has
inter alia provided that; "the person resident outside
India holding the shares or debentures of an Indian company
containing an optionality clause in accordance with the seventeenth
amendment regulations and exercising the option/right, may exit
without any assured return, subject to the following
(ii) In case of equity shares of unlisted company,at a price not exceeding that arrived on the basis of
Return on Equity (RoE) as per latest audited balance
sheet. Any agreement permitting return linked to
equity as above shall not be treated as violation of FDI
mean Profit after Tax / Net Worth; Net worth would include all free
reserves and paid up capital."
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