The Reserve Bank of India (RBI) has provided clarity for foreign private equity firms who want to use 'call' and 'put' options, saying GPs will be permitted to use these financial strategies in their Indian investment deals, according to local media reports.
A call option is an agreement that gives an investor the right (but not the obligation) to buy an asset at a specified price within a specific time period. A put option is just the opposite, allowing someone to sell an asset at an agreed price within a specified time.
The popular use of call and puts in Indian private equity deals alerted regulators, who argued private equity players should be risk-takers and should not have put options, which make them behave more like debt-providers, said Reshmi Khurana, managing director of Kroll’s India office.
“If you are going to behave like a debt-provider, you need to come under the scanner of the Reserve Bank of India and comply with some of those stringent mandates that debt providers must comply with,” she said.
But back in October private equity received welcomed news when the Securities and Exchange Board of India approved the use of foreign call and put options. Nonetheless uncertainty reigned as there were doubts over their enforceability due to RBI’s silence on the issue.
However, just before the close of last year, RBI amended regulations giving private equity firms the go-ahead to use these structures, albeit with certain conditions attached.
RBI set a minimum lock-in period of one year to use these options. The bank will only allow put options when they do not guarantee a firm an exit price. This is to ensure that foreign investors are not promised an exit price at the time of making an investment.