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 conditions:

  1. 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 policy.

Explanation - RoE shall mean Profit after Tax / Net Worth; Net worth would include all free reserves and paid up capital.”