The notification allows for shares and convertible debentures to have such optionality clauses- that is the most important piece of news and that is definitely good news. Call & Put options are common to most joint ventures and shareholder agreements, but till October last year, these pre-emption rights existed in a legally gray area. In that notification RBI has gone on to say that the exit price when it comes to listed equity with such optionalities has to be at market price which is all fair and good. However here is the big twist, when it comes to the exit price for unlisted equity with such optionality they have said that it has to be at an RoE based price.

Bharat Vasani, of the Group General Council at Tata Group says,"The Reserve Bank of India (RBI) has put an end to long pending controversy with regard to its position on Put & Call Options in favour of non-residents.
Sections of India Inc maybe very disappointed but viewers of this channel should have been prepared because way back in October itself we had brought to you the news that RBI is going to allow for Call & Put Options but it is going to de-link the pricing from any assured return or even from DCF and they have stood true to that ground.
So, price linked to the return on equity or a price which is more than the required margin put in there in that agreement for an return on equity. However, in the process of legalising Put & Call Options, it has put in conditionalities which could be perceived negatively by the long term foreign investors as RoE or return on equity is not the appropriate method to determine fair value of shares particularly when they are required to invest using DCF valuations as the floor price.

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