1. ALPHA PARTNERS
ADVOCATES AND SOLICITORS
UPDATE
RBI makes exit linked assured returns to foreign investors illegal
A. P. DIR Circular No. 86 released on January 9, 2014 by RBI (‘
o.
(‘Circular’) makes the investors investing
’)
under Regulation 5 (1) of the Foreign Exchange Management (Transfer or Issue of Security by a Person
ransfer
Resident Outside India) Regulations, 2000 (‘
utside
(‘TISRO Regulations’) (viz. the FDI investments) incapable of
’)
asking for an assured return on their investments made in equity shares or convertible instruments such as
shares
CCPS and CCD/FCD’s and provides for methods as per which the exit and the exit price shall be decided.
FCD’s
The Circular provides that an investor shall be able to exit at its option by sale/transfer/buy back of equity
shares and convertible instruments, subject to the following conditions:
nd
1. Lock-in of one year for all FDI investments provided that in case the FDI policy provides for a
higher lock-in period for any particular sector, such lock in period shall apply;
in
lock-in
2. After expiry of lock-in period, the investors shall be eligible to exit without any assured return.
in
3. The exit price, in case of listed companies, shall be the price prevailing at the recognized stock
exchange.
4. The exit price, in case of unlisted companies, shall be:
a. In case of equity shares, the Return of Equity calculated by dividing profit after tax by net
worth of the investee company. This shall be calculated as per last audited financial
accounts of the company. Net worth shall include all free reserves and pai up share
paid
capital. It is to be noted that the formula for RoE generally followed in financial circles is
the
“RoE = Net Income / shareholder’s equity” or is defined as return on net worth which is
RoE
equity”
“RoNW = Net Income / shareholder’s equity X 100”. A clarification on the formula used in
RoNW
100”.
the Circular should therefore be released by RBI.
b. In case of convertible instruments, any internationally accepted pricing method may be
applied at the time of exit, duly certified by a chartered accountant or SEBI registered
merchant banker provided that the price so calculated is not a guaranteed or assured
ass
return and that the same is a price existing at the time of exit.
The Circular applies to all existing FDI investments as on January 9, 2014. Therefore, any investment
agreement/shareholders agreement which is in force as on January 9, 2014 and provides for an assured
return on FDI investments shall, to that extent, be invalid.

2. The Circular clarifies a long due confusion in the FDI transactions as to whether or not investors can ask for
assured returns. Until now, although the regulatory view on the question of assured return was not clear,
the investors could ask for the same and make it a contractual obligation of the investee companies and its
promoters. However, now, since assured returns on FDI investments have been disallowed vide the
Circular, such an obligation in an agreement shall be legally unenforceable.
Although this may be a step ahead in clarifying regulatory intentions, as per some experts, this will
discourage foreign investors and make exit for existing investors less viable and difficult.
This regulatory update provides general information existing at the time of preparation. The update is intended as a
news update and Alpha Partners neither assumes nor accepts any responsibility for any loss arising to any person
acting or refraining from acting as a result of any material contained in this update. It is recommended that professional
advice must be taken before taking any action pursuant to it. This update does not substitute the need to refer to the
original pronouncements and does not amount to legal or other professional advice. Please note that this is not a
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