In terms of the extant foreign direct investment policy (“FDI Policy”) of the Government of India, only equity shares
and compulsorily and mandatorily convertible preference shares/debentures are allowed to be issued by Indian
companies to non-residents.
However, the Reserve Bank of India (“RBI”) has vide A.P. (DIR Series) Circular No. 86 dated January 09, 2014,
now also recognized and allowed certain optionality clauses with respect to issuance of the above instruments to
non-residents, that oblige the buy-back of securities from the non-resident investor at the price prevailing/value
determined at the time of exercise of the option, so as to enable the non-resident investor to exit without any
assured return.
The above optionality clauses have been permitted subject to fulfillment of the following conditions:
(a) There should be a minimum lock-in period of 1 (one) year or a minimum lock-in period prescribed under the
FDI Policy for the relevant sector (if any), whichever is higher (e.g. in regulated sectors such as defence and
construction development). The lock-in period will begin from the date of allotment of the securities, unless
otherwise prescribed for any specific regulated sector under the FDI Policy;
(b) After completion of the lock-in period, a non-resident investor exercising its exit option as aforesaid, will be
eligible to exit without any assured return, as under:
(i) In case of a listed company, the non-resident investor will be eligible to exit at the market price prevailing
on the recognized stock exchanges;

(ii) In case of an unlisted company, the non-resident investor will be eligible to exit from the investment in:
(A) equity shares at a price not exceeding that is arrived at on the basis of ‘Return on Equity’ (i.e. profit
after tax/net worth, where net worth would include all free reserves and paid up capital) as per the
latest audited balance sheet of the Indian company. Henceforth, any agreement permitting return
linked to equity as above will not be treated as violation of FDI Policy.
(B) Compulsorily convertible debentures and compulsorily convertible preference shares at a price
worked out as per any internationally accepted pricing methodology at the time of exit, after being duly
certified by a Chartered Accountant or a SEBI registered Merchant Banker.
The guiding principle would be that the non-resident investor is not guaranteed any assured exit price at
the time of making such investment/agreement and will be eligible to exit at the price prevailing at the time
of exit, subject to lock-in period requirements and other sectoral conditions, as applicable. The RBI has
further emphasised that all existing investment contracts will now need to comply with the above conditions
to qualify as FDI compliant.
RBI’s clarification on Establishment of Liaison Office/Branch Office/Project Office in India by Foreign
                                                                            Entities
Presently, in terms of the Foreign Exchange Management (Establishment in India of Branch or Office or other
Place of Business) Regulations, 2000, no entity or person, being a citizen of Pakistan, Bangladesh, Sri Lanka,
Afghanistan, Iran or China is allowed to establish in India, a branch office or a liaison office or a project office or
any other place of business by whatever name called, without the prior permission of the RBI.
However, the RBI vide its A.P. (DIR Series) Circular No.93 dated January 15, 2014, has also added Hong King
and Macau to the above list to control and regulate indirect entry of residents of China through Hong King and
Macau.
Resultantly, applications from entities registered in/resident of Hong Kong and Macau, for establishment of
liaison/branch/project offices or any other place of business by whatever name called, shall require prior approval
of the RBI.
RBI’s clarification on the rate of exchange for conversion of External Commercial Borrowing and
Lumpsum Fee/Royalty into Equity
In terms of the extant FDI Policy, Indian companies can convert external commercial borrowings and lump sum
fee/royalty into equity, subject to compliance with certain conditions, including the pricing guidelines for issuance
of equity shares.
In this regard, the RBI has vide A.P. (DIR Series) Circular No. 94 dated January 16, 2014 clarified that without
prejudice to the extant conditions for conversion of external commercial borrowings or lump sum fee/royalty into
equity:
(a) where the liability sought to be converted is denominated in foreign currency (as in case of external commercial
borrowings, import of capital goods, etc.), the Indian companies will need to apply the exchange rate prevailing
on the date of the agreement between the parties concerned for such conversion;
(b) the above principle will also apply mutatis mutandis to all cases where any payables/liability of an Indian
company (such as lump sum fees/royalties, etc.) are permitted to be converted to equity shares or other
securities to be issued to a non-resident; and
(c) the RBI will have no objection if a borrower Indian company intends to issue equity shares for a rupee
amount less than that arrived at as above, by a mutual agreement with the non-resident lender. The fair
value of the equity shares to be issued will, however, be worked out with reference to the date of conversion
only.