It is still fresh in our memories how the roll back of a provision in the FDI policy on March 31, 2011 brought cheer, applause and relief when the government decided to withdraw its earlier stand of compulsorily specifying the price of convertible instruments upfront at the time of issue.
It is distinctly remembered that exactly six months ago of March 31, 2011, clouds of uncertainty had gloomed the investor sentiments when they were caught unaware that their convertible instruments cannot have any kind of conversion formula and that they will have to specify the fixed conversion price upfront at the time of issue of the instruments. This had thrown their investment plans out of gear not clearly knowing what to do next till the government rolled back the provision. For those whose memory has faded and cannot clearly remember the chaos and then the thrill the above chain of events had brought, then there was a repeat of something like that very recently.
The FDI Policy released on October 1, 2011 brought a wave of shock and awe when it was learnt that instruments issued to non-resident investors cannot have any kind of options attached to them and should they have any such options, the instruments would become debt instruments instead of equity and will be governed as external borrowings rather than foreign investment. There was completely no clarity what did the policy change mean.
It was difficult to conclude whether the amendment was retrospective or prospective, nobody knew with accuracy what kind of options were included - put option, call option, buy-back, tag along, drag along, the options which ensured guaranteed returns or all kinds of options, all were clueless about the kind of investments that were covered - strategic or financial, the kind of situations that were thought to be covered, such as whether situations like exercising options in events like breach of contract or deadlock between contracting parties. The chaos and trauma it brought is known to all.
Finally, the nerves were calmed only when the government on clamor from all concerned did a complete roll back of this provision by deleting the relevant clause in the FDI policy vide Press Release dated 31st October 2011. But still it doesn't appear that options will have a smooth ride. Certain questions remain unanswered and we are still in a state of some chaos. The questions that still haunt are
will RBI withdraw notices that it issued against these kinds of options,
will RBI not take any adverse position on this - though it appears it should not since the deletion of the said contentious clause in the FDI policy could not have been made without consultation with the RBI when in the first place it was inserted at the insistence of RBI.
Even if one were to be optimistic that RBI would not take any adverse stand on this and inspite of the government softening its stand, SEBI's position on put and call options has not changed. In the absence of any further clarification from SEBI, it is believed that it continues to maintain its view that it took in the Vedanta-Cairn deal and subsequent informal guidance that such options are unenforceable under the Securities Contract Regulation Act.
One can only hope that SEBI will soon give a green signal to these options. But till then, it is anybody's imagination that the position on options is still not very crystal clear. These are just a few instances of situations where inspite of clarity there is actually no clarity. This is exactly the state of mind that one always lives in apprehending what would be the next moves of the policy makers and regulators that can jeopardise and derail all the well designed plans. As one reads this column, one is not sure if this would need to be left half read to attend to some unexpected change in the policy that has cropped up which nobody could have ever imagined.
Take for instance, the recent order of the Bombay High Court in the Aditya Birla Nuvo tax matter where the benefits of the India-Mauritius tax treaty have been diluted and an issue which was a completely settled position in law has been re-opened. Recall that the Supreme Court in the case of Azadi Bachao Andolan relying on the CBDT circulars had held that to get the India-Mauritius tax treaty benefits, the Mauritian entity had to establish its residency in Mauritius by holding a valid tax residency certificate.
The Bombay High Court has denied the tax treaty benefit to a Mauritian entity on the sale of shares held by it citing reason that the beneficial ownership of the shares was held by its US parent and therefore the treaty that will apply in this case will be India-US tax treaty and not the India Mauritius tax treaty inspite of the valid tax residency certificate possessed by the Mauritian entity.
The court actually lifted the corporate veil. Interestingly, the Indian buyer had obtained a prior no-objection certificate from the Income tax authorities which stated that the Indian buyer need not deduct any withholding tax when making payment to the Mauritian entity which transferred the shares to it. The said certificate was also ignored by the Bombay High Court stating the certificate was not good since it was obtained by suppression of material facts. As if the Vodafone matter was not enough, this judgment will put a spanner in the works.
Naturally, this decision will take all by surprise and will leave them to wonder how to design and structure a transaction when a certain thing appears absolutely permissible during the structuring stage only to discover later that some extremely different view is taken on that which could not have been imagined earlier. It is like sitting on a see saw, one moment one feels on the high, only to be pulled down the next moment by some strong force.
Literally, the experience on the ground is that there is a lot of uncertainty and ambiguity in various policies and views that the regulators take, some of which are not even publicly known unless one gets a chance to get regulator's views while resolving an issue for a transaction. Till sometime ago there was no written view that RBI's permission is required for pledging shares of an Indian company by a non-resident, those who knew about it were the ones who had an occasion to come across such a situation while working on a transaction.
Recently, it is heard that RBI takes a view that FVCIs are not permitted to transfer shares to any non-resident though there is neither any such prohibition in the FEMA regulations which govern the FVCI investment nor there is any express written view of RBI on this issue. As a result of these, one keeps wondering what could be the regulator’s view on a certain issue. It would be proper and appropriate if all concerned are not taken by surprise or are kept in dark about the views and policies on certain issues otherwise one feels that taking investment decisions are no short of taking a roller coaster ride where one experiences the fear and thrill and is not sure which way the swing will turn.