PRIVATE EQUITY FUND INVESTMENT OR QUASI LOAN / DERIVATIVE
A very serious issue is being examined by Reserve Bank of India currently in respect of various buy back and similar commitments and obligations of the investee company and / or the promoter towards the foreign private equity fund or venture capital fund investing in India as Foreign Direct Investment. It is clearly understood that external commercial borrowings from outside India is restricted to specific lenders including banks and others and can be utilised only for certain specific purposes. The Foreign Direct Investment on the other hand is more freely permitted including in sensitive sectors like real estate, single brand retail, telecommunication, insurance, banking and most of the industrial and service sectors. The Reserve Bank of India has noted that the private equity
investors/venture capital funds investing as foreign direct investment in India are investing in equity or in fully mandatorily convertible debentures with pre committed minimum return ranging from 18% to 30% besides various penalty default clauses. In view of RBI, these commitments actually convert these investments into as good as an international borrowing or as a derivative product, which is not permitted in terms of FEMA guidelines framed by Indian government as a sovereign. Such commitments can bring systemic risk. The RBI may consider with open mind about providing an exit option to the investors on the basis of listing or pre committed buy back on the basis of a valuation of the equity invested by the foreign investor at the time of disinvestment also. Currently the valuation is prescribed only at the time of investment. India need to offer a reasonable and well
structured solution to foreign investors so that it can be a win win situation for Indian industry as well as the foreign investors. A regulatory framework in this regard needs to be developed on the basis of open public debate and consensus may be arrived at keeping in mind interest of India, Indian economy and Indian entrepreneurs fully in mind while providing a judicial solution to the foreign
investors.
investors/venture capital funds investing as foreign direct investment in India are investing in equity or in fully mandatorily convertible debentures with pre committed minimum return ranging from 18% to 30% besides various penalty default clauses. In view of RBI, these commitments actually convert these investments into as good as an international borrowing or as a derivative product, which is not permitted in terms of FEMA guidelines framed by Indian government as a sovereign. Such commitments can bring systemic risk. The RBI may consider with open mind about providing an exit option to the investors on the basis of listing or pre committed buy back on the basis of a valuation of the equity invested by the foreign investor at the time of disinvestment also. Currently the valuation is prescribed only at the time of investment. India need to offer a reasonable and well
structured solution to foreign investors so that it can be a win win situation for Indian industry as well as the foreign investors. A regulatory framework in this regard needs to be developed on the basis of open public debate and consensus may be arrived at keeping in mind interest of India, Indian economy and Indian entrepreneurs fully in mind while providing a judicial solution to the foreign
investors.
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