Ques: : While the FDI Policy, 2011 is an attempt in the right direction, don’t you feel that the retail sector is yet to have a formal investment regime in place which is an expectation that still continues to loom large?

Ans: There is a growing unanimity amongst industry that the multi brand retail sector should be opened up to FDI. Indirect FDI is already allowed to the extent of 49% and a policy allowing direct investment is highly anticipated. It will lead to efficient supply chains & storage and modernise the retail stores. In the past a few big retailers have shut shop or scaled down ambitions due to the lack of funding. FDI in this sector is expected to address this problem. I believe that most of the emerging markets such as Brazil and China have already opened up the sector. Besides if we are allowing Indian giants to set up retail stores across the country on the lines of Walmart and Carrefours, then why not allow the multinationals to do the same.

Ques: Do you think equity shares with a put option should be treated as debt under FEMA?

Ans: : According to me, a put option on equity shares in favour of the foreign investor with an assured return does not automatically make it a debt instrument. For recovery of debt, a suit for recovery of debt due needs to be filed and may be in the form of a summary suit. Whereas a suit for specific performance/damages would be the contemplative legal action for breach of any put option obligations. Even if a put option is exercised, the price at which the share can be bought back from the person resident outside India cannot be more than the DCF valuation. Moreover the transaction fulfilling the put option would only be a change of asset class in the books of the obligee as against honoring a debt obligation. However, there have been views that a fixed IRR basis equity put option is akin to debt.

Ques: Recently, the Cabinet Committee on Economic Affairs of the Government of India approved the proposal to allow FDI in limited liability partnerships. Don’t you think that restricting FDI to LLPs only in approved sectors and prohibiting downline investments by such LLPs may prove to be an impediment on their use in structuring business in India?

Ans: Due to the structure of LLPs and security concerns, the government has been cautious in not allowing FDI in LLPs under the automatic route. It definitely limits structuring options, but I’m sure there will be an eventual liberalisation of FDI in LLPs.

Ques: Do you think that there are any other issues which the government should have addressed while issuing its consolidated new foreign direct investment policy, 2011?

Ans: As stated earlier, a clarification on put option on equity instruments would be most welcome. A clarification on the coupon rate for CCDs is still awaited.