Optionality clause

An optionality clause is a term in a foreign direct investment, typically a put option, that gives the non-resident investor a route to exit. The Reserve Bank of India's A.P. (DIR Series) Circular No. 86 of 9 January 2014 permits such clauses without the instrument losing its character as equity, on the principle that the investor is not guaranteed any assured exit price when the investment is made.

The circular sets a lock-in of at least one year, or the period prescribed under the foreign investment regulations if longer, and a ceiling that depends on what is held: the market price for a listed company, a price no higher than one worked out on return on equity from the latest audited balance sheet for unlisted equity, and a price under an internationally accepted method certified by a chartered accountant or a SEBI registered merchant banker for compulsorily convertible instruments. The rule-making power moved to the Central Government in 2015, so on a live deal the current rules for non-debt instruments under the Foreign Exchange Management Act, 1999 are the text to check. The position is stated as at 2 October 2026.