Put options at an assured return in FDI deals: what FEMA's NDI Rules 2019 permit on exit

Legal basis: Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (NDI Rules), S.O. 3732(E) dated 17 October 2019, made under FEMA 1999 s.46(2)(aa) and (ab): Rule 2(k) Explanation (i) (optionality clauses), Rule 9(5) (exit on exercise of an option), Rule 21(2)(b) and (c) (pricing guidelines) and Rule 6(a) proviso (land-border investors). Text as consolidated by RBI up to 2 September 2026.

Take an illustrative case. A European growth-equity fund puts ₹20 crore into a Bengaluru-based SaaS company, acquiring equity shares in an Indian private limited company. The SHA contains a tag-along in the fund's favour, a drag-along against the promoter, and a put option allowing the fund to sell its shares back to the promoter at cost plus 18% per annum after three years. Three years pass. The fund exercises the put. The promoter agrees to pay. The AD bank declines to process the remittance. The fund's lawyer says the SHA is a valid contract. The promoter's lawyer agrees. The AD bank says FEMA is a different problem.

The misconception is not about whether the exit right exists under contract law. The misconception is that a contractual exit right solves the problem of getting the money out of India. The NDI Rules govern whether equity instruments of an Indian company can be transferred between a resident and a non-resident, and at what price, independently of what any shareholder agreement says.

What the regulation actually says

The NDI Rules 2019 (S.O. 3732(E) dated 17 October 2019) were made in supersession of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2017. Rule 2(k) Explanation (i) states that equity instruments "can contain an optionality clause subject to a minimum lock-in period of one year or as prescribed for the specific sector, whichever is higher, but without any option or right to exit at an assured price."

Rule 9(5) repeats this for the exit itself: a person resident outside India holding equity instruments with an optionality clause, on exercising the option, "may exit without any assured return", subject to the pricing guidelines and the minimum lock-in. Two conditions therefore govern every optionality clause.

First: a minimum lock-in period. The option cannot be exercised within one year, or within the sector-specific lock-in period prescribed in the NDI Rules, whichever is higher (Rule 2(k) Explanation (i); Rule 9(5)). Check the sector conditions in Schedule I for the investee company before fixing the exercise window.

Second: no assured exit price. The investor may exit only "without any assured return" (Rule 9(5)). An exit price fixed or determinable at the time of investment — a predetermined rupee amount, a guaranteed IRR, or a formula not tied to fair value at the time of exit — is an assured price.

Rule 21 gives this principle pricing form. Rule 21(2)(c) provides that when a person resident outside India transfers equity instruments of an unlisted Indian company to a person resident in India, the price shall not exceed the valuation done as per any internationally accepted pricing methodology on an arm's length basis, certified by a Chartered Accountant, a SEBI-registered Merchant Banker or a practising Cost Accountant. Rule 21(2)(b) provides the mirror image: when a resident transfers to a non-resident, the price shall not be less than that valuation. The Explanation to Rule 21(2)(c) states the guiding principle: the non-resident "is not guaranteed any assured exit price at the time of making such investment or agreement and shall exit at the price prevailing at the time of exit."

Separately, Rule 6(a) proviso (i) requires an entity or citizen of a country that shares a land border with India — or an investment whose beneficial owner is a citizen of, or whose beneficial ownership is vested in, such a country — to invest only under the Government route. A European fund with no such beneficial ownership is not caught by this proviso.

How this maps onto put options, drag-along and tag-along

Put options are the most directly regulated category. A put option, as used here, is a right for the investor to require the promoter to buy its shares at a specified price. A put option structured at cost plus 18% per annum fixes the exit price at the time of investment. That is an option to exit at an assured price, which Rule 2(k) Explanation (i) and Rule 9(5) do not permit. A put at a price not exceeding the fair value certified at the time of exercise (Rule 21(2)(c)(iii)), exercisable only after the lock-in, is consistent with the NDI Rules.

Drag-along and tag-along clauses are not named in the NDI Rules. Where exercising either one results in a transfer of equity instruments between a person resident in India and a person resident outside India, that transfer is subject to the Rule 21(2)(b) or (c) pricing at the time of transfer, whatever price the SHA sets.

Before signing an SHA with a foreign investor, have each exit clause checked against Rule 2(k), Rule 9(5) and Rule 21 of the NDI Rules. To discuss a specific agreement, contact makeitlegit.in.

---

See Also

• "A parent-company loan to an India subsidiary needs no FEMA registration": what the ECB rules actually require
• Chinese LP in the fund stack: when land-border FDI needs government approval
• FDI deferred payment: 25% cap, 18‑month rule