One of the less discussed aspects of liberalization under the foreign direct investment (FDI) policy is in relation to share swaps. Apart from traditional means of cash payment for acquiring capital instruments, the extant FDI policy (effective 28 August 2017) also permits non-cash consideration.
Under the automatic route, this includes conversion of external commercial borrowings, technical know-how fee, royalty due, pre-incorporation/pre-operative expenses (subject to prescribed caps and conditions), amounts due which do not require prior permission of the government or the Reserve Bank of India (RBI) for remittance, and share swaps. The government approval route is available against import of capital goods, etc., and pre-incorporation/pre-operative expenses (where not covered under a general permission).
While share swaps were previously recognized under the FDI policy, up until November 2015 share swaps were permitted solely under the government route, with approval of now disbanded Foreign Investment Promotion Board (FIPB). This was liberalized in November 2015, when swaps of shares of companies in sectors falling under the automatic route were brought under the automatic route, subject to compliance with pricing requirements. Swaps of shares of companies operating in the government route sectors however continued to require prior approval.
Ostensibly, the language used in the FDI policy around swapping of shares is flexible enough to cover swaps of shares of Indian companies for shares of foreign companies, given the reference in the policy to valuation by investment bankers outside India. The corresponding provisions of the recently notified RBI regulations on inbound foreign investment continue to refer to valuation by investment bankers outside India though they also refer to swap of “capital instruments” – which by implication is limited to Indian companies – giving rise to some ambiguity.
A cross-border swap will inherently involve an outbound swap and this should also be permitted in order for the liberalization under the FDI policy to be more meaningful. In this regard, it is relevant to note that the RBI regulations on outbound/overseas investments and the related master direction contemplate an outbound swap of shares, and also categorically state that FIPB approval will be a prerequisite for a swap of shares, if required in terms of applicable RBI regulations governing inbound foreign investment. This clearly suggests a cross-border swap, though such clarity would be welcome in the FDI policy as well.
It is also relevant to note that the FDI policy contemplates acquisition of shares of Indian companies by non-residents under a scheme of merger/demerger/amalgamation, though with some limitations. The language in the policy seems to contemplate only merger of Indian companies. Further, the policy only refers to issuance of shares pursuant to a scheme of merger/demerger/amalgamation, and not secondary acquisitions.
While in principle a non-resident should not require approval in order to receive shares of an Indian company under a cross-border merger of a foreign company into the Indian company – certainly where activities of the Indian company fall under the automatic route – perhaps the next iteration of the FDI policy could clarify these matters.
This also assumes relevance in light of certain developments earlier in 2017. The Ministry of Corporate Affairs (MCA) notified the section of the Companies Act, 2013, dealing with cross-border mergers, and introduced a new provision in the related rules to enable cross-border mergers. These provisions clearly recognize the RBI’s domain over cross-border mergers by requiring merger schemes to be approved by the RBI as a prerequisite.
Following the MCA’s lead, the RBI issued draft regulations for cross-border mergers in April 2017 and invited comments from stakeholders. The draft regulations specified that provisions of Indian foreign exchange laws, both on inbound investment and overseas investment, would be applicable while implementing cross-border mergers.
While one can hope that the RBI will expedite these matters, a specific clarification on cross-border mergers in the FDI policy in the meantime would complement these developments. It is conceivable that a cross-border intragroup restructuring exercise could require a merger of a foreign parent company into an Indian subsidiary. Given that this is, in substance, similar to a cross-border swap, this clarity would only encourage and facilitate such restructuring exercises.
Vikrant Kumar is a partner and Naren BS is a senior associate at Luthra & Luthra Law Offices. The views expressed here are personal. They are intended for general information purposes and are not a substitute for legal advice.
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