Offers of foreign securities need careful structuring

By Bhakta Patnaik and Sarayu Pani, S&R Associates
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Companies incorporated outside India may seek to raise funds by offering securities to investors resident in India. As outlined below, a private placement exemption and the foreign exchange regulations in India need to be considered in connection with such offers and sales.

Exemption and regulations

The Companies Act, 1956, sets out an exemption for the private placement of securities. Section 67(3) states that no invitation or offer shall be treated as made to the public if the offer or invitation can be regarded as (i) not being calculated to result in it becoming available for subscription or purchase by persons other than those receiving the offer or invitation, or (ii) can be regarded, in all circumstances, as being a domestic concern of the persons making and receiving the offer or invitation.

Bhakta Patnaik Lawyer S&R Associates
Bhakta Patnaik
Lawyer
S&R Associates

Section 67(3) also clarifies that any offer or invitation made to 50 persons or more will be construed as being made to the public. Accordingly, a foreign entity needs to ensure that an invitation or offer is not made to more than 49 persons in India. The 49-person limit does not differentiate between retail and institutional investors and regulates both “invitations” and “offers”.

Unless otherwise permitted under the foreign investment regulations, any investment in the securities of a foreign entity by a person resident in India needs the prior approval of the Reserve Bank of India (RBI). The regulations for investments made by an individual and a corporate entity differ and some of the differences are summarized below.

Investments by individuals

The Foreign Exchange Management Act, 1999 (FEMA), permits an Indian resident to acquire foreign securities using funds legitimately held by the resident in a bank account outside India or funds held outside India which were inherited from a non-resident.

An Indian resident is also permitted, under certain specified circumstances, to open a “resident foreign currency account” and acquire foreign securities using funds from such an account.

The RBI also permits Indian residents to pay up to US$200,000 a year to acquire securities of any listed or unlisted company incorporated outside India, other than entities incorporated in Bhutan, Nepal, Pakistan, Mauritius and countries identified by the Financial Action Task Force as non-cooperative countries.

A person resident in India is also permitted to acquire foreign securities as part of an employee stock option scheme or as a gift from a person resident outside India.

Investments by Indian entities

Investment by listed Indian companies: Regulations under the FEMA permit listed Indian companies to invest in securities issued by a foreign entity (other than an entity in the financial services sector) which is listed on a recognized stock exchange outside India. However, such investment must not exceed 50% of the net worth of the Indian entity.

Investment in the financial services sector: Under the FEMA regulations, only Indian entities that are engaged in the financial services sector can invest in foreign entities that are engaged in financial services. Further, an Indian entity that intends to invest in foreign entities in the financial services sector must comply with certain additional conditions relating to net profit, registration with and approval of a financial services regulator, and compliance with certain prudential norms.

Sarayu Pani Lawyer S&R Associates
Sarayu Pani
Lawyer
S&R Associates

Investment by mutual funds: Mutual funds in India that are registered with the SEBI are permitted to invest up to a specified limit in various foreign securities. These securities include American and global depositary receipts of foreign companies, shares of overseas companies listed on recognized stock exchanges, and debt instruments rated not below investment grade of foreign entities incorporated in countries with fully convertible currencies.

Investment by venture capital funds: Venture capital funds registered with the SEBI are permitted to invest in equity and equity-linked instruments of offshore venture capital undertakings, subject to an overall limit and with the SEBI’s permission.

Indian companies are also permitted to make direct investments in joint ventures or wholly owned subsidiaries outside India subject to certain conditions, including meeting a net worth criterion. However, this route excludes portfolio investments and may not be directly applicable.

The above is not an exhaustive list of permitted investments under the FEMA. Also, there may be filing requirements under the foreign investment regulations, and resales of foreign securities acquired by persons resident in India may be subject to further restrictions. Offers of foreign securities in India need to be structured carefully to comply with all the restrictions.

Bhakta Patnaik and Sarayu Pani are lawyers at S&R Associates, a law firm based in New Delhi and Mumbai. The views expressed above are those of the authors and not a substitute for legal advice.

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