October 3, 2016
The Indian Market
The Indian economy continues to be an attractive investment destination due to its sustained stable growth and implementation of further liberalization policies by the Government of India ("Government"). Statistics indicate that India’s gross domestic product grew 7.6 per cent in 2015-16, up from 7.2 per cent a year ago. The full-year growth was fuelled by close to 8 per cent growth rate in the fourth quarter of 2015-16, the fastest in the world for the January-March quarter. As is evident from various amendments, the Government is focussed on making India a favoured destination for foreign investment.
Following our previous update dated May 17, 2016 (which sets out an overview of key legal and regulatory developments in India from October 1, 2015 to April 30, 2016), this update provides a brief overview of the key legal and regulatory developments in India from May 1, 2016 to August 31, 2016.
Key Legal and Regulatory Developments
- Amendments to the Foreign Direct Investment Policy: The Foreign Direct Investment Policy of the Government ("FDI Policy") is the primary regulation governing foreign investment in India which is reviewed and amended by the Government annually. The Government introduced several amendments to the FDI Policy through the annual Consolidated Foreign Direct Investment Policy Circular, 2016 issued on June 7, 2016 ("2016 FDI Policy") and a subsequent press note issued on June 24, 2016 ("Press Note"). The amendments introduced by the 2016 FDI Policy and the Press Note, enable increased levels of foreign investment in a number of business sectors such as broadcasting, airports and pharmaceuticals, and further, simplify various sector-specific conditions. For a detailed analysis, please refer to our client alert dated July 1, 2016 at:
- Deferred Consideration in Cross-border Share Purchase Transactions Allowed: The Reserve Bank of India ("RBI") has amended the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 to permit, under the automatic approval route, deferment of purchase consideration in share purchase transactions involving foreign investment.
Under the earlier regime, in a transaction where a non-resident purchased shares of an Indian company from a resident, there was a requirement that the entire agreed consideration be paid upfront at the time of the share transfer. Therefore, hold-backs, e.g., on account of post-closing adjustments or indemnity payments, were not permitted in such transactions unless the prior approval of the RBI was obtained. With this amendment, a non-resident is now permitted to hold-back a part of the agreed consideration (typically under an escrow mechanism) or require the resident to return the consideration received by it (on account of indemnity payments), subject to the following conditions:
(a) at least 75% of the agreed consideration must be paid up-front, i.e. up to 25% of the agreed consideration can be held back. In this case, the balance consideration (after adjustments) must be paid within 18 months from the date of the share purchase agreement;
(b) if the total consideration is paid up-front, up to 25% of the consideration can be returned to the non-resident by the resident on account of indemnity payments within 18 months from the date of payment of consideration.
In both of the above circumstances, the total consideration received by the resident from the non-resident, upon the expiry of the 18 month-period mentioned above, must be equal to or more than the statutory floor price determined in accordance with the RBI’s pricing guidelines.
Prior approval of the RBI continues to be required for payment of deferred consideration, which does not conform to the above conditions.
While the amendment will facilitate acquisitions in India by permitting better risk allocation between cross-border buyers and sellers, a few issues should be carefully considered during negotiations:
(a) The 18 month-period in relation to a hold-back is to be reckoned from the "signing" or "execution" date of the share purchase agreement, not from the "closing" date (the actual date on which the seller transfers the shares to the buyer in return for the consideration). It is not uncommon for the time gap between execution and closing to exceed six months, depending on the complexity of the transaction and the need for regulatory approvals. Consequently, the longer the gap between execution and closing of the transaction, the shorter the actual period of hold-back will be. A non-resident will be able to avail the full 18-month hold-back period only in transactions that are executed and closed simultaneously;
(b) As indicated above, the RBI has reiterated (in the amendment) that the total consideration paid by a non-resident to a resident must be equal to or more than the consideration determined in accordance with RBI’s pricing guidelines. Therefore, the price commercially agreed to between the parties is subject to the statutory floor price prescribed by the RBI, which needs to be paid by a non-resident to a resident. As a result, there may arise a situation where the hold-back amount will need to be paid by the non-resident to comply with the pricing guidelines of the RBI, even if such buyer is contractually permitted to retain the amount (for example, on account of indemnity payments). How this issue will be dealt with practically will need to be seen as transactions start to close subsequent to the new amendment.
- India-Mauritius Double Taxation Avoidance Agreement Amendment: India and Mauritius signed a protocol (the "Protocol") amending the India-Mauritius Double Taxation Avoidance Agreement ("India-Mauritius DTAA"). This radically changes the tax liability on capital gains arising from alienation of shares of an Indian resident company by a Mauritian tax resident. Under the erstwhile regime, such gains were taxable in the country of residence i.e. Mauritius, resulting in zero taxation. Now, the Protocol imposes taxes on such gains at the source i.e. at the level of the Indian resident company at the applicable domestic tax rate. This amendment effectively takes away the capital gains exemptions that were available investing through the Mauritius route. The Protocol has been made effective on investments made on or after April 1, 2017. Therefore, investments made prior to March 31, 2017 and related exits/share transfers will remain unaffected by this change.
Corporate Law & Financing
- Clarification on Rupee Denominated Offshore Bonds: The Ministry of Corporate Affairs has clarified that issuance of rupee denominated offshore bonds will not be governed by the requirements of private placement or public offer under the [Indian] Companies Act, 2013. Also, the securities regulator in India, Securities and Exchange Board of India ("SEBI") has issued a notification to clarify that the SEBI (Foreign Portfolio Investors) Regulations, 2013, will not apply to such offshore bonds. Cumulatively, these clarifications have eliminated the confusion with regard to the regulations applicable to rupee denominated offshore bonds and clearly establish the jurisdiction of the RBI in this matter, under its Master Direction on External Commercial Borrowings issued in January 2016.
- Reforms in Debt Recovery and Enforcement of Security Interest Proceedings: The Indian Parliament has amended the [Indian] Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and the [Indian] Recovery of Debts due to Banks and Financial Institutions Act, 1993. These amendments are aimed at reducing the time taken in debt recovery proceedings by reforming procedures followed by tribunals established for this purpose. These amendments include provisions on electronic filings and record keeping for all debt recovery tribunals. Additionally, these amendments provide greater powers to secured creditors to enforce their collateral interest and take over the management of defaulting corporate debtors.
- Insolvency and Bankruptcy Code, 2016: The Insolvency and Bankruptcy Code, 2016 (the "Code") has been notified in the [Indian] official gazette on May 28, 2016. The Code overhauls laws governing insolvency in India and is a major initiative of the government towards improving the ease of doing business in the country. The Code applies to companies, partnerships, limited liability partnerships and individuals. The Code replaces the existing insolvency framework which was confusing and fraught with substantial delays. Insolvency proceedings against a corporate debtor commence with a resolution process that seeks to resolve the insolvency of a debtor as a going concern by formulating a resolution plan. If this process fails to achieve a resolution, the debtor is subjected to liquidation proceedings to settle pending claims against it within a specific time frame. The process of corporate insolvency is subject to the overarching supervision of the National Company Law Tribunal ("NCLT"). Further, the Code envisions the establishment of an Insolvency and Bankruptcy Board which is mandated with the task of training and regulating the functioning of insolvency professionals who will have an important role in administering the insolvency proceedings along with the NCLT. For a detailed analysis, please refer to our client alert dated June 08, 2016 available at:
- National Company Law Tribunal Notified: Corporate litigation in India has substantially been reformed with the constitution of the NCLT and the National Company Law Appellate Tribunal ("NCLAT") with benches across major cities. The NCLT has jurisdiction over matters that were earlier dealt with by the Company Law Board and the High Courts, in addition to the functions assigned to it under the Code (as discussed above). This includes court approved mergers, winding-up, reduction of share capital, oppression of minority shareholders and mismanagement of companies, among others. The NCLAT will decide on appeals of the NCLT’s decisions.
 Press Note 5 (2016 Series) dated June 24, 2016.
 Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) (Seventh Amendment) Regulations, 2016, notified on May 20, 2016.
 The fair value of the shares of the Indian company determined by a chartered accountant of a merchant banker registered with the Securities and Exchange Board of India, in accordance with any internationally accepted pricing methodology.
 Press Release dated May 10, 2016 issued by the Central Board of Direct Taxes available at http://www.incometaxindia.gov.in/Lists/Press%20Releases/Attachments/468/Press-release-Indo-Mauritius-10-05-2016.pdf
 General Circular No. 09/2016 issued by the Ministry of Corporate Affairs on August 3, 2016 available at http://www.mca.gov.in/Ministry/pdf/GeneralCircular09_03082016.pdf
 Circular Issued by the Securities and Exchange Board of India dated August, 4, 2016 available at http://www.sebi.gov.in/cms/sebi_data/attachdocs/1470299109414.pdf
 [Indian] Gazette Notification dated June 1, 2016 (S.O. 1932(E)).
Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. For further details, please contact the Gibson Dunn lawyer with whom you usually work or the following authors in the firm’s Singapore office:
Jai S. Pathak (+65 6507 3683, email@example.com)
Priya Mehra (+65 6507 3671, firstname.lastname@example.org)
Bharat Bahadur (+65 6507 3634, email@example.com)
Karthik Ashwin Thiagarajan (+65 6507 3636, firstname.lastname@example.org)
Sidhant Kumar (+65 6507 3661, email@example.com)
© 2016 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.