October 3, 2016
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.
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[3].
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.
Corporate Law & Financing
[1] Press Note 5 (2016 Series) dated June 24, 2016.
[2] Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) (Seventh Amendment) Regulations, 2016, notified on May 20, 2016.
[3] 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.
[4] 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
[5] 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
[6] 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
[7] [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:
India Team:
Jai S. Pathak (+65 6507 3683, [email protected])
Priya Mehra (+65 6507 3671, [email protected])
Bharat Bahadur (+65 6507 3634, [email protected])
Karthik Ashwin Thiagarajan (+65 6507 3636, [email protected])
Sidhant Kumar (+65 6507 3661, [email protected])
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