Mumbai: The Reserve Bank of India (RBI) has paved the way for foreign owned or controlled companies (FOCCs) in India to buy into local companies by issuing shares and swapping stocks.
In absence of policy clarity, till now such deals were cut either with specific regulatory clearance or through pure cash deals --- where an FOCC brought in fresh capital from abroad or dipped into retained earnings here.
However, the central bank has cleared the policy fog in a master direction released this month. The move gives FOCCs greater flexibility in acquiring stakes in local businesses.
An FOCC is an entity in which foreigners own more than 50% equity or exercise control through other means like management rights and board presence.
The regulator has also tweaked foreign exchange regulations to permit local companies to change the tenor on compulsorily convertible debentures and preference shares issued to overseas investors. This could enable the domestic investee company as well its foreign partner to delay share conversion if at the end of the originally agreed tenor the fair value of shares is well below the conversion price. While such postponement of tenor is allowed under Companies Act, the RBI directive has endorsed it under the Foreign Exchange Management Act (FEMA).
“The RBI’s decision to allow applicability of nearly all FDI provisions for downstream investments is a significant liberalization measure. Share swap transactions and deferred payment terms are now clarified to have been permitted under downstream investments. This change enables both listed and unlisted startups with over 50% foreign shareholding to quickly close peer acquisitions involving stock-and-cash deals without requiring RBI approval,” said Harshal Bhuta, partner at the P. R. Bhuta & Co, a CA firm specialising in international taxation and FEMA.
Stock purchases by an FOCC, either with cash or share-swaps, are called downstream investments under foreign direct investment (FDI) as the FOCC was incorporated with foreign currency inflows under the conventional FDI route. In a traditional, cross-border FDI deal, 75% of the money must be paid upfront, while the balance 25% can be paid over the next 18 months. However, till now in downstream investments, the full amount had to be paid initially. Now, RBI has extended the 75:25 flexibility available under regular FDI to downstream FDI investments as well.
A stock deal could involve issuing fresh shares by an FOCC or exchanging its existing share holding in a local company to pick stake in another domestic entity.
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