Structuring Inbound Investments

Transcription

1 Structuring Inbound Investments Interplay with Companies Act, 2013 & FEMA/FDI Policy January 16, 2016 Lalit Kumar, Partner J. Sagar Associates advocates & solicitors Ahmedabad Bengaluru Chennai Gurgaon Hyderabad Mumbai New Delhi

2 Foreign Investment Routes FDI Route Schedule 1 & 9, FEMA 20 Companies, LLP Equity, CCPS, CCD Approval & Automatic Route Pricing Guidelines FVCI Route Schedule 6, FEMA 20 SEBI regd. FVCIs Approval & Automatic Route No Pricing Guidelines

3 Foreign Investment Routes FPI Route Schedule 2, 2A & 5, FEMA 20 FIIs FDI & PIS Approval & Automatic Route No Pricing Guidelines NRI Route Schedule 3 & 4, FEMA 20 NRE(PIS); NRO(PIS) Non-repatriation on the PIS + repatriation through the exchange No pricing guidelines

4 Share Capital & Debentures Equity Share Capital With voting rights With differential rights as to dividend, voting or otherwise Companies Act, 2013 provides for it but the FEMA / FDI policy do not clearly provide for it Preference Share Capital Redeemable Preference Shares up to 20 years but can exceed 20 years and up to 30 years for specified infrastructure projects Convertible Preference Shares Optionally or Compulsorily Convertible Share Warrant FEMA/FDI policy provides for it but not the Companies Act, 2013 Debentures Non-Convertible Unsecured Debentures Non-Convertible Secured Debentures Convertible Debentures Optionally Convertible or Compulsorily Convertible

5 Choice of Instruments Equity Shares Complete Ownership & Voting Rights Plain Vanilla or with Differential Voting Rights No restriction on amount payment of dividend No fixed dividend pay out obligation Payment of dividend and repayment of capital subject to preference shares (No liquidation preference) Hybrid between equity and debt CCPS Optionally Convertible / Non Convertible treated as ECB Voting rights only with respect to preference shares No restriction on amount payment of dividend Dividend < 300 basis points over SBIPLR Second proviso of Section 47(2), Companies Act, : fixed dividend obligation?

6 Choice of Instruments Compulsorily convertible Debt until conversion into shares No voting right until conversion CCDs Interest payment until conversion Treated as FDI instrument Fixed coupon pay out No limits on coupon Priority over equity and CCPS OCDs Optionally convertible Debt until conversion into shares No voting right until conversion Interest payment until conversion / redemption Treated as ECB

7 Pricing Put and Call Options: SEBI vs RBI No assured exit 1 year lock-in Exit per PMV at such time Does Section 194 of the Companies Act, 2013 prohibiting forward dealings by whole time directors and KMP not permit call and put options? Recent Developments: Docomo exit from Tata Teleservices :Assured exit was permitted by RBI but Ministry of Finance rejected Para 20 of Sixth Bi-monthly Monetary Policy it has been decided to introduce greater flexibility in the pricing of instruments/ securities, including an assured return at an appropriate discount over the sovereign yield curve through an embedded optionality clause...guide lines in this regard will be issued separately.

8 Process of Private Placement Private placement limit does not include QIBs and ESOPs Preferential issue price to be determined by registered valuer - Companies Act, 2013 and FEMA / FDI policy both require valuation Rules prescribe: o 200 person limit o The value of the offer or invitation per person must be with an investment size of not less than INR 20,000 of the face value of the securities Very Tricky Issue! No such condition in FEMA / FDI policy o Above 2 conditions not applicable to NBFCs and HFCs if RBI / NHB have prescribed regulations and they are compliant with them o Special resolution to issue all securities required for each offer

9 Process of Private Placement In Private Placement monies payable shall be paid through cheque or demand draft of other banking channels but not by cash Allotment of Securities within 60 days from the date of receipt of application money - The FEMA / FDI policy permit allotment within 180 days which one will prevail? Money received on application shall be kept in a separate bank account and shall not be utilised for any purpose except For adjustment against allotment of securities For repayment of monies where the company is unable to allot securities Certificate for the allotted securities to be issued Within 2 months from the date of allotment of shares Within 6 months from the date of allotment of debentures Is there a way out from private placement process?

10 Are you my subsidiary? Test of subsidiary is exercise or control of > 50% of the total share capital instead of > 50% equity share capital (s. 2(87)) So an investor holding CCPs of a greater amount than equity shareholders may become the holding company of its portfolio entity? PE investors not registered as companies under 2013 Act also covered? 50% test can be satisfied directly or together with other subsidiaries (s. 2(87)) Holding of CCDs does not trigger the provision

11 Concept of Control Control - Has the same definition in Companies Act, 2013 and FDI policy o Right to appoint majority of the directors o Right to control the management or policy decisions o Exercisable by a person or persons acting individually or in concert o Directly or indirectly o Including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner o But does not apply for the test of subsidiary subsidiary s test still on controlling the composition of the Board of Directors

12 Concept of Control Will veto rights make gives control? Subhkam Ventures (SAT) says NO SEBI s position: the definition of control would include veto rights since such negative control would effectively control the management and policy decisions of a company Differing from the SEBI s position, Securities Appellate Tribunal (SAT) in order dated January 15, 2010 held: control meant positive control, that is, the ability to cause a company to perform certain actions, and that it did not cover rights constituting negative control, i.e. the right to prevent the company from doing certain actions. The SEBI had appealed the aforesaid decision of SAT before the Supreme Court Both SEBI and Subhkam Ventures reached an out of court settlement in the matter and the Supreme Court passed an order disposing off the appeal. The Supreme Court s order dated November 16, 2011 accepting the out of court settlement between SEBI and the respondents, specifically states that the question of law (i.e., whether negative control is control) remains open and that the SAT decision would not be treated as precedent. This observation has far reaching ramifications Multi Screen Media (CCI) says YES

13 Sample Veto Rights which may not trigger control amendment of charter documents (including change of name) increase or decrease of share capital acquisition or disposal of material assets amalgamation and merger of the company or demerger, share exchange, equity transfer, business transfer or business acquisition, or dissolution or any other transaction of similar nature approval of financial statements and dividend distribution material change in operation change in business plan

14 Exemption from Deposit Rule 2(1)(c)(ii) exempts amount received for persons resident outside India if received subject to the provisions of FEMA and the rules and regulations thereunder So does a company need to compulsorily convert the CCDs from a foreign investor within 5 years as required under the Companies (Acceptance of Deposits) Rules, 2014?

15 Foreign Company business address in India Companies Act, 2013 intends to cover within its ambit those foreign companies which operate in India through electronic means such as through e-commerce but the manner in which this has been dealt in the Companies Act, 2013 has lead to a widespread confusion The definition of "electronic mode" as provided in Companies (Specification of Definitions Details) Rules, 2014 includes carrying out electronically any business to business or business to consumer transactions, web marketing, advisory and transactional services whether by , mobile devices, social media, voice or data transmission or otherwise, a wide range of activities may amount to a foreign company having a place of business in India. This wide ambit of electronic mode may to lead to unintended consequences and perhaps every foreign company (especially in service industry) having any electronic transaction with a customer / client in India may be deemed to have established a place in India. So such company need an approval from RBI under FEMA regulations?

16 Issues for CSR Foreign Contribution Regulation Act, Clause (vi) of Section 2(j) provides that any Indian company in which 51% shareholding is held by a foreign company or foreign citizens, the said Indian company will qualify as a foreign source So any contribution received by an Indian entity from such foreign owned Indian company will require approval and registration with the Government (Ministry of Home Affairs) under the FCRA before the foreign contribution is received in India?

17 Other Issues Concept of Section 4(7) of Companies Act, 1956 now not applicable Section 2(46) of the Companies Act, 2013 dealing with the definition of holding company are foreign holding companies excluded? Few exemptions to private limited company and automatic route for LLP is LLP a good substitute?

18 Thank You Disclaimer: This presentation has been compiled for general information and does not constitute professional guidance or legal opinion. Readers should obtain appropriate professional advice.