Chamber of Tax Consultants

Transcription

1 Chamber of Tax Consultants Inbound Investments Tax & Regulatory Aspects October 22, amithraj123@gmail.com

2 Contents Entry Options for FDI Funding Options Downstream Investments FDI in Real Estate FDI in LLP Trading SBRT/ MBRT/ WCC Wholesale Trading Single Brand Retail Trading Ecommerce Models Investment by NRIs Recent Policy Changes Inbound Jurisdictions Case Studies Shares/ CCD Allotments 2

3 Section 1 Entry Options for FDI

4 Choice of Entity Company either a JV/ WOS Liaison/ Branch/ Project Office Partnership Firm/ Proprietary Concern LLP 4

5 100% FDI permitted through Automatic Route Agriculture & animal husbandry Almost all forms of manufacturing and service industries Mining Coal & lignite Electricity generation, transmission, distribution & trading (not in atomic plants) E-commerce activities (B to B) SEZ development Development of townships, housing, built-up infrastructure & constructiondevelopment projects Industrial parks NBFCs Petroleum & natural gas sector Cash & carry wholesale trading/ wholesale Trading (including sourcing from MSEs) Airports Greenfield projects 5

6 Sectors where FDI is prohibited Lottery business including Government/ private lottery, online lotteries Gambling & betting including casinos Business of chit fund Nidhi company Trading in Transferable Development Rights (TDRs) Real Estate business or construction of farm houses Manufacturing of cigars, cheroots, cigarillos & cigarettes, of tobacco or of tobacco substitutes Activities/ sectors not opened to private sector investment including atomic energy and railway transport (other than mass rapid transport systems) 6

7 Section 2 Funding Options

8 Funding Options Equity Shares Compulsorily Convertible Preference Shares Compulsorily Convertible Debentures External Commercial Borrowings Optionally Convertible Preference Shares Optionally Convertible Debentures Masala Bonds 8

9 Equity Shares & CCPS Equity Shares Simplest mode for funding No end use restrictions Pricing guidelines applicable Limited repatriation options DDT payable Compulsorily Convertible Preference Shares Preference Shares have preferential right over Equity Shares, in terms of: Repayment of capital on winding-up of the company Payment of dividend Preference Shares have to be compulsorily redeemed/ converted within 20 years Only fully and mandatorily Convertible Preference Shares are construed as part of equity and considered as FDI All other forms of preference shares construed on par with ECB Maximum dividend: SBI PLR + 3% DDT payable No end use restrictions 9

10 CCD Compulsorily Convertible Debentures Only Fully and Mandatorily Convertible Debentures are construed as part of equity and considered as FDI All other forms of debentures construed on par with ECB No time limit for conversion prescribed Interest payment to comply with Indian transfer pricing regulations Interest deductible in hands of the company Lower cost of capital Interest income would be taxable in the hands of debenture holders as per IT Act or DTAA The applicable withholding tax rate under the IT Act would be 40% ++ Interest payment to non-residents taxes to be withheld No end use restrictions 10

11 ECB Forms of ECB Track I: Foreign currency denominated ECB with Minimum Average Maturity (MAM) of 3/ 5 years Track II: Long term foreign currency denominated ECB with MAM of 10 years Track III: Indian rupee denominated ECB with MAM of 3/ 5 years Permitted End uses of Track I ECB Capital expenditure in the form of: Import of capital goods (including for services, technical know-how and license fees) Local sourcing of capital goods New projects Modernization/ expansion of existing units, etc For Track I ECB, utilization of ECB for any other purposes is not permitted 11

12 ECB Permitted End uses of Track II and III ECB There are no specific restrictions in relation to utilization of Track II and Track III ECB proceeds cannot be utilized to acquire land Key distinction between Track II and Track III ECB is the denomination of ECB All-in-cost ceilings All-in-cost includes rate of interest, other fees, expenses, charges, guarantee fees whether paid in foreign currency or INR All-in-cost will not include commitment fees, pre-payment fees/ charges, withholding tax payable in INR Track I ECB: Libor + 3% or 5% Track II ECB: Maximum spread of 500 bps per annum over the benchmark has been prescribed Track III ECB: In line with the market conditions 12

13 ECB ECB from direct or indirect foreign equity holders Direct foreign equity holder with minimum 25% direct equity holding Indirect equity holder with minimum indirect equity holding of 51% Group company with common overseas parent ECB liability : Equity Ratio for ECBs from direct/ indirect equity holder Should not be more 4 : 1 Under approval route, the ratio can be up to 7 : 1 Securities premium on allotment of shares also included in equity Maximum ECB Upto USD 750 mn for manufacturing companies and USD 200 Mn for software companies ECB lock-in period As discussed earlier, Track I Forex denominated ECB with MAM of 3/ 5 years permitted for capital expenditure Track II ECB has a MAM of 10 years and Track III ECB has a MAM of 3/ 5 years and early retirement is ordinarily not permitted 13

14 ECB Income-tax Interest payment should be allowed as business expenditure Interest rate to be at arm s length in accordance with international transfer pricing regulations Interest on ECB is taxable in 5%++ for forex denominated ECB and 15% for INR denominated ECB WHT under IT Act for forex denominated ECB 5%++ (loan should be received before July 2017) WHT under IT Act for INR denominated ECB 40%++ WHT under various DTAAs with India 7.5% to 15% Stamp Duty Nominal Stamp duty for execution of loan agreement Stamp duty on conversion similar to conversion of CCD into equity shares 14

15 NCD Exchange Control Regulations Schedule 5 of FEMA 20 governs foreign investment under NCD route Securities and Exchange Board of India (SEBI) registered FPIs are allowed to invest in listed NCDs of Indian companies Primary issue with the condition that NCDs/ Bonds are committed to be listed within 15 days of investment Terms of offer to have a clause that if not listed within 15 days, the issuer shall immediately redeem/ buyback SEBI (Foreign Portfolio Investors) Regulations, 2014 govern investment by FPIs Three categories of FPI Investors: CAT I : includes Government, Govt agencies, sovereign funds, etc. CAT II : includes mutual funds, investment trusts, insurance companies, etc. CAT III : includes corporate bodies, trusts, foundations, individuals, etc. An overseas group entity shall need to obtain FPI registration with the SEBI FPI registered entity is not permitted to hold more than 10% equity in an Indian company Further, a view exists that a subsidiary of an FPI entity shall not also hold more than 10% equity in an Indian company Hence, the entity holding NCD and equity shares should be different 15

16 NCD Exchange Control Regulations (contd.) Person seeking FPI registration should engage a Designated Depository Participant (DDP) for obtaining the registration DDP shall also act as a custodian of securities for the FPI NCDs are to be mandatorily listed in the Wholesale Debt Market (WDM) segment of stock exchange NCDs subscribed/ purchased by FPIs are not treated as ECB No end-use restrictions and also conditions applicable to FDI investors under FDI policy would not apply NCDs should have a minimum maturity of 3 years No restrictions on the interest remittances and also on redemption NCD issue to comply with SEBI (Issue and Listing of Debt Securities) Regulations 16

17 NCD Income-tax interest Interest payment should be allowed as business expenditure Interest rate to be at arm s length Interest on NCDs is taxable in the hands of recipient India company to comply with withholding tax provisions WHT rate to be as per of IT Act or applicable DTAA WHT under IT Act is 5%++ until June 2017 there are no reports on extention Stamp Duty Stamp 0.05% per year subject to 0.25% of the fair value Maximum of INR 2.5 mn Repatriation of Principle Invested NCDs can be redeemed anytime after 3 years Transfer of NCDs to other non-resident FPI entities is permitted, subject to the NCDs having a residual maturity of 3 years] Warehousing of NCDs WHT under various DTAAs with India 7.5% to 15% 17

18 Masala Bonds Exchange Control Regulations Indian companies can issue rupee denominated bonds to its parent for borrowing funds Maximum amount of borrowing: INR 50 billion (~ USD 750 million) per financial year Minimum average maturity: 3 years Residents of counties covered under the financial action task force can subscribe to Masala Bonds Further, residents in countries that are signatories to memorandum of undertaking (appendix A) of international organization of securities commission can also subs Interest coupon: In line with the market conditions End-use restrictions: Proceeds from masala bonds cannot be used for: Acquisition of land or other Real Estate activity except development of integrated township/ affordable housing projects Investing in capital markets/ equity investment domestically On lending Activities prohibited under foreign direct investment regulations 18

19 Masala Bonds Exchange Control Regulations Equity liability, reporting requirements similar to ECB Income-tax Interest payment should be allowed as business expenditure Interest rate to be at arm s length in accordance with international transfer pricing regulations Interest on masala bond should be liable to tax in 5%++ - to be further assessed WHT under IT Act 5%++ (amount should have been borrowed before July 2017) WHT under DTAAs with India 7,5% to 15% Stamp Duty Similar to ECB 19

20 Funding Options Comparison Regulatory Challenge Redeemable Preference shares ECB/ FCCB Equity/ CCPS CCD/ NCD/ Masala Bonds Tax Efficiency 20

21 Funding Options Classification Funding Instruments Exchange Control Income Tax Equity Shares Equity Equity CCPS Equity Equity CCD Equity Debt RPS/ OCPS Debt Equity ECB/ Loans/ Debt/ OCD/ PCD Debt Debt NCD/ Masala Bonds Debt No end use Debt NCD & Masala Bonds Most Tax & Regulatory Efficient Instruments Anti abuse provisions are being implicitly adopted 21

22 Section 3 Downstream Investments

23 Downstream Investments Controlled by resident Indian citizens Co X controlled by resident Indian citizens Resident Indian citizen Co X Co Y (Indian) Resident Indian citizens have power to appoint majority directors & own > 50% capital of Y Both Co Y & resident Indian citizens have power to appoint majority directors in Co X 23

24 Downstream Investments Owned by resident Indian citizens Resident Indian citizen Co Y (Indian) Resident Indian citizens have power to appoint majority directors & own > 50% capital of Y Co X owned by resident Indian citizens Co X Both Co Y & resident Indian citizens own > 50% of capital in Co X 24

25 Downstream Investments Calculation of total foreign investment in a company: Direct + Indirect Direct All investments held directly by non resident entity Indirect Calculation of Indirect Foreign Investment In case the investing Indian company is owned or controlled by non resident entities, the entire investment by such company into the target would be considered as indirect foreign investment Non resident entity 75% Indian investing company ( Y ) 26% will be indirect foreign investment in X 26% Target ( X ) Downstream investments by such companies are to be notified to SIA/ FIPB 25

26 Downstream Investments Calculation of indirect foreign investment In case the investing Indian company is owned and controlled by resident Indian citizens and/ or Indian companies which are owned and controlled by resident Indian citizens, investment by such company into the target will not be considered foreign investment Resident Indian shareholder Non resident entities 15% 85% Indian investing company ( Y ) 26% Y s investment will not be considered foreign investment Target ( X ) 26

27 Downstream Investments Calculation of indirect foreign investment Indirect foreign investment in 100% owned subsidiaries of an investing Indian company, will be limited to the foreign investment in such Indian company Resident Indian shareholder 45% Non resident entities 55% Indian investing company ( Y ) Target ( X ) 100% 27

28 Section 4 FDI in Real Estate

29 FDI in Real Estate Trade Not Permitted Buy and Lease Construction & Sale Construction & Lease Permitted Services Permitted, subject to lock-in and performance conditions Permitted Services SEZ Permitted Industrial Park Construction Services Permitted Permitted under General Services Not Real Estate 29

30 FDI in Real Estate Construction Development Development of townships, construction of residential/ commercial premises, roads or bridges, hotels, resorts, hospitals, educational institutions, recreational facilities, city and regional level infrastructure, townships FDI allowed under the automatic route Each phase of the construction development project considered as a separate project Lock-in and Exit by Investors On completion of the project or after development of trunk infrastructure Trunk infrastructure roads, water supply, street lighting, drainage and sewerage On completion of the project or after development of trunk infrastructure Lock-in for 3 year period computed tranche wise Sale to another NR permitted even before completion of project or 3 years Buy-back during the lock-in period not permitted Townships, malls/ shopping complexes and business centres Lock-in-period of 3 years computed tranche wise Transfer of immovable property not permitted during this period 30

31 Industrial Parks & SEZ Industrial Parks 100% FDI permitted in new and operating Industrial Parks Comprises of minimum 10 units and no single unit occupies > 50% of the allocable area Minimum percentage of the area for industrial activity 66% of total allocable area SEZ 100% FDI permitted in SEZ 31

32 Section 5 FDI in LLP

33 Overview of FDI/ FEMA regulations FDI in LLP FDI in LLP allowed under the automatic route Sectors: where 100% FDI is allowed under automatic route for companies and there are no FDI-linked performance conditions (minimum cap, lock-in, etc.) Indian companies having FDI are permitted to make downstream investment in LLPs Only if both the Indian company and the LLP operate where 100% FDI is permitted under automatic route and no FDI-linked conditions attached LLPs with FDI are also eligible to make downstream investments in India Interest can be paid on capital ODI by an Indian LLP Overseas investment by an Indian LLP permitted Indian LLPs with FDI can make investments in overseas companies ECB by LLP LLPs cannot raise foreign currency loan (ECB) 33

34 LLP FEMA Compliance Aspects Reporting Requirements Receipt of consideration for capital contribution or profit share Within 30 days Form Foreign Direct Investment LLP(I) Copies of FIRC KYC report of non-resident investor RBI will allot UIN for each remittance Transfer of capital contribution or profit share between NR and R Within 60 days Form Foreign Direct Investment LLP(II) NR to NR transfer FIPB approval required No specific reporting specified 34

35 LLP FEMA Compliance Aspects Pricing Capital contribution or acquisition of profit share should be at fair value Fair value as per internationally accepted/ adopted norms as per market practice Valuation to be carried out by CA or a practicing Cost Accountant or by an approved valuer from the panel maintained by the Central Government (Registered Valuers) 35

36 Section 6 Trading SBRT/ MBRT/ WCC

37 FDI Policy Trading Sector Wholesale/ Cash & Carry Trading 100% FDI permitted under Automatic Route Restriction on Sales to group companies, in excess of 25% Multi Brand Retail 51% FDI permitted with FIPB approval Local Sourcing Norms Applicable Single Brand Retail Upto 49% Automatic Route 49% to 100% FDI permitted with FIPB approval Local Sourcing Norms Applicable for FDI > 51% Market Place Platform linking buyers and sellers May fit within the definition of e-commerce Formal clarification on the status of e- commerce expected Reverse Logistics Simply provide pick-up and delivery services Concentrated on local procurement and delivery No significant issues, as the platform merely facilitates flow of transaction and logistics Retailing is allowed, Retail Trading is regulated 37

38 Manufacture Meaning FDI/ Income tax Manufacture means: Change in non living physical object or thing Resulting in transformation of the object or article or thing into a new object or article or thing having a different name, character or use Bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure Excise Manufacture includes any process: Incidental or ancillary to the completion of a manufactured product Which involves packing or repacking of such goods in a unit container or labelling or re-labelling of containers including the declaration 38

39 Manufacture Different Concepts Full Fledged Manufacturing Permitted to sell in any mode Online e-commerce also permitted Minimum 70% to be manufactured in-house Maximum of 30% can be outsourced to Indian manufacturers Should the Indian manufacture be Indian owned and controlled Contracting Manufacturing Buyer of goods not considered as manufacturer Buyer qualifies as trader Owning of design and formulation does not allow buyer to qualify as manufacturer All restrictions applicable Toll Manufacturing Ownership of raw materials with buyer Only job work carried out by manufacturer Buyer can qualify as manufacturer Spirit of such arrangements may be challenged 39

40 Section 7 Wholesale Trading

41 Wholesale Trading Eligible Customers Sales tax/ VAT registration/ service tax/ excise duty registration holders Trade license holders Permits/ license, etc. from Government Authorities Certificate of incorporation or society registration or trust registration Other Aspects Normal credit facilities can be extended Same entity can undertake wholesale and retail sale Sales to Group Companies Wholesale trading to group companies not to exceed 25% of the total turnover of the wholesale venture Meaning of group company Two or more enterprises, which are directly or indirectly in a position to: Exercise at least 26% voting rights in the other enterprise Appoint more than 50% of directors in the other enterprise 41

42 Section 8 Single Brand Retail Trading

43 Single Brand Retail Trading FDI Limits Upto 49%: Automatic Route 49% to 51%: Approval Route No local sourcing requirements Beyond 51%: Approval Route Local sourcing requirements Foreign Brand Owner: Key Aspects Product should be branded during manufacturing Brand owner directly or licensee through a legally tenable agreement can undertake SBRT in India Brand license agreement to be submitted RBI or SIA/ FIPB SBRT operating through brick and mortar stores permitted to undertake retail trading through e-commerce Each and every product to be approved Fresh application required for addition of products List of products to be sold (except food products) to be provided to RBI in case of Automatic Route 43

44 Single Brand Retail Trading Indian Brand Owner: FDI less than 50% Brand should be owned and controlled by Indian citizens or Indian companies owned and controlled by Indian citizens Licensing requirements not applicable Brand can be held by the retail trading company Indian Brand Owner: FDI more than 50% Indian company ceases to be controlled and owned by Indian citizens Export sales become mandatory Licensing requirements not applicable Separate entity for holding brand can be considered, to overcome export obligation Key Changes Same entity can undertake SBRT and wholesale trading Separate books of account to be maintained and audited Respective conditions for SBRT and wholesale trading to be complied with 44

45 Single Brand Retail Trading Local Sourcing: FDI > 51% Sourcing of 30% of the value of goods purchased for FDI beyond 51% Sourcing preferably from MSME Self certification of local procurement and checked by auditors Annual compliance of local procurement requirement (no 5 year block) Relaxation of sourcing norms: Products having state of art and cutting edge technology, where local sourcing not possible 45

46 Single Brand Retail Trading Issues Same legal entity owning multiple brands Local sourcing only by Indian entity or Group Experience Centers/ Studios Online only brands Instore ordering backend supply Food Products 46

47 Section 9 Ecommerce Models

48 Ecommerce Models Basic Model Investors Foreign & Indian Indian Investors Online Portal Wholesale Cash & Carry Retail Frontending Customers Sale of Goods Sale of Goods 100% FDI Permitted FDI Prohibited Shipment of Goods 48

49 Ecommerce Models Holding Company Model Indian Investors Foreign Investors > 50% < 50% Services Entity 100% Trading Entity 49

50 Ecommerce Models Pure Market Place (No Inventory) Investors Foreign & Indian Indian Sellers Order & Payment Sale of Goods Market Place Order & Payment Customers Shipment of Goods 50

51 Ecommerce Models Market Place Model Investors Foreign & Indian Indian Investors Wholesale Cash & Carry Sale of Goods Retail Frontending Order & Payment Market Place 100% FDI Permitted FDI Prohibited Sale of Goods Order & Payment Customers Shipment of Goods 51

52 Ecommerce Models Market Place Model Variant Investors Foreign & Indian Indian Investors 51% Foreign Investors 49% HoldCo-cum- Services Co IOCC 99.99% Wholesale Cash & Carry Sale of Goods Retail Frontending Order & Payment Market Place 100% FDI Permitted Sale of Goods Order & Payment Shipment of Goods Customers 52

53 Section 10 Investment by NRIs

54 Investment by NRIs Direct Investment Investment thru Entities Press Note 7 of 2015 Investment under Non Repatriation Route on par with resident investment Pricing, sectoral caps, etc. not applicable Investments by NRIs Press Note 12 of 2015 Investments made by entities owned and controlled by NRIs Treated on par with resident investment Form of entities covered Company, Trust and Partnership Firm 54

55 Investment by NRIs NRI Foreign Investors NRI Foreign Investors > 50% < 50% > 50% < 50% Foreign Foreign < 50% Equity Company 100% Masala Bonds Company > 50% Masala Bonds Indian Indian Company Company Not FDI 100% Downstream IndianCo Not FDI 55

56 Section 11 Recent Policy Changes

57 Issue of Partly Paid Shares and Warrants Partly paid equity shares Partly paid shares now FDI compliant Pricing to be determined upfront 25% of consideration to be paid upfront (balance within 12 months) Can be received after 12 months, if issue size > 500 cr and appoint monitoring agency in line with the ICDR regulations Warrants Warrants now FDI compliant Pricing of warrants and price/conversion formula to be determined upfront 25% of consideration to be paid upfront (balance within 18 months) Price for conversion not to be lower than fair value at the time of issuance of warrants Investee company can receive more than pre-determined price Indian company whose activity falls under government route for FDI would require prior approval of FIPB / GOI for issue of partly paid shares / warrants 57

58 Capitalization of Payables General permission has been given to issue of equity shares against any legitimate dues payable Remittance of such dues should not require prior permission of the FIPB or the RBI Dues should not be overdue Prior permission of the FIPB/ RBI not required for allotment of shares The equity shares issued should comply with the extant FDI guidelines on sectoral caps, pricing guidelines etc. CCPS/ CCD allotment not permitted Withholding tax requirements to be complied with 58

59 Section 12 Inbound Jurisdictions

60 Investment Structure: Direct Route vs SPV Route F Co F Co Outside India Outside India India SPV Tax efficient jurisdiction Outside India India Indian Co Indian Co F Co to directly invest in Indian Co F Co to set up an SPV in a tax efficient jurisdiction to invest in Indian Co. Flexibility in movement of funds SPV Route Desirable from tax perspective Also flexibility for infusion of JV partners Substance and GAAR Implications 60

61 SPV Considerations Corporate tax rate in SPV jurisdiction Taxation of dividend/ interest Singapore Withholding tax on dividend/ interest Mauritius Capital gain tax on transfer of investments/ shareholding Thin Cap rules Netherlands Limitation on Benefit clauses Cyprus Ease of access to debt and equity capital Tax Haven/ Black listed Countries Treaty network Cost of setting up and administration Other non-tax considerations like political stability, banking facility etc. Luxembourg UAE Tax Havens BVI/ Cayman 61

62 Hold Co/ SPV Jurisdictions Investment in India through Corporate tax rate Capital Gains taxability in India Capital Gains taxability overseas Dividend taxability overseas Remarks Singapore 17% Linked to Mauritius treaty Not Taxable Not Taxable (Foreign Sourced Income exemption on fulfilment of certain conditions) Substance + LoB conditions SGD Cyprus 12.5% Taxable Grandfathering the investments made before March 2017 Not Taxable Not Taxable as per domestic laws Treaty renegotiation completed Formal notification withdrawing 94A awaited Netherlands 25% Not Taxable, unless shares sold to Indian resident Not Taxable Participation Exemption Not Taxable Participation Exemption Capital Gains taxable in India if sold to Indian Resident Luxembourg 22.05% 21.63%/ 43.26% Not Taxable Participation Exemption Not Taxable Participation Exemption Blacklisting concerns Mauritius 15% (80% deemed FTC) Taxable Grandfathering the investments made before March 2017 Not Taxable Not Taxable due to Underlying Tax Credit Max rate 3% Tax Residency Certificate (TRC) and requirement to demonstrate substance, limited GAAR 62

63 Section 13 Case Studies

64 Appropriate Capital Structure Background Target Business Slump Sale ForeignCo India SubCo Equity + Debt ForeignCo is planning to acquire business of a Target IndiaCo New India SubCo is sought to be set-up Mix of debt and equity to be infused Capital Structure Equity 15% - 20% Permissibility to raise ECB Track I, II or III NCD Masala Bonds 64

65 Share Acquisition Structure Background India HoldCo to acquire shares in the Target ForeignCo India HoldCo Target Equity and CCD/ NCD Merger India HoldCo to be funded through equity and CCD/ NCD Target to be merged upstream into India HoldCo Key Issues Tax break on interest cost used for acquisition Difference between cost of acquisition and fair value of assets recognized as Goodwill Goodwill depreciable for tax purposes Goodwill recognition mandatory under IndAS 65

66 Non Tax Compliant Merger Equity ForeignCo India HoldCo Target Equity and CCD/ NCD Equity Merger Background India HoldCo to acquire shares in the Target India HoldCo to be funded through equity and CCD/ NCD Foreign Co to acquire small stake say 5% Target to be merged upstream into India HoldCo CCD to be allotted as consideration for the merger Key Issues Merger not compliant with Section 2(1B) Can be treated as liquidation Step-up available on liquidation Goodwill can also be recorded 66

67 Acquisition by India ListCo ForeignCo India ListCo India HoldCo Target Equity and CCD Merger Background India HoldCo intends to acquire shares in the Target Significant premium paid over book value Need to create Goodwill and also maintain EPS IndAS applicable Key Issues India ListCo cannot infuse debt instrument other than CCD into India HoldCo Scheme to provide for amortization of Goodwill even post IndAS at India HoldCo level High Court order not binding on India ListCo for consolidation accounting Lower tax and MAT interest and goodwill depreciation/ amortization 67

68 Acquisition below Section 56(2) value Background Seller ForeignCo Target IndiaCo Buyer ForeignCo Share Transfer Seller ForeignCo intending to exit Target IndiaCo Commercially agreed consideration < Book value Section 56(2) incidence for Buyer ForeignCo Book value: 100; Consideration: 80 Reserves available Possible structure Target IndiaCo to buy-back 25% of the shares at par value Effective book value of the balance shares increases beyond 80 68

69 Adjustment for Down Round Background ForeignCo Foreign Investor has made investment in the earlier round Subsequent round being carried out at discount to the earlier round Down round protection gets triggered IndiaCo Investors hold CCPS and equity Approach I Adjust the CCPS conversion ratio upto to fair value determined earlier Approach II Adjust the CCPS conversion ratio of other shareholders downwards Equity shares can be bought back at par 69

70 Section 14 Shares/ CCD Allotments Compliance Aspects

71 Shares/ CCD Allotments Equity Shares Allotment of fresh shares by Indian company to NR Fair value as per internationally accepted/ adopted norms as per market practice Minimum price Valuation needs to be done by a CA or Cat I Merchant Banker Compliance: Reporting of receipt of funds within 30 days Shares to be allotted within 180 days from the date of receipt of funds Filing of Form FC-GPR with annexures within 30 days from date of allotment Allotment of Equity Shares in New Companies Allotment of shares pertaining to the Subscribed Capital as per MoA can be carried out at face value Subscribed Capital as per MoA can be in excess of Rs. 1 lac/ 5 lacs Fair Value requirement not applicable in such cases Allotment of shares at premium Boon or Bane?? Shell & Vodafone Case 71

72 Shares/ CCD Allotments Convertible Instruments CCPS or CCD Conversion price or conversion formula to be fixed upfront Conversion price under conversion formula should be in compliance with pricing guidelines Conversion price Conversion price > Current Fair Value Variable conversion ratio Conversion price at the lower end (maximum shares allotted) > Current Fair Value Justification needs to be provided to RBI Valuation needs to be done by a CA or Cat I Merchant Banker Compliance: Reporting of receipt of funds within 30 days Shares to be allotted within 180 days from the date of receipt of funds Filing of Form FC-GPR with annexures within 30 days from date of allotment of convertible instruments Filing of Form FC-GPR also required on conversion 72

73 Transfer of Shares/ CCD Transfer of Shares in Indian company by R to NR Equity Shares Consideration for transfer > Current Fair Value Convertible Instruments CCPS or CCD Transfer price to be determined based on conversion ratio Conversion price, based on transfer price > Current Fair Value Valuation needs to be done by a CA or Cat I Merchant Banker Compliance: Filing of Form FC-TRS within 60 days from the date of transfer Indian company can record share transfer only on receiving acknowledged Form FC-TRS Transfer of Shares in Indian company by NR to NR Valuation guidelines are not applicable Technically, no reporting requirements 73

74 Transfer of Shares/ CCD Transfer of Shares in Indian company by NR to R & Buy-back of Shares Equity Shares Consideration for transfer/ buy-back price < Current Fair Value Convertible Instruments CCPS or CCD Transfer price to be determined based on conversion ratio Conversion price, based on transfer price < Current Fair Value Valuation needs to be done by a CA or Cat I Merchant Banker Compliance: Filing of Form FC-TRS within 60 days from the date of transfer Indian company can record share transfer only on receiving acknowledged Form FC-TRS 74

75 Downstream Investments Foreign Co > 50% Indian Co 1% to 100% Downstream Indian Co Investment by FOCC into another Indian company Covers fresh investment and acquisition of existing shares Regarded as Indirect FDI Pricing guidelines applicable to Direct FDI will equally apply Investment/ consideration for transfer > Fair Value Compliance: Filing of intimation with SIA, DIPP and FIPB within 30 days from date of investment Downstream buy-backs also covered by pricing guidelines Buy-back price < Current Fair Value Valuation needs to be done by a CA or Cat I Merchant Banker Anomaly: Downstream investment through acquisition of shares from NR Indian company can record share transfer only on receiving acknowledged Form FC-TRS 75

76 Rights Issue, ESOP & Others Rights Issue Price of allotment to NR should not be less than R Unsubscribed portion of Rights Issue can be subscribed by NR Position if there are no R ESOP Allotment of ESOP by Unlisted Cos not specifically dealt with In the absence of specific waiver, normal pricing of allotment to NR should apply Issue of shares against lump sum technical know how/ royalty, ECB, preincorporation expenses/ import payables Same guidelines as fresh allotment of shares Bonus Issue Pricing guidelines not applicable Selective bonus? 76

77 Changes in Form FC - GPR Deletion of Declarations Declarations with respect to existing JV or technology transfer or trade mark agreement in India in the same field Declarations with respect to Small Scale Sector Introduction of New Declarations Additional declaration under the Prevention of Money Laundering Act 2002 and the Unlawful Activities (Prevention) Act, 1967 The foreign investment received and reported now will be utilized in compliance with the provision of a Prevention of Money Laundering Act 2002 (PMLA) and Unlawful Activities (Prevention) Act, 1967 (UAPA). We confirm that the investment complies with the provisions of all applicable Rules and Regulations 77

78 Thank You amithraj123@gmail.com Views expressed in the presentation are personal