Challenges in Entry for PEs in India & Investment Abroad

Transcription

1 Challenges in Entry for PEs in India & Investment Abroad - Anup P. Shah 1 st February Days Real Estate Summit Hotel J.W. Marriott

2 Challenges in Entry for PEs in India

3 Types of PE Seed Investors start-up Angel Investors early / start-up stage VC Funds second stage Private Equity Growth stage / pre-ipo PIPE Private Investment in Public Equity aka Preferential Issue to PEs PRAVIN P. SHAH & ASSOCIATES, CAs 3

4 Veto Rights Veto Rights / Affirmative Vote Fundamental Issues on which PE s consent is a must Most contentious clause PEs want Veto on almost all matters Should be clearly spelt out rather than leaving it broad and vague PRAVIN P. SHAH & ASSOCIATES, CAs 4

5 Restrictions on Transfer Restrictive Covenants in Articles Valid against Co. only if part of Articles, else remains a Private Contract - Whether Valid in a Public Listed / Unlisted Co.? No pre-emptive rights allowed in Public Cos. Pre-emptive rights possible in Public Cos. Position under New Cos. Bill PRAVIN P. SHAH & CO. 5

6 FDI & Instruments PRAVIN P. SHAH & CO. 6

7 Relevant Regulations Consolidated FDI Policy DIPP, Ministry of Commerce AP Dir Circulars RBI s changes from time to time FEMA Regulations Mode of Investments + Reporting PRAVIN P. SHAH & CO. 7

8 Who Can Invest? Non-resident Entity Erstwhile OCBs FIIs Any Foreign Co. / LLP / Entity Provided not on RBI s Watch List Can invest under FDI with RBI / FIPB approval Can invest under PIS or FDI Route Company must bifurcate the two FVCIs Can invest under FVCI Route in a VCF or under FDI route in a Company. Segregate FVCI & FDI PRAVIN P. SHAH & CO. 8

9 Entities for FDI Company Private / Public Firm RBI Route for Rep. basis LLPs Only on FIPB Route Trusts Must be SEBI Regd. VCF PRAVIN P. SHAH & CO. 9

10 Instruments FDI / PE Instruments Equity Hybrid Warrants Voting NVR CCD CCPS PRAVIN P. SHAH & CO. 10

11 Equity Shares Consideration must be for Cash All other cases FIPB approval Issue Price of FDI Shares Listed Cos. Unlisted Cos. Must be issued within 180 days of funds PRAVIN P. SHAH & CO. 11

12 Equity Shares DCF Valuation No Guidelines specified Discretion to Valuer in selection of: No. of Years Forecast Discount Rate / WACC Growth Rate Method of Calculation of Terminal Value / Perpetuity PRAVIN P. SHAH & CO. 12

13 CCDs Quasi-equity Instruments Subject to ECB restrictions? Cap on Rate of Interest? All-in-cost ceilings like ECBs? Tax Deduction benefits to Investee Co. Can be redeemed / bought back by Co.? Time limit for conversion into Equity? 8 years reasonable? PRAVIN P. SHAH & CO. 13

14 CCDs CFDIP Issue Price or Conversion Formula to be specified upfront at time of issue Conversion Date > Issue Date FMV = DCF OR Preferential issue Pricing under ICDR Earlier Issue Price was required Flexibility in Earn-out Formula Deals Beneficial for PE / VCF Deals Co. gets higher Value if performance good PRAVIN P. SHAH & CO. 14

15 NVR Shares Issue of NVR Shares possible? When Useful? If Public Company? Examples PRAVIN P. SHAH & CO. 15

16 Preference Shares Part of Sectoral Caps Only if CCPS If RPS / OCPS treated as ECBs Must be converted within a reasonable timeframe Plain redemption / buyback possible? Max. Dividend Rate PRAVIN P. SHAH & CO. 16

17 Others Issue of Warrants? Partly Paid-up Shares Flip-flop in Policy Recent Reports - Proposal Paid-up portion - a part of Capital 25% paid-up upfront Balance within 12 months PRAVIN P. SHAH & CO. 17

18 FDI in LLPs FDI allowed in LLPs: Only with FIPB Approval and in sectors where Auto Route FDI is allowed Not in sectors where FDI requires FIPB approval Not in sectors linked with performance conditions: Real Estate Downstream Invst. not possible from LLP FIPB approval reqd. for: Conversion of Co. with FDI into LLP Is conversion of a RE Co. allowed? FIPB PRAVIN P. SHAH & CO. 18

19 FDI in LLPs FDI allowed in LLPs: FIIs / FVCIs cannot invest in LLPs Indian Co. with FDI can make a downstream in LLP Both Co. & LLP must be in auto-route sectors Both must not be in performance related sectors Thus, no downstream in RE/ NBFC PRAVIN P. SHAH & CO. 19

20 Total FDI Direct FDI FDI from Overseas in Indian Co. Indirect FDI FDI routed via an Indian Co. PRAVIN P. SHAH & CO. 20

21 Indirect FDI FDI via Indian Cos Owned & Controlled by Resident Indian Citizens = Domestic Investment not counted as FDI Owned & Controlled by NRs = Indirect FDI Ownership More than 50% of Voting Power Control Power to appoint Majority of BoD PRAVIN P. SHAH & CO. 21

22 Indirect FDI FDI in Real Estate Indco Indco s Invst.in SPV Indirect FDI in SPV Does SPV need to be FDI compliant? 49% 51% Nil Indco is O&C by Indians 75% 26% 26% - Indco is O&C by NRs so entire Downstream is Indirect FDI 51% 75% 75% - Indco is O&C by NRs so entire Downstream is Indirect FDI 60% 100% 60% - Downstream in SPV is a mirror image of Indco PRAVIN P. SHAH & CO. 22

23 FDI in Real Estate PRAVIN P. SHAH & CO. 23

24 FDI in Real Estate General Prohibitions Real Estate Business Construction of Farm House Trading in Transferable Development Rights (TDRs) Real Estate Business : Meaning Assignment of Development Agreements? Leasing? PRAVIN P. SHAH & CO. 24

25 FDI in Real Estate Guidelines 100% FDI allowed under Automatic Route subject to conditions in Construction & Development Projects Projects Permitted Housing Commercial Premises Resorts Educational Institutions Recreational Facilities City & Regional Level Infrastructure Townships PRAVIN P. SHAH & CO. 25

26 Conditions Minimum Area Serviced Housing Plots 10 hectares/25 acres Built-up area: 50,000 sq. mtrs. or 5,38,200 s.ft. Combination Project Any one of above 2 conditions What is built-up area? What is included and what is excluded in it? PRAVIN P. SHAH & CO. 26

27 Conditions Investment Minimum Capitalisation In case of WOS US $10M In case of JV US $ 5M FDI in a JV in 99:1 between Foreign & Indian Partner What should be the min. capital? RBI s Recent Proposal for min. Foreign Stake in JV Securities Premium included in Min. Cap? Whether Preference Shares included? PRAVIN P. SHAH & CO. 27

28 Conditions Funds to be brought within 6 months of commencement of business What is Commencement of Business? Would it be date when Co. buys land as its SIT Would it be date of approval by Local Authority? What if delay in getting Min. Cap.? 6 mts. Time for Min. Capitalisation of $ 10 mn. not relaxed for a WOS PRAVIN P. SHAH & CO. 28

29 Conditions Original Investment locked-in for 3 years Lock-in from receipt of each Tranche or Completion of Min. Cap. ~ whichever is later 50% project must be developed in 5 years from date of obtaining all statutory clearances RBI s view both conditions are cumulative & No EXIT What is developed ~ Must be LIVABLE / OC obtained 50% completion of Project in 5 years also a condition for repatriation in addition to 3 years lock-in? PRAVIN P. SHAH & CO. 29

30 Conditions Lock-in of Initial Investment Can Foreign Investor sell to another NR within 3 years? No outflow /remittance from Co. Is lock-in on Investor or on Investment? Can Foreign Investor sell to Domestic Investor within 3 years? PRAVIN P. SHAH & CO. 30

31 Conditions Lock-in of Initial Investment Can Mauritian Co. / Cypriot Co. which has made FDI be sold before 3 years? Transfer of Foreign Investor offshore FIPB s View NR-NR transfer allowed within 3 years for Foreign Investor in RE Co. pursuant to Group Reorganisation of Investor? FIPB s View PRAVIN P. SHAH & CO. 31

32 Conditions Investor cannot sell Undeveloped Plots Undeveloped Plots means road, water supply, street lighting, drainage, sewerage, etc. not made available Developer to provide infrastructure and obtain CC before disposing serviced housing plots All Conditions should be mandatorily fulfilled Min. Capitalisation / Min. Area / Lock-in NA to Education Sector & Old Age Homes Earlier Exit? PRAVIN P. SHAH & CO. 32

33 FDI in Real Estate Issues Whether Agricultural Land can be acquired for developing serviced housing plots? If FDI & non-fdi compliant projects, can Co. get FDI? FIPB planning to monitor end-use of funds on a Qtly basis PRAVIN P. SHAH & CO. 33

34 FDI in Real Estate Issues Whether Service Provider to Developer needs to comply with conditions of P.Note? Is RE Consultancy, Valuation, Property Management = RE Business? Is FDI allowed in this activity? Logic? PRAVIN P. SHAH & CO. 34

35 Structuring of PE Investments Mauritian Co. Cypriot Co. Singaporean Co. Real Estate SPV India PRAVIN P. SHAH & CO. 35

36 Structuring of PE Investments Azadi Bachao Andolan (SC) Treaty Shopping is Valid To claim DTAA benefits PO Box Office & Professional Directors with TRC? Substantial Presence? What if DTAA does not contain a LOB Clause? Singapore better than Mauritius / Cyprus? PRAVIN P. SHAH & CO. 36

37 Structuring of PE Investments Factor Mauritius Cyprus Singapore Interest under DTAA Domestic Tax Rate Credit for DDT Underlying Tax Credit for Dividends Capital Gains Tax LoB in DTAA Perception Ranking PRAVIN P. SHAH & CO. 37

38 Top 10 FDI Jurisdictions ( )

39 PIS by FIIs Can FIIs purchase shares of Listed RE Cos. Under PIS DLF/Unitech / Oberoi? What if Listed Cos. have non-fdi compliant projects? Any limit? Can FIIs buy under IPO? Conditions for RE FDI applicable? What about Pre-IPO Placements? PRAVIN P. SHAH & CO. 39

40 PIPE PE in a Listed Co. If PIPE of 25% or more in a Listed Co. by Preferential Issue Additional Factors to be Considered : Special Resolution - s. 81(1A) of Cos. Act Pricing as per SEBI Preferential Issue G/L 1 year lock-in from allotment Open Offer under Takeover Regs. 26% of total post-issue shares Pricing of Offer as per SEBI Takeover Regs. PRAVIN P. SHAH & ASSOCIATES, CAs 40

41 PIPE of 15%+ Open Offer for min. 26% by PE Triggered on Date of Board Resolution approving Preferential Issue not EGM Notice Diageo - UB If Foreign PE, then prior permission of RBI not reqd. PRAVIN P. SHAH & ASSOCIATES, CAs 41

42 FDI in Hotels & Hospitals 100% FDI under Auto Route in Hotels & Tourism Hotels includes: Restaurants Beach Resorts Other Tourist Complexes Convention centres, seminar units 100% FDI under Auto. Route also allowed in Hospitals RE Conditions applicable to Hotels & Hospitals? RBI s Proposal? What if Mixed Use Projects? DIPP Proposal? PRAVIN P. SHAH & CO. 42

43 FDI in Industrial Parks 100% FDI allowed under the Automatic Route FDI in Setting up of IPs and also in Established IPs STPs, IT Parks, Bio-tech parks, etc RE Conditions applicable? Conditions for FDI Minimum 10 Units and No Single Unit > 50% of allocable area Minimum 66% of the total allocable area for Industrial Activity Tax Benefits under Industrial Park Scheme, 2008 Difference between IPS 2008 and Circular 1/2011 Which is more liberal PRAVIN P. SHAH & CO. 43

44 FDI in SEZs 100% FDI allowed under the Automatic Route in Development of : SEZs Free Trade Warehousing Zones RE Conditions Applicable? Conditions of SEZ Act should be fulfilled What about Transfer of Shares of an SEZ Developer? Recent Stand of BoA PRAVIN P. SHAH & CO. 44

45 Challenges in Investment Abroad

46 Liberalised Remittance Scheme Scheme of RBI For Resident Individuals Foreign citizens Resident in India? Minors? US $200,000 equivalent / FY Any permissible Capital or Current A/c Transaction Opening Bank A/c, Acquiring Real Estate Only US$ or any Foreign Currency equivalent PRAVIN P. SHAH & CO. 46

47 Country Negative List Prohibited Countries? Mauritius, Pakistan, Bhutan & Nepal FATF Non co-operative Iran, North Korea What about following countries which appear in the List of High-risk and Non co-operative of FATF? Thailand? Sri Lanka Cuba Indonesia Turkey PRAVIN P. SHAH & CO. 47

48 Sources Out of owned funds? Borrow and Invest? Banks can lend for LRS? Application-cum-Declaration Form Rental Income / Capital gains earned on assets held abroad under LRS can be retained abroad and reinvested PRAVIN P. SHAH & CO. 48

49 Buying Property Through a Co. Set-up Co. Abroad & Acquire Property in Co.? Would RBI permit setting up of a Co. under LRS? Can Resident buy out shares of an Existing Co. for a price equal to Property value? Can Resident buy Initial Capital of an Existing Co. and Invest balance under a Rights Issue? Can Co. borrow abroad for buying a Mortgaged Property? PRAVIN P. SHAH & CO. 49

50 Practical Situations R & NRI relative jointly buy a house abroad Resident sends $200,000 & Balance by NRI Relative 2 Resident Brothers 4 members in each Brother s Family Flat at Chelsea, London - $30,00,000 / 19,00,000 Can remit $15 lakhs of Purchase price by March 2013 and balance $15 lakhs in April 2013 Flat would be jointly owned by 8 co-owners PRAVIN P. SHAH & CO. 50

51 Practical Situations Can Resident sell House / Asset in India and invest in HP abroad? Can he claim benefit u/ss. 54 / 54F? Is Benefit available for Houses abroad? Yes ~ S.54 No ~ S.54F Recent decision disallowed u/s. 54F distinguishing the earlier 2 favourable decisions since they were under s.54 PRAVIN P. SHAH & CO. 51

52 Other Considerations Stamp Duty Can be as high as 10% in Singapore Agent s Fees Property Transaction Fees Foreign Lawyer Inheritance Tax / Estate Duty PRAVIN P. SHAH & CO. 52

53 Thank You!!