Assignment

Regulatory Aspects Of
Inbound Mergers and Acquisitions

Submitted by:
Rohit Gupta
EPGDIB (2013-2015), Section A
Roll No. 43

INBOUND CROSS BORDER M&AS IN INDIA AND THE FEMA LAWS

Inbound cross border M&As in India also means foreign investment in India.

Foreign investment in India, i.e. investment in India by a person resident outside

India is governed by FEMA 20.

Foreign Direct Investment (FDI) in India is undertaken in accordance with the FDI Policy
which is formulated and announced by the Government of India

The Department of Industrial Policy and Promotion, Ministry of Commerce and Industry,
Government of India issues a Consolidated FDI Policy Circular on an yearly basis on
March 31 of each year (since 2010) elaborating the policy and the process in respect of
FDI in India.

Under FEMA 20, general permission has been granted to any non-resident to purchase shares
or convertible debentures of an Indian company under Foreign Direct Investment Scheme,
subject to the terms and conditions specified in Schedule 1 thereto. However citizens of
Bangladesh, Pakistan or Sri Lanka resident outside India and entities in Bangladesh or Pakistan
are not permitted to purchase shares or debentures issued by Indian companies or any other
Indian security without the prior approval of the RBI.

Further, persons resident outside India are permitted to purchase shares or convertible
debentures offered on a rights basis by an Indian company which satisfies the conditions
restated herein below:
(i)

The offer on right basis does not result in increase in the percentage of foreign equity
already approved, or permissible under the Foreign Direct Investment Scheme in terms
of FEMA 20;

(ii)

The existing shares or debentures against which shares or debentures are issued by the
company on right basis were acquired and are held by the person resident outside India
in accordance with FEMA 20;

(iii)

The offer on right basis to the persons resident outside India is at a price which is not
lower than that at which the offer is made to resident shareholders;

The rights shares so acquired shall be subject to the same conditions regarding repatriation as
applicable to original shares. Further, under FEMA 20, an Indian company has been permitted
to issue shares to its employees or employees of its joint venture / subsidiary abroad, who are
non-resident, either directly or through a trust.

Under Regulation 7 of FEMA 20, once a scheme of merger, demerger or amalgamation has
been approved by the court, the transferee company (whether the survivor or a new company)
is permitted to issue shares to the shareholders of the transferor company who are persons
resident outside India, subject to the condition that the percentage of non-resident holdings in
the company does not exceed the limits for which approval has been granted by the RBI or the
prescribed sectoral ceiling under the foreign direct investment policy set under the FEMA laws.
If the new share allotment exceeds such limits, the company will have to obtain the prior
approval of the FIPB and the RBI before issuing shares to the non-residents.

General permission has also been granted for transfer of shares / convertible debentures by a
non-resident as follows:
(i)

Non-residents other than non-resident Indians (NRIs) or Overseas Corporate Bodies

(OCBs) may transfer shares / convertible debentures to any non-resident, provided
that the transferee should have obtained permission of the Central Government, if he
had any previous venture or tie-up in India through investment in any manner or a
technical collaboration or trademark agreement in the same or allied field in which the
Indian company whose shares are being transferred is engaged;

(ii)

NRIs or OCBs are permitted to transfer by way of sale, any shares or convertible
debentures of Indian companies to other NRIs or OCBs only;

(iii)

Non-residents are permitted to transfer shares / debentures of any Indian company to a

resident by way of gift.

FEMA 20 further stipulates that any transfer of security by a resident to a non-resident would
require the prior approval of the RBI. For the transfer of existing shares/convertible debentures
of an Indian company by a resident to a non-resident by way of sale, the transferor will have to
obtain the approval of the Central Government before applying to the RBI. In such cases, the
RBI may permit the transfer subject to such terms and conditions, including the price at which
the sale may be made.

For the purpose of FEMA 20, investment in India by a non-resident has been divided into the
following 5 categories and the regulations applicable have been specified in respective
schedules as under:

(i)

Investment under the Foreign Direct Investment Scheme (the FDI Scheme).

(ii)

Investment by Foreign Institutional Investors (FIIs) under the Portfolio Investment

Scheme (the Portfolio Investment Scheme).

(iii)

Investment by NRIs/OCBs under the Portfolio Investment Scheme.

(iv)

Purchase and sale of shares by NRIs/OCBs on non-repatriation basis.

(v)

Purchase and sale of securities other than shares or convertible debentures of an Indian
company by non-residents.

The following are the prominent features of the schemes listed above:

I.

FDI Scheme

Under the FDI Scheme, a non-resident or a foreign entity, whether incorporated or not, may
purchase shares or convertible debentures of an Indian company. Any Indian company which is
not engaged in the activity or manufacture of items listed in Annexure A to the FDI Scheme has
been permitted to issue shares to a non-resident up to the extent specified in Annexure B to
the FDI Scheme, on a repatriation basis, provided that:
(i)

The issuer company does not require an industrial license;

(ii)

The shares are not being issued for acquiring existing shares of another Indian company;

(iii)

If the non-resident to whom the shares are being issued proposes to be a collaborator,
he should have obtained the Central Governments approval if he had any previous
investment/collaboration/tie-up in India in the same or allied field in which the Indian
company issuing the shares is engaged.

Further, a trading company incorporated in India may issue shares or convertible debentures to
the extent of 51% of its capital, to persons resident outside India subject to the condition that
remittance of dividend to the shareholders outside India is made only after the company has
secured registration as an export/trading/star trading /super trading house from the
Directorate General of Foreign Trade, Ministry of Commerce, Government of India, New Delhi.

II.

Investment by Foreign Institutional Investors (FIIs)

Government of India also prescribes a ceiling of 10% of the total paid-up equity capital or 10%
of the paid-up value of each series of convertible debentures, and provides that the total
holdings of all FIIs/sub-accounts of FIIs put together shall not exceed 24% of paid-up equity
capital or paid up value of each series of convertible debentures. A registered FII is also
permitted to purchase shares/convertible debentures of an Indian company through private
placement/arrangement, subject to the prescribed ceilings.

RBI may also permit a domestic asset management company or a portfolio manager registered
with SEBI as FIIs for managing the sub-account to make investment under the Portfolio
Investment Scheme on behalf of non-residents who are foreign citizens and bodies corporate
registered outside India, provided such investment is made out of funds raised or collected or
brought from outside India through normal banking channel. Such investment is restricted to
5% of the equity capital or 5% of the paid-up value of each series of convertible debentures
within the overall ceiling of 24% or 40% as applicable for FIIs for the purpose of the Portfolio
Investment Scheme.

The designated branch of an authorized dealer is authorized to allow remittance of net sale
proceeds (after payment of taxes) or to credit the net amount of sale proceeds of shares /
convertible debentures to the foreign currency account or a non-resident rupee account of the
registered FII concerned.

III.

Investment by NRIs/OCBs under the Portfolio Scheme

Under Schedule 3, a NRI/OCB is permitted to purchase/sell shares and/or convertible

debentures of an Indian company, through a registered broker on a recognized stock exchange,
subject to the following conditions:
(i)

The NRI/OCB designates a branch of an authorized dealer for routing his/its transactions
relating to purchase and sale of shares/ convertible debentures under the Portfolio
Investment Scheme, and routes all such transactions only through the branch so
designated;

(ii)

The paid-up value of shares of an Indian company, purchased by each NRI/OCB both on
repatriation and on non-repatriation basis, does not exceed 5% of the paid-up value of
shares issued by the company concerned;

(iii)

The paid-up value of each series of convertible debentures purchased by each NRI/OCB
both on repatriation and non-repatriation basis does not exceed 5% of the paid-up value
of each series of convertible debentures issued by the company concerned;

(iv)

The aggregate paid-up value of shares of any company purchased by all NRIs and OCBs
does not exceed 10% of the paid up capital of the company and in the case of purchase
of convertible debentures the aggregate paid-up value of each series of debentures
purchased by all NRIs and OCBs does not exceed 10% of the paid-up value of each series
of convertible debentures;

(v)

The NRI/OCB takes delivery of the shares purchased and gives delivery of shares sold;

(vi)

Payment for purchase of shares and/or debentures is made by inward remittance in

foreign exchange through normal banking channels or out of funds held in NRE/FCNR
account maintained in India if the shares are purchased on repatriation basis and by

inward remittance or out of funds held in NRE/FCNR/NRO/NRNR/NRSR account of the

NRI/OCB concerned maintained in India where the shares/debentures are purchased on
non-repatriation basis;
(vi)

The OCB informs the designated branch of the authorized dealer immediately on the
holding/interest of NRIs in the OCB becoming less than 60%.

Paragraph 2 of Schedule 3 further provides that the link office of the designated branch of an
authorized dealer is obliged to furnish daily report to the Chief General Manager, Reserve Bank
of India (ECD) detailing the name of the NRI/OCB and the company wise number of shares
and/or debentures and paid-up value thereof, purchased and/or sold by each NRI /OCB.