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.
Big Liberalisation Measure
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 to downstream investments is a significant liberalisation 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 PR 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.
Chinese subsidiaries in India
However, while giving more latitude to foreign companies in cutting deals with local businesses, RBI has simultaneously and firmly clarified that Indian companies owned by investors from ‘land-bordering countries’ — a term that understandably points at investors from China and Hong Kong — cannot freely acquire companies in India even from their retained earnings in India. Thus, Chinese subsidiaries in India cannot use their profits from Indian operations to buy into an Indian company.
