REGULATORY

FRAMEOWRK

FOR INBOUND

M&A IN INDIA Assignment 1

ABSTRACT A foreign entity can invest in India through: FDI or

Foreign Direct Investment or through FPI or Foreign

Portfolio Investment

Arun Maithani M&A

1

Assignment 1 Regulatory framework for inbound M&A by a Foreign Entity

In an increasingly globalized world, Mergers & Acquisitions (M&A) are assuming tremendous

significance with several corporations seeing consolidation as a quick and effective growth strategy.

Indian companies have traditionally been attractive targets for acquisition by international companies.

A foreign entity can invest in India through;

FDI or Foreign Direct Investment FPI or Foreign Portfolio Investment

1) Foreign direct investment

FDI is investment in equity of the Indian company, it is the long term investment. The Foreign

Investment in India is undertaken in accordance with the FDI Policy which is formulated and announced

by the Government of India.

Types of Instruments to invest in India

Equity shares

Fully Compulsorily and Mandatorily convertible Debentures.

Fully Compulsorily and Mandatorily convertible Preference shares.

Policy and regulatory framework toward FDI

The Government has put in place a policy framework on Foreign Direct Investment, which is embodied

in the Circular on Consolidated FDI Policy. The Department of Industrial Policy and Promotion (DIPP),

Ministry of Commerce & Industry, Government of India makes policy pronouncements on FDI through

Press Notes/ Press Releases which are notified by the Reserve Bank of India as amendments to the

Foreign Exchange Management Act1.

FDI policy is reviewed on an ongoing basis and measures for its further liberalization are taken. Change

in sectoral policy/sectoral equity cap is notified from time to time through Press Notes by the DIPP.

1 http://www.femaindia.in/

Foreign Investment

Foreign Portfolio

Investment Foreign Direct

Investment

Foreign Venture

Capital Investment

Automatic Route

Government Route

FIIs

NRIs

PIOs

SEBI

Regd.

2

Entry Routes for Investment in India

Under the FDI Scheme2, investments through two routes:

Automatic Route: Under the Automatic Route, the foreign investor or the Indian company does

not require any approval from the Reserve Bank or Government of India for the investment.

Government Route: Under the Government Route, the foreign investor or the Indian company

should obtain prior approval of the Government of India (Foreign Investment Promotion Board

(FIPB), Department of Economic Affairs (DEA), Ministry of Finance or Department of

Industrial Policy & Promotion, as the case may be) for the investment.

FDI is not permissible in the following some cases like Atomic energy, Agricultural or

plantation activities or Agriculture (excluding Floriculture, Horticulture), Gambling\Betting etc.

Entry options for foreign investors in India

A foreign company planning3 to set up business operations in India has the following options:

1. Incorporated Entity: By incorporating a company under the Companies Act, 2013 through

Joint Ventures; or

Wholly Owned Subsidiaries

Foreign equity in such Indian companies can be up to 100% depending on the requirements of the

investor, subject to equity caps in respect of the area of activities under the Foreign Direct Investment

(FDI) policy.

2. As an Unincorporated Entity: As a foreign Company through

Liaison Office/Representative Office

Project Office

Branch Office

Such offices can undertake activities permitted under the Foreign Exchange Management

(Establishment in India of branch or office of other place of business) Regulations, 2000.

2 https://www.rbi.org.in/Scripts/FAQView.aspx?Id=26 3 http://www.company-formationindia.com/

RBI Ministry of

Finance

Ministry of

Commerce

and Industry

FIPB

FEMA FDI Regulation

DIPP

3

2) Foreign Portfolio Investment

FPI is done by foreign institutional investors (FIIs). FII means an institution established or incorporated

outside India which proposes to make investment in securities in India.

What FIIs can do?

A Foreign Institutional Investor may invest only in the following:

Securities in the primary and secondary markets including shares, debentures and warrants of

companies unlisted, listed or to be listed on a recognised stock exchange in India; and

Units of schemes floated by domestic mutual funds including Unit Trust of India, whether listed

on a recognised stock exchange or not

Units of scheme floated by a collective investment scheme

Dated Government Securities

Derivatives traded on a recognised stock exchange

Commercial paper

Security receipts

Indian Depository Receipt

FIIs are allowed to trade in all exchange traded derivative contracts subject to the position limits as

prescribed by SEBI from time to time. Clearing Corporation monitors the open positions of the FII/

sub-accounts of the FII for each underlying security and index, against the position limits, at the end of

each trading day.

Regulation of FIIs

The regulations for foreign investment in India have been framed by the Reserve Bank of India and

Foreign Exchange Management Act, 1999 4 . In line with the said regulations, since 2003, the

Securities and Exchange Board of India (SEBI) has been registering FIIs and monitoring investments

made by them through the portfolio investment route under the SEBI (FII) regulations 1995. SEBI acts

as the nodal point in the registration of FIIs.

Who can get registered as FII?

Following foreign entities / funds are eligible to get registered as FII:

Pension Funds, Mutual Funds, Investment Trusts, Banks, Insurance Companies / Reinsurance Company,

Foreign Central Banks, Foreign Governmental Agencies, Sovereign Wealth Funds , International/

Multilateral organization/ agency, University Funds (Serving public interests), Endowments (Serving

public interests), Foundations (Serving public interests), Charitable Trusts / Charitable Societies

(Serving public interests)

3) External commercial borrowing

Any investment other than equity share or that may or may not give an option to the investor to convert

its instrument into equity and which does not involve upfront pricing of the instrument is not termed as

FDI. Rather it is termed as ECB (external commercial borrowing) and has to comply with the ECB

guidelines.

4 www.sebi.gov.in/faq/fiifaq.pdf

4

The DEA (Department of Economic Affairs), Ministry of Finance, Government of India along

with Reserve Bank of India, monitors and regulates ECB guidelines and policies. Infrastructure

and Greenfield projects, funding up to 50% (through ECB)5 is allowed. In telecom sector too, up to

50% funding through ECBs is allowed. Borrowers can use 25 per cent of the ECB to repay rupee debt

and the remaining 75 per cent should be used for new projects. A borrower cannot refinance its existing

rupee loan through ECB.

4) Foreign venture capital investments

A Foreign Venture Capital Investor (FVCI)6 is an investor incorporated or established outside India

who can invest either in a Domestic Venture Capital Fund or a Venture Capital Undertaking (Domestic

Unlisted Company). Foreign equity player or Foreign Venture can also invest in India directly

under FDI Scheme subject only to SEBI Regulation and sector specific caps.

The registered foreign venture capital institutions can invest through:

Equity, equity linked and debt instruments through an initial public offer or private placement.

Can also invest in securities on recognized stock exchange.

The Reserve bank of India in 2012 allowed FIIs registered with SEBI to invest in eligible securities

through private arrangement or purchase from third party. This has enhanced the investment flexibility

available to the foreign venture capital institutional investors. The service sector, information

technology sector along with telecommunication sector have shown great interest from FIIs side and

have garnered maximum investments.

Benefits of Registering under the FVCI Regulations

SEBI has given certain benefits to the investors who are registered as an FVCI.

FVCI instead of paying a price based on the net asset value of the investee company could pay

by negotiable price (acceptable to the buyer and the seller/issuer.).

The shares acquired by FVCI in an unlisted company are not subject to the one year lock-up

period upon the Initial Public Offering (IPO) of the shares of the company.

FVCIs registered with the SEBI are Qualified Institutional Buyers in the SEBI. Thus they are

eligible for subscribing for the securities in an IPO under the typical book-building process.

Certain restrictions are also imposed on use of funds for those who register as an FVCI.

Foreign Venture Capital Fund is required to submit a quarterly statement in the prescribed

format. Every venture capital fund shall maintain, for a period of eight years, books of account,

records and documents.

5 Wikipedia 6 http://www.helplinelaw.com