DOWN ROUNDS ARE COMING - ENFORCEMENT OF ANTI-DILUTION ADJUSTMENTS

Introduction

The standstill of global economic activity and consequent market downturn caused by the Covid-19 outbreak has delivered a double whammy of capital scarcity and significant valuation correction across several asset classes. Many Indian companies will be in the race to restructure business and/or raise capital, unfortunately, at reduced enterprise valuations.

For businesses with existing venture capital and private equity investors, the looming slew of ‘down rounds’ will trigger anti-dilution rights attaching to convertible securities held by their existing shareholders.

Anti-dilution adjustments are self-executing rights that offer protection from value erosion in the form of reduction of conversion price of securities, translating into a proportional increase in the number of equity shares issuable to the investor on conversion.
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Back to the future - restoring the Mauritius route for FPI investments

Background

On September 23, 2019, the Securities and EXCHANGE Board of India (“SEBI”) notified the SEBI (Foreign Portfolio Investors) Regulations, 2019 (“New FPI Regulations”), overhauling the erstwhile SEBI (Foreign Portfolio Investors) Regulations, 2014 (“Erstwhile FPI Regulations”). Under the New FPI Regulations, SEBI recategorised FPIs in to two categories (as against the three categories under the Erstwhile FPI Regulations), based on their regulatory status and jurisdiction of residence. Under the New FPI Regulations, Category I FPIs include sovereign wealth funds, pension funds, appropriately regulated entities, certain endowments and other entities from the Financial Action Task Force (FATF) member countries, which are appropriately regulated funds or unregulated funds whose investment manager is appropriately regulated and registered as Category I FPI or is owned to the extent of at least 75% by certain Category I FPIs. Category II FPIs include entities that do not qualify for Category I status under the New FPI Regulations. Further, on account of the overhauling and recategorisation under the New FPI Regulations, those Category II FPIs under the Erstwhile FPI Regulations, which did not qualify to be recategorised as Category I FPIs under the New FPI Regulations got recategorised as Category II FPIs under the New FPI Regulations, along with Category III FPIs under the Erstwhile FPI Regulations. Hence, with one stroke of the pen, Mauritius based FPIs became disentitled for Category I status as Mauritius is not an FATF member.
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Barbarians at the gate – no entry without approval

To say that the Covid-19 has unleashed unprecedented times is an understatement. Every country, government, regulator and citizen across the globe is trying to come to terms with the implications of this deadly virus and surviving it. It is indeed a Hobson’s Choice – to save lives or to save the economy. But several countries, in said and unsaid words, have expressed vulnerability to the corporate raiders from China! They are literally at the gate and it has become a cause of worry for most governments and corporations.

Japan has proposed building an economy that is less dependent on China, so that Japan can mitigate supply chain disruptions caused by the current Covid-19 pandemic. To this end, Japan announced an emergency economic package on April 7, 2020, earmarking 240 billion yen (approximately USD 2.2 billion) for fiscal 2020 to pay  Japanese manufacturing firms to leave China and relocate production either to their home country or to diversify their production bases into South East Asia. Australia, Italy, Spain, and Germany have announced amendments to their respective foreign investment laws to make acquisitions and takeovers by foreigners much harder. So has the European Union. The Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) of the United States has seen increased review of foreign investments under the Trump administration due to security and national interest concerns.
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 REITs in India - Some predictions for the next 24 months

  • Tenant-landlord dynamics are likely to change. In the short term, tenants may seek dispensation, moratoriums or discounts to their payment obligations, on the grounds of force majeure or otherwise. In the medium term, there will be an expectation from developers to increase spend on social wellness and hygiene infrastructure.
  • The forced experiment of remote working may become a norm for certain businesses and have an impact on the flexi-working policies of all businesses, one way or another. As a result, tenants may reassess their space utilisation requirements, and developers, their ability to offer IT infrastructure, which can enable seamless connectivity for their tenants.


Continue Reading REITs in India: Some predictions for the next 24 months (and beyond)

mplications of the Finance Bill, 2020, on INVITs, REITs and its Unitholders

The Finance Minister, Nirmala Sitharaman, presented the Union Budget 2020-2021 on February 1, 2020 and consequently, introduced the Finance Bill, 2020 (“Bill”) in the Lok Sabha. The Bill comprises the financial proposals, including taxation related proposals, to amend the provisions of the Income-tax Act, 1961 (“Income-tax Act”) for the financial year 2021.

The Income-tax Act comprised provisions in relation to the taxability of, and exemptions available to, infrastructure investment trusts (“InvITs”) and real estate investment trusts (“REITs”, together with “InvITs”, referred to as “business trusts”) registered with the Securities and Exchange Board of India under the Securities Exchange Board of India (Infrastructure Investment Trusts) Regulations, 2014 (“InvIT Regulations”) or the Securities Exchange Board of India (Real Estate Investment Trusts) Regulations, 2014 (“REIT Regulations”), respectively.
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Mutual Funds and Alternative Investments - Stewardship Code

Introduction

On December 24, 2019, Securities and Exchange Board of India (“SEBI”) released a circular setting up a stewardship code for Asset Management Companies (“AMCs”), Mutual Funds (“MFs”) and all the categories of Alternative Investment Funds (“AIFs”) investing in listed Indian companies (“Stewardship Code” or “Code”). In keeping with global trends, SEBI has made it necessary for the power wielding cash-rich institutional investors, to act in accordance with the responsibilities that invariably accompany and behoove such powers and formulate a policy adopting the principles enshrined in the Code.

The Stewardship Code prescribes certain principles which, aim at enhancing the responsibilities of the AMCs/ AIFs to protect the interests of their investors/beneficiaries. The requirements pertaining to the Stewardship Code shall come into effect on April 1, 2020.
Continue Reading Being Responsible Corporate Citizens – How Mutual Funds and Alternative Investment Funds will Rise Up to the Stewardship code

DECRIMINALIZING OUR COMPANY LAW

In line with the government’s stated goal of promoting Ease of Doing Business, the Company Law Committee (CLC), set up by the Ministry of Corporate Affairs (MCA), has recently submitted its report to the MCA, recommending decriminalisation of 46 compoundable offences under the Companies Act, 2013 (the Act). This list is in addition to the 16 compoundable offences already decriminalised by the Companies (Amendment) Act, 2019.

To put things into perspective, attempts to decriminalise business laws is not new to India. This process began with liberalisation of the Indian economy in 1991. The first commercial law that was decriminalised was the Imports and Exports (Control) Act, 1947. It was replaced by the Foreign Trade (Development and Regulation) Act, 1992, which decriminalised most of the offences relating to imports and exports. The most fundamental step in this direction was the replacement of draconian Foreign Exchange Regulation Act (FERA), 1973, by Foreign Exchange Management Act (FEMA), 1999 which decriminalized offences relating to foreign exchange regulations.
Continue Reading Decriminalizing our Company Law – Has the Pendulum Moved Too Far?

Non-Debt Instruments -The New Rules for Foreign Flows

In a quiet mid-October surprise, nearly four and a half years after the passage of the Finance Act 2015 (20 of 2015), the Government notified the effective date for implementation of the clauses that amended Section 6 of the Foreign Exchange Management Act, 1999 (FEMA). The notification defining debt and non-debt instruments followed suit and then of course the Non Debt Instrument Rules (NDI Rules) under FEMA, which superseded the extant FEMA 20R and 21R.
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Private Equity Blog - Control Deals Acquisition

Private equity (PE) investors have traditionally invested in the Indian marketplace as ‘financial investors’, acquiring a minority stake in their target with negotiated contractual rights to oversee their financial investments.

The past few years have borne witness to the trend of acquiring “controlling stakes” in the target. Data gathered from public sources suggest that the total value of control deals in India went up from USD 4.8 billion in 2017 to USD 5.9 billion in 2018.
Continue Reading Is Private Equity the New ‘Strategic’? Control Acquisitions are Here to Stay!

Foreign Portfolio Investor - Corporate Debt - Voluntary Retention Route

As the Indian economy has grown over the years, so have the means of raising foreign debt by Indian companies. What began with limited investment channels for foreign banks and certain qualified institutional investors, has now flourished into a robust foreign debt investment market. Based on the commercial considerations driving a deal, Indian corporates can now raise ECBs under multiple tracks, issue various kinds of rupee denominated bonds, or avail of monies through fund structures such as alternative investment funds (AIFs) and real estate investment trusts (REITs).

Added to this mix is the foreign portfolio investment (FPI) route. What sets FPI apart is the degree of commercial flexibility it accords to investors and companies. For example, end-use and pricing norms applicable to FPI investments are relatively relaxed. Because of this, FPI is often the preferred option for raising debt, particularly short-term debt and working capital funding requirements.[1]
Continue Reading Investment through the Voluntary Retention Route: Fresh Push for FPI in Corporate Debt?