On June 7th, 2018, the Reserve Bank of India (RBI) had introduced two new forms (namely Single Master Form and Entity Master Form) vide a circular (RBI Circular), with the aim of simplifying reporting under the Foreign Exchange and Management Act, 1999 (FEMA). Our earlier blog post contained details of the two forms and our in-depth analysis of the same. On June 27th, 2018, RBI released a User Manual for Entity Master – FIRMS (User Manual) which provides detailed instructions and the process for filing the Entity Master Form. Continue Reading India Simplifies Foreign Investment Reporting Process: Update
There have been some very wide sweeping and deep impact changes in the business and economic environment over the past few years, many of which have also had a strong social impact. While some changes could be considered political, there are many changes that have happened basically because the government of the day chose to bite the bullet. These were long overdue and just couldn’t be kicked any further down the road – to put it succinctly, “the time had come”.
India’s Foreign Direct Investment (FDI) policy, which has its genesis in the liberalisation era beginning in the early 1990s, had always been subject to periodic incremental relaxation of sectoral caps and other easing measures. However, after years of a gradualist mode, the current decade has seen more dramatic shifts in the hitherto entrenched position in respect to FDI in various sectors. The ultimate measure was of course the abolition in June 2017 of the two and half decades old Foreign Investment Promotion Board (FIPB), the inter-ministerial body that granted ‘prior government approval’ in mandated sectors.
The demise of this institution regarded as venerable by some and obstructionist by others, met as expected, with a mixed response. With nearly 95% of the FDI inflows in the country already coming in through the automatic route, the utility and need for such a body was clearly on the wane; practitioners were, however, apprehensive of the absence of the body, which had become the proverbial ‘go to place’ for clarifications and was the last port of call for policy intervention in case of need.
With the formal dissolution of the FIPB at the end of June 2017, a Standard Operating Procedure (SOP) was put in place whereby the sectors / activities / transactions that required government approval were mandated to approach the respective administrative ministries for the same. Simultaneously, the FIPB portal was literally morphed into the Foreign Investment Facilitation Portal (FIFP), bringing with it bare essential changes to name and ownership, but virtually nothing more.
Previously, the provisions of the Companies Act, 2013 (Act) governing inbound and outbound mergers, amalgamations or arrangements between Indian companies and foreign companies (Cross Border Mergers) were notified by the Ministry of Corporate Affairs on April 13th, 2017. Subsequently, on April 26th, 2017, the Reserve Bank of India (RBI) issued draft regulations to govern Cross Border Mergers (Draft RBI Regulation).
We had published an earlier blog piece on this, discussing the key highlights of the Draft RBI Regulation, which is available here.
It has been close to a year since the Draft RBI Regulation and on March 20th, 2018, the RBI has finally notified the Foreign Exchange Management (Cross Border Merger) Regulations, 2018 (Merger Regulation). This article briefly analyses the key changes brought about in the Merger Regulation and its implications.
Foreign investors into India have often found that when they seek to enforce customary contractual rights in investment agreements, such as option rights, guarantees and indemnities, they have been hamstrung by the ability of the Indian counterparty to contend that such rights are in contravention of the Foreign Exchange Management Act, 1999 (FEMA) and the regulations issued by the Reserve Bank of India (RBI).
It is in this context that the recent Delhi High Court judgment in the case of Cruz City I Mauritius Holdings v. Unitech Limited, MANU/DE/0965/2017, is relevant, in that it categorically strikes down the defence that an arbitral award is not enforceable on the ground that certain provisions of the contract pursuant to which the award was issued were allegedly in contravention of the FEMA regulations.
Cruz City 1 Mauritius Holdings (Cruz City) filed a petition in the Delhi High Court for enforcement of an arbitral award rendered under the rules of the London Court of International Arbitration (Award). This required Unitech Limited (Unitech) and Burley Holding Limited (Burley), a wholly owned subsidiary of Unitech, to pay Cruz City the pre-determined purchase price of all of Cruz City’s equity shares in a joint venture (incorporated in Mauritius) pursuant to:
- A “put option” exercised by Cruz City against Burley.
- A keepwell agreement (which was in the nature of a guarantee) whereby Unitech was to make the necessary financial contribution in Burley to enable it to meet its obligations.
Do We Really Need the “Approval” Route?
The announcement in the Budget Speech that the Foreign Investment Promotion Board (FIPB) is going to be wound down in 2017-18, has led to speculation amongst consultants, lawyers, foreign investors and the media as to what will take its place. After all, the FIPB, an institution that has been around for more than two decades, epitomises, inter alia, the “government approval” route for foreign investment in sensitive sectors and has been the bedrock of the Foreign Direct Investment (FDI) Policy. It has been the “go-to” body for approvals, clarifications, waivers of conditions and post facto approvals of transgressions, etc.
After successive liberalisations, the “approval route “ now accounts for only 10% or so of the FDI inflows and, therefore, the real question to ask should not be as to how or which agency(ies) will give the required approval for FDI in the sensitive sectors, but whether approval is required at all. Following from my earlier blog piece on “FIPB – The Sunset Year”, I would like to make the case that in the sectors, currently still under the FIPB route as per the contours of the FDI policy, an FDI approval per se is not required at all.
FDI Approval an Additional Layer
First, it may be observed that in the approval route sectors, the FIPB approval forms only one layer of approval, even though the FIPB process is indeed “single window” (in the sense that it brings all the stakeholders to the table). There is another very vital approval required from the administrative ministry, the regulator or the licensor concerned, which gives the operating license/approval. This includes the allocation of the resource (spectrum/ airwaves/mine etc.) as per the laid down procedures. This is true for all the extant FIPB mandated sectors viz. mining, telecom, defence, media, etc, except single brand and multi-brand trading (this has been discussed later). The policy also prescribes follow-on FIPB approvals for changes in ownership, additional capital etc in these “licensed sectors”. The need for engagement by two separate government layers is clearly debatable.
Foreign Ownership is Not a Concern
Second, also as a result of the periodic liberalisation of the FDI Policy, the sectoral cap in nearly all the approval route sectors has gone up progressively along the usual pattern of 26% to 49% to 51% over the years and now stands at 74% or even 100% in some cases. This clearly implies that in respect of these sectors, where the FDI sectoral cap is at 51% or above, there are no real concerns as regards to foreign ownership and control of entities from a sectoral perspective. In such a situation, therefore, the exact percentage of foreign investment in an entity becomes merely a matter of record, rather than one requiring a formal approval from a high powered government inter-ministerial body.
On November 15, 2016, the Supreme Court delivered an important judgment in IDBI Trusteeship Services Limited v. Hubtown Ltd, a case involving investment in India by a foreign investor. While the main thrust of the judgment was on circumstances under which a defendant may be granted leave to defend in a suit for summary judgment, the observations of the court in the context of the structure in consideration provides important indicators as to how courts should look at structured transactions.
In brief, the facts of the case are as follows. FMO, a non-resident foreign entity, made an investment into an Indian company, Vinca Developer Private Limited (Vinca) by way of compulsorily convertible debentures (CCPS) and equity shares. The CCPS were to convert into 99% of the voting shares of Vinca. The proceeds of the investment were further invested by Vinca in its wholly owned subsidiaries, Amazia Developers Private Limited (Amazia) and Rubix Trading Private Limited (Rubix) by way of optionally convertible debentures (OPCDs) bearing a fixed rate of interest. IDBI Trusteeship Services Ltd. (Debenture Trustee) was appointed as a debenture trustee in relation to the OPCDs, acting for the benefit of Vinca. Hubtown Limited (Hubtown) also issued a corporate guarantee in favour of the Debenture Trustee to secure the OPCDs. Continue Reading IDBI Trusteeship v. Hubtown – Supreme Court Gives a Fillip to Structured Investments
The Early Years
With the creation of the Securities and Exchange Board of India (SEBI) in 1992, the existence of the Controller of Capital Issues (CCI) which was overseeing Indian capital markets was rendered redundant. However, the pricing guidelines issued by the CCI (PG) assumed greater importance despite CCI’s redundancy, given India’s intent to attract foreign direct investment (FDI). This was especially as most FDI transactions were in the unlisted entity space whereas SEBI was regulating listed entities. As such, the PG formulated by the CCI became the guiding principle for various investments into India. As per Reserve Bank of India (RBI) stipulations, the fair value of shares (FV) to be issued/ transferred to non residents (NRs) was to be determined by a chartered accountant (CA), in accordance the PG formula laid down by the CCI.
The rationale behind these stipulations was to garner maximum value and forex for Indian shares and was resultant of the 1991 crisis on balance of payments faced by India. Principles laid down in Press Notes 18/ 1998 and 1/2005 were also aimed at strengthening Indian promoters. In so far as outgo of currency was concerned, regulatory supervision was exercised to ensure that such outflow would be heavily regulated and minimised. This mindset continued to operate in the new millennium even as substantial liberalisation of sectors took place (in the context of FDI) and even when the context changed from regulation of forex to maintenance thereof.