In a welcome move the Reserve Bank of India (the “RBI”) has permitted Indian companies that are foreign owned and controlled to use share swaps and deferred payment mechanisms for acquiring other Indian targets. Until now, the law was unclear in this regard.
An Indian company is treated as foreign owned and controlled (“FOCC”) when, as the name suggests, for example, the Indian company’s board1 is not controlled by resident Indian citizens or where the majority of the Indian company’s shares are not held by resident Indian citizens and/or held by other Indian companies which in turn are not owned or controlled by resident Indians citizens. In other words, only when an Indian company is both owned and controlled by resident Indian citizens it would fall outside of the definition of an FOCC.
An FOCC, when it acquires other Indian entities is required to comply with all foreign exchange management laws. One of the requirements of which is to use internal accruals and/or investment or loans from its parent or other overseas investors, to acquire Indian targets, and not to use funds borrowed from the domestic market. While these aspects were clear, it wasn’t clear, if share swaps and deferred payment mechanisms could be used, and if these needed specific approvals.
The RBI has now clarified that share swaps and deferred payment mechanisms do not need prior approvals, provided the other eligibility conditions for foreign investment in a particular sector are met.
- Board control is not the only test. ↩︎
