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INBOUND CROSS BORDER M&AS IN INDIA AND THE FEMA LAWS

When we talk about inbound cross border M&As in India, we essentially mean forei
gn investment in India. As stated earlier, foreign investment in India, i.e. inv
estment in India by a person resident outside India , (hereinafter to be interchang
eably used with non resident ) [5] is governed by FEMA 20.[6]
Under FEMA 20, general permission has been granted to any non-resident to purcha
se shares or convertible debentures of an Indian company under Foreign Direct In
vestment Scheme, subject to the terms and conditions specified in Schedule 1 the
reto. However citizens of Bangladesh, Pakistan or Sri Lanka resident outside Ind
ia and entities in Bangladesh or Pakistan are not permitted to purchase shares o
r debentures issued by Indian companies or any other Indian security without the
prior approval of the RBI.[7]
Further, persons resident outside India are permitted to purchase shares or conv
ertible debentures offered on a rights basis by an Indian company[8] which satis
fies the conditions restated hereinbelow[9]:
(i)
The offer on right basis does not result in increase in the percenta
ge of foreign equity already approved, or permissible under the Foreign Direct I
nvestment Scheme in terms of FEMA 20;
(ii)
The existing shares or debentures against which shares or debentures
are issued by the company on right basis were acquired and are held by the pers
on resident outside India in accordance with FEMA 20;
(iii)
The offer on right basis to the persons resident outside India is at
a price which is not lower than that at which the offer is made to resident sha
reholders;
The rights shares so acquired shall be subject to the same conditions regarding
repatriation as applicable to original shares.[10] Further, under FEMA 20, an In
dian company has been permitted to issue shares to its employees or employees of
its joint venture / subsidiary abroad, who are non-resident, either directly or
through a trust.[11]
Under Regulation 7 of FEMA 20, once a scheme of merger, demerger or amalgamation
has been approved by the court, the transferee company (whether the survivor or
a new company) is permitted to issue shares to the shareholders of the transfer
or company who are persons resident outside India, subject to the condition that
the percentage of non resident holdings in the company does not exceed the limi
ts for which approval has been granted by the RBI or the prescribed sectoral cei
ling under the foreign direct investment policy set under the FEMA laws. If the
new share allotment exceeds such limits, the company will have to obtain the pri
or approval of the FIPB and the RBI before issuing shares to the non residents.[
12]
General permission has also been granted for transfer of shares / convertible de
bentures by a non-resident as follows:[13]
(i)
Non-residents other than non-resident Indians ( NRIs ) or Overseas Corpo
rate Bodies ( OCBs )[14] may transfer shares / convertible debentures to any non-res
ident, provided that the transferee should have obtained permission of the Centr
al Government, if he had any previous venture or tie-up in India through investm
ent in any manner or a technical collaboration or trademark agreement in the sam
e or allied field in which the Indian company whose shares are being transferred
is engaged;
(ii)
NRIs or OCBs are permitted to transfer by way of sale, any shares or
convertible debentures of Indian companies to other NRIs or OCBs only;
(iii)
Non-residents are permitted to transfer shares / debentures of any I
ndian company to a resident by way of gift.
FEMA 20 further stipulates that any transfer of security by a resident to a non-

resident would require the prior approval of the RBI.[15] For the transfer of ex
isting shares/convertible debentures of an Indian company by a resident to a non
resident by way of sale, the transferor will have to obtain the approval of the
Central Government before applying to the RBI.[16] In such cases, the RBI may p
ermit the transfer subject to such terms and conditions, including the price at
which the sale may be made.[17]
For the purpose of FEMA 20, investment in India by a non-resident has been divid
ed into the following 5 categories and the regulations applicable have been spec
ified in respective schedules as under:
(i)
Investment under the Foreign Direct Investment Scheme ( the FDI Scheme )
.
(ii)
Investment by Foreign Institutional Investors ( FIIs ) under the Portfol
io Investment Scheme ( the Portfolio Investment Scheme ).
(iii)
Investment by NRIs/OCBs under the Portfolio Investment Scheme.
(iv)
Purchase and sale of shares by NRIs/OCBs on non-repatriation basis.
(v)
Purchase and sale of securities other than shares or convertible deben
tures of an Indian company by non-residents.
The following are the prominent features of the schemes listed above:
I.
FDI Scheme
Under the FDI Scheme, a non resident or a foreign entity, whether incorporated o
r not, may purchase shares or convertible debentures of an Indian company. Any I
ndian company which is not engaged in the activity or manufacture of items liste
d in Annexure A to the FDI Scheme has been permitted to issue shares to a non re
sident up to the extent specified in Annexure B to the FDI Scheme, on a repatria
tion basis, provided that:[18]
(i)
The issuer company does not require an industrial licence;
(ii)
The shares are not being issued for acquiring existing shares of ano
ther Indian company;
(iii)
If the non resident to whom the shares are being issued proposes to
be a collaborator, he should have obtained the Central Government s approval if he
had any previous investment/collaboration/tie-up in India in the same or allied
field in which the Indian company issuing the shares is engaged.
Further, a trading company incorporated in India may issue shares or convertible
debentures to the extent of 51% of its capital, to persons resident outside Ind
ia subject to the condition that remittance of dividend to the shareholders outs
ide India is made only after the company has secured registration as an export/t
rading/star trading /super trading house from the Directorate General of Foreign
Trade, Ministry of Commerce, Government of India, New Delhi.[19]
It also prescribes a ceiling of 10% of the total paid-up equity capital or 10% o
f the paid-up value of each series of convertible debentures, and provides that
the total holdings of all FIIs/sub-accounts of FIIs put together shall not excee
d 24% of paid-up equity capital or paid up value of each series of convertible d
ebentures.[20] A registered FII is also permitted to purchase shares/convertible
debentures of an Indian company through private placement/arrangement, subject
to the prescribed ceilings.[21]
RBI may also permit a domestic asset management company or a portfolio manager r
egistered with SEBI as FIIs for managing the sub-account to make investment unde
r the Portfolio Investment Scheme on behalf of non-residents who are foreign cit
izens and bodies corporate registered outside India, provided such investment is
made out of funds raised or collected or brought from outside India through nor
mal banking channel. Such investment is restricted to 5% of the equity capital o
r 5% of the paid-up value of each series of convertible debentures within the ov
erall ceiling of 24% or 40% as applicable for FIIs for the purpose of the Portfo

lio Investment Scheme.[22]


The designated branch of an authorised dealer is authorised to allow remittance
of net sale proceeds (after payment of taxes) or to credit the net amount of sal
e proceeds of shares / convertible debentures to the foreign currency account or
a non-resident rupee account of the registered FII concerned.[23]
III.
Investment by NRIs/OCBs under the Portfolio Scheme
Under Schedule 3, a NRI/OCB is permitted to purchase/sell shares and/or converti
ble debentures of an Indian company, through a registered broker on a recognised
stock exchange, subject to the following conditions[24]:
(i)
The NRI/OCB designates a branch of an authorised dealer for routing
his/its transactions relating to purchase and sale of shares/ convertible debent
ures under the Portfolio Investment Scheme, and routes all such transactions onl
y through the branch so designated;
(ii)
The paid-up value of shares of an Indian company, purchased by each
NRI/OCB both on repatriation and on non-repatriation basis, does not exceed 5% o
f the paid-up value of shares issued by the company concerned;
(iii)
The paid-up value of each series of convertible debentures purchased
by each NRI/OCB both on repatriation and non-repatriation basis does not exceed
5% of the paid-up value of each series of convertible debentures issued by the
company concerned;
(iv)
The aggregate paid-up value of shares of any company purchased by all
NRIs and OCBs does not exceed 10% of the paid up capital of the company and in t
he case of purchase of convertible debentures the aggregate paid-up value of eac
h series of debentures purchased by all NRIs and OCBs does not exceed 10% of the
paid-up value of each series of convertible debentures[25];
(v)
The NRI/OCB takes delivery of the shares purchased and gives delivery
of shares sold;
(vi)
Payment for purchase of shares and/or debentures is made by inward rem
ittance in foreign exchange through normal banking channels or out of funds held
in NRE/FCNR account maintained in India if the shares are purchased on repatria
tion basis and by inward remittance or out of funds held in NRE/FCNR/NRO/NRNR/NR
SR account of the NRI/OCB concerned maintained in India where the shares/debentu
res are purchased on non-repatriation basis;
(vi)
The OCB informs the designated branch of the authorised dealer immedia
tely on the holding/interest of NRIs in the OCB becoming less than 60%.
Paragraph 2 of Schedule 3 further provides that the link office of the designate
d branch of an authorised dealer is obliged to furnish furnish daily report to t
he Chief General Manager, Reserve Bank of India (ECD) detailing the name of the
NRI/OCB and the company wise number of shares and/or debentures and paid-up valu
e thereof, purchased
and/or sold by each NRI /OCB.