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Inbound Investments

Tax & Regulatory Aspects

October 22, 2016

Chamber of Tax Consultants

CA. Amithraj AN

+ 91 98861 20086

[email protected]

mailto:[email protected]

2CTC CA. Amithraj AN

Contents

• Entry Options for FDI

• Funding Options

• Downstream Investments

• FDI in Real Estate

• FDI in LLP

• Trading – SBRT/ MBRT/ WCC

• Wholesale Trading

• Single Brand Retail Trading

• Ecommerce Models

• Investment by NRIs

• Recent Policy Changes

• Inbound Jurisdictions

• Case Studies

• Shares/ CCD Allotments

Section 1

Entry Options for FDI


Choice of Entity

• Company – either a JV/ WOS

• Liaison/ Branch/ Project Office

• Partnership Firm/ Proprietary Concern

• LLP


100% FDI permitted through Automatic Route

• Agriculture & animal husbandry

• Almost all forms of manufacturing and

service industries

• Mining

• Coal & lignite

• Electricity generation, transmission,

distribution & trading (not in atomic

plants)

• E-commerce activities (B to B)

• SEZ development

• Development of townships, housing,

built-up infrastructure & construction-

development projects

• Industrial parks

• NBFCs

• Petroleum & natural gas sector

• Cash & carry wholesale trading/

wholesale Trading (including sourcing

from MSEs)

• Airports – Greenfield projects


Sectors where FDI is prohibited

• Lottery business including Government/ private lottery, online lotteries

• Gambling & betting including casinos

• Business of chit fund

• Nidhi company

• Trading in Transferable Development Rights (TDRs)

• Real Estate business or construction of farm houses

• Manufacturing of cigars, cheroots, cigarillos & cigarettes, of tobacco or of tobacco

substitutes

• Activities/ sectors not opened to private sector investment including atomic energy

and railway transport (other than mass rapid transport systems)

Section 2

Funding Options


• Equity Shares

• Compulsorily Convertible Preference Shares

• Compulsorily Convertible Debentures

• External Commercial Borrowings

• Optionally Convertible Preference Shares

• Optionally Convertible Debentures

• Masala Bonds

Funding Options


Equity Shares

• Simplest mode for funding

• No end use restrictions

• Pricing guidelines applicable

• Limited repatriation options – DDT payable

Compulsorily Convertible Preference Shares

• Preference Shares have preferential right over Equity Shares, in terms of:

− Repayment of capital on winding-up of the company

− Payment of dividend

• Preference Shares have to be compulsorily redeemed/ converted within 20 years

• Only fully and mandatorily Convertible Preference Shares are construed as part of

equity and considered as FDI

• All other forms of preference shares construed on par with ECB

• Maximum dividend: SBI PLR + 3% – DDT payable


Equity Shares & CCPS


Compulsorily Convertible Debentures

• Only Fully and Mandatorily Convertible Debentures are construed as part of equity

and considered as FDI

• All other forms of debentures construed on par with ECB

• No time limit for conversion prescribed

• Interest payment to comply with Indian transfer pricing regulations

• Interest deductible in hands of the company – Lower cost of capital

• Interest income would be taxable in the hands of debenture holders as per IT Act or

DTAA

• The applicable withholding tax rate under the IT Act would be 40% ++

• Interest payment to non-residents – taxes to be withheld


CCD


ECB

Forms of ECB

• Track I: Foreign currency denominated ECB with Minimum Average Maturity (MAM) of 3/ 5 years

• Track II: Long term foreign currency denominated ECB with MAM of 10 years

• Track III: Indian rupee denominated ECB with MAM of 3/ 5 years

Permitted End uses of Track I ECB

• Capital expenditure in the form of:

− Import of capital goods (including for services, technical know-how and license fees)

− Local sourcing of capital goods

− New projects

− Modernization/ expansion of existing units, etc

• For Track I ECB, utilization of ECB for any other purposes is not permitted


ECB

Permitted End uses of Track II and III ECB

• There are no specific restrictions in relation to utilization of Track II and Track III

• ECB proceeds cannot be utilized to acquire land

• Key distinction between Track II and Track III ECB is the denomination of ECB

All-in-cost ceilings

• All-in-cost includes rate of interest, other fees, expenses, charges, guarantee fees whether paid in

foreign currency or INR

• All-in-cost will not include commitment fees, pre-payment fees/ charges, withholding tax payable

in INR

• Track I ECB: Libor + 3% or 5%

• Track II ECB: Maximum spread of 500 bps per annum over the benchmark has been prescribed

• Track III ECB: In line with the market conditions


ECB

ECB from direct or indirect foreign equity holders

• Direct foreign equity holder with minimum 25% direct equity holding

• Indirect equity holder with minimum indirect equity holding of 51%

• Group company with common overseas parent

ECB liability : Equity Ratio for ECBs from direct/ indirect equity holder

• Should not be more 4 : 1

• Under approval route, the ratio can be up to 7 : 1

• Securities premium on allotment of shares also included in equity

• Maximum ECB – Upto USD 750 mn for manufacturing companies and USD 200 Mn for software

companies

ECB lock-in period

• As discussed earlier, Track I – Forex denominated ECB with MAM of 3/ 5 years permitted for

capital expenditure

• Track II ECB has a MAM of 10 years and Track III ECB has a MAM of 3/ 5 years and early

retirement is ordinarily not permitted


ECB

Income-tax

• Interest payment should be allowed as business expenditure

− Interest rate to be at arm’s length in accordance with international transfer pricing regulations

• Interest on ECB is taxable in India @ 5%++ for forex denominated ECB and 15% for INR

denominated ECB

− WHT under IT Act for forex denominated ECB – 5%++ (loan should be received before July 2017)

− WHT under IT Act for INR denominated ECB – 40%++

− WHT under various DTAAs with India – 7.5% to 15%

Stamp Duty

• Nominal Stamp duty for execution of loan agreement

• Stamp duty on conversion – similar to conversion of CCD into equity shares


NCD

Exchange Control Regulations

• Schedule 5 of FEMA 20 governs foreign investment under NCD route

• Securities and Exchange Board of India (SEBI) registered FPIs are allowed to invest in listed NCDs

of Indian companies

− Primary issue with the condition that NCDs/ Bonds are committed to be listed within 15 days of investment

− Terms of offer to have a clause that if not listed within 15 days, the issuer shall immediately redeem/ buyback

• SEBI (Foreign Portfolio Investors) Regulations, 2014 govern investment by FPIs

• Three categories of FPI Investors:

− CAT I : includes Government, Govt agencies, sovereign funds, etc.

− CAT II : includes mutual funds, investment trusts, insurance companies, etc.

− CAT III : includes corporate bodies, trusts, foundations, individuals, etc.

• An overseas group entity shall need to obtain FPI registration with the SEBI

• FPI registered entity is not permitted to hold more than 10% equity in an Indian company

− Further, a view exists that a subsidiary of an FPI entity shall not also hold more than 10% equity in an Indian

company

− Hence, the entity holding NCD and equity shares should be different


NCD

Exchange Control Regulations (contd.)

• Person seeking FPI registration should engage a Designated Depository Participant (DDP) for

obtaining the registration

− DDP shall also act as a custodian of securities for the FPI

• NCDs are to be mandatorily listed in the Wholesale Debt Market (WDM) segment of stock

exchange

• NCDs subscribed/ purchased by FPIs are not treated as ECB

− No end-use restrictions and also conditions applicable to FDI investors under FDI policy would not apply

• NCDs should have a minimum maturity of 3 years

• No restrictions on the interest remittances and also on redemption

• NCD issue to comply with SEBI (Issue and Listing of Debt Securities) Regulations


NCD

Income-tax – interest

• Interest payment should be allowed as

business expenditure

− Interest rate to be at arm’s length

• Interest on NCDs is taxable in the hands of

recipient

• India company to comply with withholding

tax provisions

− WHT rate to be as per of IT Act or applicable

DTAA

− WHT under IT Act is 5%++ until June 2017 –

there are no reports on extention

− WHT under various DTAAs with India – 7.5%

to 15%

Stamp Duty

• Stamp duty @ 0.05% per year subject to

0.25% of the fair value

• Maximum of INR 2.5 mn

Repatriation of Principle Invested

• NCDs can be redeemed anytime after 3 years

• Transfer of NCDs to other non-resident FPI

entities is permitted, subject to the NCDs

having a residual maturity of 3 years]

• Warehousing of NCDs


Masala Bonds


• Indian companies can issue rupee denominated bonds to its parent for borrowing funds

• Maximum amount of borrowing: INR 50 billion (~ USD 750 million) per financial year

• Minimum average maturity: 3 years

• Residents of counties covered under the financial action task force can subscribe to Masala Bonds

− Further, residents in countries that are signatories to memorandum of undertaking (appendix A) of

international organization of securities commission can also subs

• Interest coupon: In line with the market conditions

• End-use restrictions: Proceeds from masala bonds cannot be used for:

− Acquisition of land or other Real Estate activity except development of integrated township/ affordable

housing projects

− Investing in capital markets/ equity investment domestically

− On lending

− Activities prohibited under foreign direct investment regulations


Masala Bonds


• Equity liability, reporting requirements similar to ECB

Income-tax

• Interest payment should be allowed as business expenditure

− Interest rate to be at arm’s length in accordance with international transfer pricing regulations

• Interest on masala bond should be liable to tax in India @ 5%++ - to be further assessed

− WHT under IT Act – 5%++ (amount should have been borrowed before July 2017)

− WHT under DTAAs with India – 7,5% to 15%

Stamp Duty

• Similar to ECB


Funding Options – Comparison

ECB/ FCCB

Equity/ CCPS

Redeemable Preference shares

Regulatory Challenge

Tax Efficiency

CCD/ NCD/ Masala Bonds


Funding Options – Classification

Funding Instruments Exchange Control Income Tax

Equity Shares Equity Equity

CCPS Equity Equity

CCD Equity Debt

RPS/ OCPS Debt Equity

ECB/ Loans/ Debt/ OCD/ PCD Debt Debt

NCD/ Masala Bonds Debt

No end use

Debt

NCD & Masala Bonds – Most Tax & Regulatory Efficient Instruments

Anti abuse provisions are being implicitly adopted

Section 3

Downstream Investments



Co X

Co Y (Indian)Co X

controlled by resident Indian

citizens

Resident Indian citizens have power to appoint

majority directors & own > 50% capital of Y

Both Co Y & resident Indian citizens have

power to appoint majority directors in Co X

Resident Indian citizen

‘Controlled by resident Indian citizens’



‘Owned by resident Indian citizens’

Co X

Co Y (Indian)

Co X owned by resident Indian

citizens Both Co Y & resident Indian citizens own > 50% of capital in Co X

Resident Indian citizens have power to

appoint majority directors & own > 50%

capital of Y

Resident Indian citizen



• Calculation of total foreign investment in a company: Direct + Indirect

− Direct – All investments held directly by non resident entity

− Indirect

• Calculation of Indirect Foreign Investment

In case the investing Indian company is owned or controlled by ‘non resident entities’, the entire

investment by such company into the target would be considered as indirect foreign investment

• Downstream investments by such companies are to be notified to SIA/ FIPB

Indian investing company (‘Y’)

Target (‘X’)

Non resident entity

75%

26%

26% will be indirect foreign investment in X



Calculation of indirect foreign investment…

In case the investing Indian company is owned and controlled by resident Indian citizens and/ or

Indian companies which are owned and controlled by resident Indian citizens, investment by such

company into the target will not be considered foreign investment


Target (‘X’)

Non resident entities15%

26%

Y’s investment will not be considered

foreign investment

Resident Indian shareholder

85%



Calculation of indirect foreign investment…

Indirect foreign investment in 100% owned subsidiaries of an investing Indian company, will be limited to the foreign investment in such Indian company


Target (‘X’)

Non resident entities55%

100%

Resident Indian shareholder

45%

Section 4

FDI in Real Estate


FDI in Real Estate

Trade Not Permitted

Buy and Lease Permitted – Services

Construction & SalePermitted, subject to lock-in and

performance conditions

Construction & Lease Permitted – Services

SEZ Permitted

Industrial Park Permitted

Construction Services Permitted under General Services –

Not Real Estate


FDI in Real Estate – Construction Development

• Development of townships, construction of residential/ commercial premises, roads

or bridges, hotels, resorts, hospitals, educational institutions, recreational facilities,

city and regional level infrastructure, townships

• FDI allowed under the automatic route

• Each phase of the construction development project considered as a separate project

Lock-in and Exit by Investors

• On completion of the project or after development of trunk infrastructure

Trunk infrastructure – roads, water supply, street lighting, drainage and sewerage

On completion of the project or after development of trunk infrastructure

• Lock-in for 3 year period – computed tranche wise

• Sale to another NR permitted even before completion of project or 3 years

• Buy-back during the lock-in period – not permitted

Townships, malls/ shopping complexes and business centres

• Lock-in-period of 3 years – computed tranche wise

• Transfer of immovable property not permitted during this period


Industrial Parks & SEZ

Industrial Parks

• 100% FDI permitted in new and operating Industrial Parks

• Comprises of minimum 10 units and no single unit occupies > 50% of the allocable

area

• Minimum percentage of the area for industrial activity – 66% of total allocable area

SEZ

• 100% FDI permitted in SEZ

Section 5

FDI in LLP

33CTC CA. Amithraj AN33

Overview of FDI/ FEMA regulations

FDI in LLP

• FDI in LLP allowed under the automatic route

• Sectors: where 100% FDI is allowed under automatic route for companies and there

are no FDI-linked performance conditions (minimum cap, lock-in, etc.)

• Indian companies having FDI are permitted to make downstream investment in

LLPs

− Only if both the Indian company and the LLP operate where 100% FDI is permitted under

automatic route and no FDI-linked conditions attached

• LLPs with FDI are also eligible to make downstream investments in India

• Interest can be paid on capital

ODI by an Indian LLP

• Overseas investment by an Indian LLP permitted

• Indian LLPs with FDI can make investments in overseas companies

ECB by LLP

• LLPs cannot raise foreign currency loan (ECB)


LLP – FEMA Compliance Aspects

Reporting Requirements

• Receipt of consideration for capital contribution or profit share – Within 30 days

− Form Foreign Direct Investment – LLP(I)

− Copies of FIRC

− KYC report of non-resident investor

− RBI will allot UIN for each remittance

• Transfer of capital contribution or profit share between NR and R – Within 60 days

− Form Foreign Direct Investment – LLP(II)

• NR to NR transfer

− FIPB approval required

− No specific reporting specified


LLP – FEMA Compliance Aspects

Pricing

• Capital contribution or acquisition of profit share should be at fair value

• Fair value as per internationally accepted/ adopted norms as per market practice

• Valuation to be carried out by CA or a practicing Cost Accountant or by an approved

valuer from the panel maintained by the Central Government (Registered Valuers)

Section 6

Trading – SBRT/ MBRT/ WCC


FDI Policy – Trading Sector

Wholesale/ Cash & Carry

Trading

• 100% FDI permitted under

Automatic Route

• Restriction on Sales to

group companies, in excess

of 25%

Multi Brand Retail

• 51% FDI permitted with

FIPB approval

• Local Sourcing Norms

Applicable

Single Brand Retail

• Upto 49% Automatic Route

• 49% to 100% FDI permitted

with FIPB approval

• Local Sourcing Norms

Applicable for FDI > 51%

Retailing is allowed, Retail Trading is regulated

Market Place

• Platform linking buyers and sellers

• May fit within the definition of e-commerce

• Formal clarification on the status of e-

commerce expected

Reverse Logistics

• Simply provide pick-up and delivery services

• Concentrated on local procurement and

delivery

• No significant issues, as the platform merely

facilitates flow of transaction and logistics


Manufacture – Meaning

FDI/ Income tax

Manufacture means:

• Change in non living physical object or

thing

• Resulting in transformation of the

object or article or thing into a new

object or article or thing having a

different name, character or use

• Bringing into existence of a new and

distinct object or article or thing with a

different chemical composition or

integral structure

Excise

Manufacture includes any process:

• Incidental or ancillary to the

completion of a manufactured

product

• Which involves packing or repacking

of such goods in a unit container or

labelling or re-labelling of containers

including the declaration


Manufacture – Different Concepts

Full Fledged Manufacturing

• Permitted to sell in any

mode

• Online e-commerce also

permitted

• Minimum 70% to be

manufactured in-house

• Maximum of 30% can be

outsourced to Indian

manufacturers

• Should the Indian

manufacture be Indian

owned and controlled

Contracting Manufacturing

• Buyer of goods not

considered as manufacturer

• Buyer qualifies as trader

• Owning of design and

formulation does not allow

buyer to qualify as

manufacturer

• All restrictions applicable

Toll Manufacturing

• Ownership of raw materials

with buyer

• Only job work carried out by

manufacturer

• Buyer can qualify as

manufacturer

• Spirit of such arrangements

may be challenged

Section 7

Wholesale Trading


Eligible Customers

• Sales tax/ VAT registration/ service tax/ excise duty registration holders

• Trade license holders

• Permits/ license, etc. from Government Authorities

• Certificate of incorporation or society registration or trust registration

Other Aspects

• Normal credit facilities can be extended

• Same entity can undertake wholesale and retail sale

Sales to Group Companies

• Wholesale trading to group companies not to exceed 25% of the total turnover of the

wholesale venture

• Meaning of ‘group company’ – Two or more enterprises, which are directly or

indirectly in a position to:

• Exercise at least 26% voting rights in the other enterprise

• Appoint more than 50% of directors in the other enterprise

Wholesale Trading

Section 8

Single Brand Retail Trading



FDI Limits

• Upto 49%: Automatic Route

• 49% to 51%: Approval Route – No local sourcing requirements

• Beyond 51%: Approval Route – Local sourcing requirements

Foreign Brand Owner: Key Aspects

• Product should be branded during manufacturing

• Brand owner directly or licensee through a legally tenable agreement can undertake

SBRT in India

• Brand license agreement to be submitted – RBI or SIA/ FIPB

• SBRT operating through brick and mortar stores permitted to undertake retail

trading through e-commerce

• Each and every product to be approved

• Fresh application required for addition of products

• List of products to be sold (except food products) to be provided to RBI in case of

Automatic Route



Indian Brand Owner: FDI less than 50%

• Brand should be owned and controlled by Indian citizens or Indian companies

owned and controlled by Indian citizens

• Licensing requirements not applicable

• Brand can be held by the retail trading company

Indian Brand Owner: FDI more than 50%

• Indian company ceases to be controlled and owned by Indian citizens

• Export sales become mandatory

• Licensing requirements not applicable

• Separate entity for holding brand can be considered, to overcome export obligation

Key Changes

• Same entity can undertake SBRT and wholesale trading

• Separate books of account to be maintained and audited

• Respective conditions for SBRT and wholesale trading to be complied with



Local Sourcing: FDI > 51%

• Sourcing of 30% of the value of goods purchased for FDI beyond 51%

• Sourcing preferably from MSME

• Self certification of local procurement and checked by auditors

• Annual compliance of local procurement requirement (no 5 year block)

• Relaxation of sourcing norms: Products having ‘state of art’ and ‘cutting edge’

technology, where local sourcing not possible



Issues

Same legal entity owningmultiple brands

Online only brands

Local sourcing only by Indian entity or Group

Experience Centers/ Studios

Food ProductsInstore ordering – backend

supply

Section 9

Ecommerce Models


Ecommerce Models – Basic Model

Wholesale Cash & Carry

100% FDI Permitted

RetailFrontending

FDI Prohibited

InvestorsForeign & Indian

IndianInvestors

Sale of Goods

Customers

Sale of Goods

Online Portal

Shipment of Goods


Ecommerce Models – Holding Company Model

Trading Entity

Foreign Investors

Services Entity

IndianInvestors

< 50%> 50%

100%


Ecommerce Models – Pure Market Place (No Inventory)

Indian

Sellers


Customers

Sale of Goods

Market Place

Order & Payment

Order & Payment

Shipment of Goods


Ecommerce Models – Market Place Model


100% FDI Permitted

RetailFrontending

FDI Prohibited


IndianInvestors

Sale of Goods

Customers

Sale of Goods

Market Place

Order & Payment

Order & Payment

Shipment of Goods


Ecommerce Models – Market Place Model Variant


100% FDI Permitted

RetailFrontending


IndianInvestors

Sale of Goods

Customers

Sale of Goods

Market Place

Order & Payment

Order & Payment

Shipment of Goods

ForeignInvestors

HoldCo-cum-Services Co

49%51%

99.99%

IOCC

Section 10

Investment by NRIs


Investment by NRIs

Investments

by

NRIs

Direct Investment Investment thru Entities

Press Note 7 of 2015

• Investment under Non Repatriation Route on par with resident investment

• Pricing, sectoral caps, etc. not applicable

Press Note 12 of 2015

• Investments made by entities owned and controlled by NRIs

• Treated on par with resident investment

• Form of entities covered –Company, Trust and Partnership Firm


Investment by NRIs

Foreign

Company

ForeignInvestors

NRI

Indian

Company

> 50%

Masala Bonds

Not FDI

100%

Foreign

Company

ForeignInvestors

NRI

Indian

Company

> 50%

Masala Bonds

Not FDI

> 50%

Downstream

IndianCo

100%

< 50% < 50%

< 50% Equity

Section 11

Recent Policy Changes


Issue of Partly Paid Shares and Warrants

Partly paid equity shares

• Partly paid shares now FDI compliant

• Pricing to be determined upfront

• 25% of consideration to be paid upfront (balance within 12 months)

• Can be received after 12 months, if issue size > 500 cr and appoint monitoring agency

in line with the ICDR regulations

Warrants

• Warrants now FDI compliant

• Pricing of warrants and price/conversion formula to be determined upfront

• 25% of consideration to be paid upfront (balance within 18 months)

• Price for conversion not to be lower than fair value at the time of issuance of warrants

− Investee company can receive more than pre-determined price

Indian company whose activity falls under government route for FDI would require prior approval of FIPB / GOI for issue of partly paid shares / warrants


Capitalization of Payables

• General permission has been given to issue of equity shares against any legitimate

dues payable

• Remittance of such dues should not require prior permission of the FIPB or the RBI

• Dues should not be overdue

• Prior permission of the FIPB/ RBI not required for allotment of shares

• The equity shares issued should comply with the extant FDI guidelines on sectoral

caps, pricing guidelines etc.

• CCPS/ CCD allotment not permitted

• Withholding tax requirements to be complied with

Section 12

Inbound Jurisdictions


Investment Structure: Direct Route vs SPV Route

F Co

Indian Co

F Co

SPV

Indian Co

Outside India

Outside India

Outside India

India

India

Tax efficient jurisdiction

F Co to set up an SPV in a tax efficient jurisdiction to invest in Indian Co. Flexibility in movement of funds

F Co to directly invest in Indian Co

SPV Route – Desirable from tax perspectiveAlso flexibility for infusion of JV partners

Substance and GAAR Implications


SPV Considerations

• Corporate tax rate in SPV jurisdiction

• Taxation of dividend/ interest

• Withholding tax on dividend/ interest

• Capital gain tax on transfer of investments/ shareholding

• Thin Cap rules

• Limitation on Benefit clauses

• Ease of access to debt and equity capital

• Tax Haven/ Black listed Countries

• Treaty network

• Cost of setting up and administration

• Other non-tax considerations like political stability, banking facility etc.

Singapore

Netherlands

Mauritius

Luxembourg

Cyprus

UAE

Tax Havens – BVI/

Cayman


Hold Co/ SPV Jurisdictions

Investment in India through

Corporate tax rate

Capital Gains taxability in

India

Capital Gains taxability overseas

Dividend taxability overseas

Remarks

Singapore 17% Linked to Mauritius treaty

Not Taxable Not Taxable

(Foreign Sourced Income exemption

on fulfilment of certain conditions)

Substance + LoBconditions

SGD

Cyprus 12.5% Taxable

Grandfathering the investments

made before March 2017

Not Taxable Not Taxable as per domestic laws

Treaty renegotiation completed

Formal notification withdrawing 94A awaited

Netherlands 25% Not Taxable, unless shares sold to Indian

resident

Not Taxable –Participation Exemption


Capital Gains taxable in India if sold to Indian Resident

Luxembourg 22.05% Taxable @ 21.63%/ 43.26%



Blacklisting concerns

Mauritius 15%

(80% deemed

FTC)

Taxable

Grandfathering the investments

made before March 2017

Not Taxable Not Taxable due to Underlying Tax

Credit Max rate 3%

Tax Residency Certificate (TRC) and requirement to demonstrate substance, limited GAAR

Section 13

Case Studies


Appropriate Capital Structure

Target India

SubCo

Slump Sale

Background

• ForeignCo is planning to acquire business of

a Target IndiaCo

• New India SubCo is sought to be set-up

• Mix of debt and equity to be infused

Capital Structure

• Equity – 15% - 20%

• Permissibility to raise ECB – Track I, II or III

• NCD

• Masala Bonds

ForeignCo

Equity + Debt

Business


Share Acquisition Structure

Target

India HoldCo

Merger

Background

• India HoldCo to acquire shares in the Target

• India HoldCo to be funded through equity

and CCD/ NCD

• Target to be merged upstream into India

HoldCo

Key Issues

• Tax break on interest cost used for

acquisition

• Difference between cost of acquisition and

fair value of assets recognized as Goodwill

• Goodwill depreciable for tax purposes

• Goodwill recognition mandatory under

IndAS

ForeignCo

Equity and CCD/ NCD


Non Tax Compliant Merger

Target

India HoldCo

Merger

Background

• India HoldCo to acquire shares in the Target

• India HoldCo to be funded through equity

and CCD/ NCD

• Foreign Co to acquire small stake – say 5%

• Target to be merged upstream into India

HoldCo

• CCD to be allotted as consideration for the

merger

Key Issues

• Merger not compliant with Section 2(1B)

• Can be treated as liquidation

• Step-up available on liquidation

• Goodwill can also be recorded

ForeignCo

Equity and CCD/ NCD

Equity

Equity


Acquisition by India ListCo

Target

India HoldCo

Merger

Background

• India HoldCo intends to acquire shares in

the Target

• Significant premium paid over book value

• Need to create Goodwill and also maintain

EPS

• IndAS applicable

Key Issues

• India ListCo cannot infuse debt instrument

other than CCD into India HoldCo

• Scheme to provide for amortization of

Goodwill even post IndAS at India HoldCo

level

• High Court order not binding on India

ListCo for consolidation accounting

• Lower tax and MAT interest and goodwill

depreciation/ amortization

India ListCo

Equity and CCD

ForeignCo


Acquisition below Section 56(2) value

Seller ForeignCo

Buyer ForeignCo

Share Transfer

Background

• Seller ForeignCo intending to exit Target

IndiaCo

• Commercially agreed consideration < Book

value

• Section 56(2) incidence for Buyer ForeignCo

• Book value: 100; Consideration: 80

• Reserves available

Possible structure

• Target IndiaCo to buy-back 25% of the

shares at par value

• Effective book value of the balance shares

increases beyond 80

Target IndiaCo


Adjustment for Down Round

ForeignCo

Background

• Foreign Investor has made investment in the

earlier round

• Subsequent round being carried out at

discount to the earlier round

• Down round protection gets triggered

• Investors hold CCPS and equity

Approach I

• Adjust the CCPS conversion ratio upto to fair

value determined earlier

Approach II

• Adjust the CCPS conversion ratio of other

shareholders downwards

• Equity shares can be bought back at par

IndiaCo

Section 14

Shares/ CCD Allotments

Compliance Aspects



Equity Shares

• Allotment of fresh shares by Indian company to NR

• Fair value as per internationally accepted/ adopted norms as per market practice –

Minimum price

• Valuation needs to be done by a CA or Cat I Merchant Banker

• Compliance:

− Reporting of receipt of funds within 30 days

− Shares to be allotted within 180 days from the date of receipt of funds

− Filing of Form FC-GPR with annexures within 30 days from date of allotment

Allotment of Equity Shares in New Companies

• Allotment of shares pertaining to the Subscribed Capital as per MoA can be carried

out at face value

• Subscribed Capital as per MoA can be in excess of Rs. 1 lac/ 5 lacs

• Fair Value requirement not applicable in such cases

• Allotment of shares at premium – Boon or Bane ??

• Shell & Vodafone Case



Convertible Instruments – CCPS or CCD

• Conversion price or conversion formula to be fixed upfront

• Conversion price under conversion formula should be in compliance with pricing

guidelines

• Conversion price

− Conversion price > Current Fair Value

• Variable conversion ratio – Conversion price at the lower end (maximum shares

allotted) > Current Fair Value

• Justification needs to be provided to RBI


• Compliance:

− Reporting of receipt of funds within 30 days

− Shares to be allotted within 180 days from the date of receipt of funds

− Filing of Form FC-GPR with annexures within 30 days from date of allotment of convertible

instruments

− Filing of Form FC-GPR also required on conversion


Transfer of Shares/ CCD

Transfer of Shares in Indian company by R to NR

• Equity Shares

− Consideration for transfer > Current Fair Value

• Convertible Instruments – CCPS or CCD

− Transfer price to be determined based on conversion ratio

− Conversion price, based on transfer price > Current Fair Value


• Compliance:

− Filing of Form FC-TRS within 60 days from the date of transfer

− Indian company can record share transfer only on receiving acknowledged Form FC-TRS

Transfer of Shares in Indian company by NR to NR

• Valuation guidelines are not applicable

• Technically, no reporting requirements


Transfer of Shares in Indian company by NR to R & Buy-back of Shares

• Equity Shares

− Consideration for transfer/ buy-back price < Current Fair Value

• Convertible Instruments – CCPS or CCD

− Transfer price to be determined based on conversion ratio

− Conversion price, based on transfer price < Current Fair Value


• Compliance:

− Filing of Form FC-TRS within 60 days from the date of transfer

− Indian company can record share transfer only on receiving acknowledged Form FC-TRS

Transfer of Shares/ CCD



• Investment by FOCC into another Indian company

• Covers fresh investment and acquisition of existing shares

• Regarded as Indirect FDI

• Pricing guidelines applicable to Direct FDI will equally apply

− Investment/ consideration for transfer > Fair Value

• Compliance: Filing of intimation with SIA, DIPP and FIPB within 30 days from date of investment

• Downstream buy-backs also covered by pricing guidelines

− Buy-back price < Current Fair Value


• Anomaly: Downstream investment through acquisition of shares from NR

− Indian company can record share transfer only on

receiving acknowledged Form FC-TRS

Foreign Co

Indian Co

Downstream Indian Co

> 50%

1% to 100%


Rights Issue, ESOP & Others

Rights Issue

• Price of allotment to NR should not be less than R

• Unsubscribed portion of Rights Issue can be subscribed by NR

• Position if there are no R

ESOP

• Allotment of ESOP by Unlisted Cos not specifically dealt with

• In the absence of specific waiver, normal pricing of allotment to NR should apply

Issue of shares against lump sum technical know how/ royalty, ECB, pre-

incorporation expenses/ import payables

• Same guidelines as fresh allotment of shares

Bonus Issue

• Pricing guidelines not applicable

• Selective bonus ?


Changes in Form FC - GPR

Deletion of Declarations

• Declarations with respect to existing JV or technology transfer or trade mark

agreement in India in the same field

• Declarations with respect to Small Scale Sector

Introduction of New Declarations

• Additional declaration under the Prevention of Money Laundering Act 2002 and the

Unlawful Activities (Prevention) Act, 1967

• The foreign investment received and reported now will be utilized in compliance with

the provision of a Prevention of Money Laundering Act 2002 (PMLA) and Unlawful

Activities (Prevention) Act, 1967 (UAPA). We confirm that the investment complies

with the provisions of all applicable Rules and Regulations

Thank You

CA. Amithraj AN

+ 91 98861 20086

[email protected]

Views expressed in the presentation are personal

mailto:[email protected]

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