Outbound Investments by Cyril Shroff Managing Partner Amarchand & Mangaldas & Suresh A. Shroff & Co....
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Transcript of Outbound Investments by Cyril Shroff Managing Partner Amarchand & Mangaldas & Suresh A. Shroff & Co....
Privileged & Confidential
Outbound Investments
by
Cyril ShroffManaging Partner
Amarchand & Mangaldas & Suresh A. Shroff & Co. Peninsula Chambers, Peninsula Corporate Park,
Ganpatrao Kadam Marg, Lower Parel, Mumbai - 400 013Tel: (91-22) 2496-4455 Fax:(91-22) 2496-3666
Email: [email protected]
February 21, 2015
12.15 p.m. to 1.30 p.m.
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About Amarchand Mangaldas
Privileged & Confidential
India’s Leading and Largest Law Firm
• Over 650 lawyers including 82 partners
• Presence in 8 major cities in India - new office in Gurgaon
• Over 95 years of experience
• Full service offering
Consistently Voted as One of the Top Law Firms in Asia Pacific
• IFLR Asia Awards - National Law Firm of the Year (India) for 2014, 2013 & 2012
• ALB SE Asia Law Awards - India Deal Firm of the Year for 2014, 2013, 2012 & 2011
• Acritas’ Elite Law Firm Brand Index – 4th in Asia Pacific & 20th Globally for 2014
• Asian Legal Business – 10th Largest Firm in Asia 2014
• The Lawyer Asia Pacific - Ranked 13th in Asia Pacific Top 100 Independent Law Firms for 2014
• Asian Legal Business Employer of Choice for 2014 & 2013
• IBLJ Indian Law Firm Awards – Law Firm of the Year & Best Overall Law Firm for 2013, 2012 & 2011
• RSG India - Ranked 1 amongst India’s Top 40 Law Firms for 2013, 2012 & 2011
Leading clients include domestic and foreign commercial enterprises, financial institutions, leading private equity funds and venture capital funds as well as state and regulatory bodies
Mumbai
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New Delhi
Hyderabad
Chennai
Bangalore
Kolkata
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Ahmedabad
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Consistently been rated as top ranked law firm in India by various professional organizations
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Gurgaon
Mr. Cyril Shroff
Cyril Shroff Managing Partner
Cyril is a leading practitioner in the field of corporate and securities law and has been associated with a significant number of high-profile and complex mergers and acquisitions and securities market transactions by Indian issuers
Cyril has over 30 years of experience in a wide range of areas including corporate, mergers & acquisitions, capital markets, infrastructure and others
Cyril has been consistently rated as India’s leading lawyer in most practice areas by several international surveys including those conducted by International Financial Law Review (IFLR), Euromoney, Chambers Global, Asia Legal 500, Asia Law and others
Cyril has authored several publications on legal topics and has written many articles. He is a member of the Centre for Study of the Legal Profession established by the Harvard Law School (HLS)
Cyril is a full member of the Society of Trust Estate Practitioners. He is also the only member from India in the International Academy of Estate and Trust Law.
Privileged & ConfidentialPrivileged & Confidential 3
Overview
Introduction
Investing in Companies Overseas – What are the laws?
Establishing Overseas Branch Office
Liberalized Remittance Scheme (LRS)
Recent Developments and Issues
Privileged & Confidential 4
Introduction
Liberalization• Phase I – 1992 to 1995
− ‘Automatic route’ for overseas investments introduced − Cash remittances permitted for the first time− Value restricted to US$ 2 million, with cash component not exceeding US$ 0.5
million, in a block of 3 years
• Phase II – 1995 to 2000− Policy framework laid down – Creation of Fast Track Route− Limits raised to US$ 4 million and linked to average export earnings of the
preceding 3 years − Cash remittances continued to be restricted to US$ 0.5 million− Beyond US$ 4 million – Approval of committee consisting of members from
RBI, MoF, MoEA and MoC− Beyond US$ 15 million – Considered by MoF + Special Committee− Indian promoters allowed to set up 2nd and subsequent generation companies,
provided first generation company set up under Fast Track Route − Neutrality condition done away with in 1999
Privileged & Confidential 6
Introduction
• Phase III – 2000 till date− Scope of outward investments increased considerably pursuant to FEMA − In 2002, per annum upper limit for automatic approval raised to US$100 million − In 2003, investment limit was 100% of net worth , and gradually increased to
400% of net worth − ECB policy modified and funding of JV/ WOS abroad included as permissible
end-use− Capital control measures introduced in 2013, but reversed in 2014
Trend Analysis – 2000 till date• Level of ODI has increased manifold since 1999 – 2000
− Sharp uptrend at US$ 74.3 billion recorded during 2nd half of 2000s, compared to US$ 8.2 billion in the 1st half of 2000s
− Trend moderately affected during 2009 – 2010 crises; however, rebound seen in 2010 – 2011; may have been affected again in 2013 – 2014
− January, 2015 – US$ 2.05 billion; down from US$ 7.3 billion invested in January, 2014
− June to December, 2014 – US$ 11.8 billion − India’s share in total developing economy ODI increasing continuously since
2005Privileged & Confidential 7
Introduction
India Inc looking abroad• Overseas assets – source of raw materials, research and technology
(primarily IP), base for untapped developing markets and diversification of revenue streams
• Acquisition not restricted to developing markets – includes developed markets as well
• Desire to compete globally • Increased foreign currency revenues• Easy accessibility to finance and low cost of debt capital – global
economic downturn / increased appetite of Western countries for M&A• Mid level firms also seeking to acquire assets abroad
Privileged & Confidential 8
Investing in Companies Overseas – What are the Laws?
Foreign Exchange Management Act, 1999
Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004 (FEMA 120)
Master Circular on Direct Investments by Residents in Joint Venture (JV) / Wholly Owned Subsidiary (WOS) abroad, dated July 1, 2014
RBI Master Circular on Guarantees and Co-Acceptances, dated July 1, 2014
NBFC (Opening of Branch, Subsidiary, JV, Representative Office or Undertaking Investments Abroad by NBFCs) Directions, 2011
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Investing in Companies Overseas
Automatic route v. Approval route Who can invest?• Until recently only companies and registered partnerships could invest• LLPs now included in ‘Indian Party’ definition• Resident individuals permitted to invest in JV/ WOS overseas – interplay with
LRS• Unregistered partnerships and proprietorships permitted under Approval Route• Registered societies and trusts engaged in manufacturing/ educational/ hospital
sector may invest in same sector, under Approval Route Conditions for equity investment• Total financial commitment of Indian company – limit reinstated to 400% from
100% in July, 2014− Financial commitment not to exceed US$ 1 billion under automatic route
• JV/WOS to be engaged in bona fide business activity• Indian party not to be on RBI’s exporters caution list or defaulters list or under
investigation by any investigation/ enforcement agency or regulator• Annual performance report filed• Transactions relating to the investment to be done through one branch of an ADPrivileged & Confidential 11
Investing in Companies Overseas
Overall Acquisition Ceiling = 4 X Net Worth – total financial commitment already incurred, subject to cap of US$ 1 billion
Calculating total financial commitment• 400% of the amount of equity shares; preference shares; loans; guarantees
(including 3rd party bank guarantees, but excluding performance guarantees (50% ))
Investments through SPVs – Permitted (Impact of S. 186 of the Companies Act, 2013)
Post investment• JV/ WOS permitted to diversify its activities/ set up step down subsidiaries/
alter its shareholding pattern• Further acquisitions by JV/ WOS can be funded from accruals offshore
Portfolio investments by listed Indian companies • Listed Indian companies permitted to invest up to 50% of net worth in
shares and bonds / fixed income securities, issued by listed overseas companiesPrivileged & Confidential 12
Investing in Companies Overseas
Valuation • Category I Merchant Banker registered with SEBI or an Investment
Banker/ Merchant Banker registered with appropriate regulatory authority in the host country for investment, when:− Higher than US$ 5 million
− By swap of shares (with prior FIPB approval)
• In all other cases, valuation to be done by Chartered Accountant or Certified Public Accountant
ODI by NBFCs• RBI approval required for overseas JV/ WOS/ representative office/
other investments
• Additional conditions
• Multi layered, cross jurisdictional structures – specifically prohibited
Privileged & Confidential 13
Investing in Companies Overseas
Sensitive Sectors• ODI in real estate business (buying and selling of real estate or trading
in TDRs) and banking business prohibited
• Additional compliances – investment in financial services sector− Conditions
» Register with the regulatory authority in India for financial sector activities
» Earned profit in preceding 3 financial years from financial services activities
» Obtained approval from relevant Indian and overseas regulator
» Capital adequacy requirement complied with
− Conditions to be complied with for each step-down subsidiary
− Conditions also applicable to regulated entities in financial services sector in India investing in any sector overseas
Privileged & Confidential 14
Guarantees and Access to Debt Capital Overseas
Guarantees by Indian parties (subject to net worth limit)• JV/ WOS – guarantees permitted• First level operating step down – irrespective of whether direct JV/ WOS is
established as SPV or operating company, guarantee permitted • Second level/ subsequent level step down operating subsidiaries –
guarantee permitted if:− prior approval of RBI procured− Indian party holds at least 51% in the subsidiary indirectly
Financing investments – 3rd party credit enhancement• Guarantees/ LOC/ SBLC issued by Indian banks for overseas investments• LOC/ SBLC issued by AD on behalf of the Indian borrower with respect to
its JV/ WOS/ first level step down permitted (subject to net worth limit)• Faster and cheaper access to finance – leveraging Indian balance sheets for
financing abroad• Credit enhanced – offshore financing transactions now becoming a reality
Privileged & Confidential 15
Guarantees and Access to Debt Capital Overseas
Pledge of shares• Indian party can pledge shares of JV/ WOS/ step-down subsidiary overseas to
domestic or overseas lender for availing credit facility (funded and non-funded)
for itself or group companies or for JV/ WOS/ step-down subsidiary overseas − Liberalized in December, 2014 – includes pledge of shares of step-down subsidiaries− Value of facility included in financial commitment of Indian party
Creation of charge on assets• Approval route until December, 2014• Indian party can now create a charge under automatic route on its assets in
favour of an overseas lender for availing credit facility (funded and non-
funded) for its JV/ WOS/ step-down subsidiary overseas• Indian party can now create a charge under automatic route on the assets of its
overseas JV/ WOS/ step-down subsidiary in favour of an AD bank in India as
security for availing of facilities for itself or its JV/ WOS/ step-down outside
India− Value of facility included in financial commitment of Indian partyPrivileged & Confidential 16
Structuring Options:Investor Profile
Case Study Profile• The Patels are an Indian family – comprising of Father, Mother and 2
sons – Son 1 and Son 2. Patels are promoters of a conglomerate that is primary based in India, with interests in the manufacturing, steel, energy sectors
• Son 1 is engaged in the business. Son 2 is currently a UK resident
• The flagship company of the Patel Group is contemplating acquisition of a mid-sized steel processing business in the UK
• The family members are contemplating acquisition of a BPO company in the UK, as an investment by the family
17Privileged & Confidential
Structuring Options: Acquisition of Steel Co
Acquisition of shares of offshore target company to be in accordance with FEMA 120
Investment can be up to 400% of the ‘net worth’ of the Indian entity – subject to cap of US$ 1 billion
Valuation Report – Chartered Accountant or Category I Merchant Banker (depending on value)
Remittance through an Authorized Dealer
18Privileged & Confidential
Structuring Options: Acquisition of Steel Co
19Privileged & Confidential
Structuring • Direct investment unfavourable
• May be routed through an overseas SPV− Tax Benefits (accumulation
overseas)
− Leveraging on group strength to raise finance
− Borrowing of funds at the SPV level
− Foreign exchange fluctuation risk mitigated
• However, CFC implications under proposed Direct Taxes Code will require consideration
UK Target Company
Indian Party
Equity and Preference
Structuring Options: Acquisition of Steel Co
Factors to consider when choosing location for SPV• Low/ nil withholding tax on dividend and
interest• Low/ nil income tax and capital gains tax
on exit• Favourable tax treaty with Target and
Indian Party• Capitalization norms• Favorable Jurisdictions – Singapore,
Mauritius, the Netherlands, etc Use of SPVs for investment in the UK • Indian Tax Laws
− Dividend received from Singapore SPV taxable in India @ 15%
− Redemption of preference shares at par not subject to tax in India
20Privileged & Confidential
Indian Party
Singapore SPV
UK Target Company
Counter Guarantee by Indian Parent
Equity and Preference
Equity
(Operating / SPV)
(Operating / can not be
holding company)
Borrowings
Structuring Options: Acquisition of BPO Co
Possible to now acquire 100% of shares of the BPO company under LRS
• Father, Mother and Son 1 can combine remittances under LRS
− Total remittance – US$ 375,000
− Son 2 cannot remit under LRS, as non-resident
• Mandatory to invest directly into the BPO Co – no SPVs permitted
• No step-down subsidiaries allowed under LRS
21Privileged & Confidential
Key Tax Considerations
Profit repatriation#• Reduced rate of taxation @15% for dividends from overseas subsidiary
(shareholding of 26% or more) Transfer pricing issues • Indian holding companies required to charge guarantee fees at arms
length (Indian corporate tax rate – 30%)• The remittance to overseas subsidiary is loan, not equity – thus, interest
earnings on deemed loans to be taxed in India Benefits / advantages for overseas hold co/ regional hold co• Income from target company – taxed in India only when remitted to
India – income accumulation in overseas hold co pre-Indian tax permitted
• Minimum tax leakage – consider tax benefits for dividend, interest and capital gain between hold co jurisdiction and target company jurisdiction, including the beneficial provisions contained in the relevant tax treaties
# Surcharge and education cess additionalPrivileged & Confidential 23
Key Tax Considerations
Going Forward• Controlled Foreign Company Rules under the proposed Direct Tax Code
− Passive income earned by an overseas subsidiary, controlled directly or indirectly, by Indian resident shall be charged to tax, even if such income is not distributed to shareholders in India
• Place of Effective Management under the proposed Direct Tax Code− Foreign company regarded as resident in India if at anytime in the year its
POEM is in India (based on where BoD/ executive directors make commercial and strategic decisions)
• General Anti-Avoidance Rules – Expected to be postponed
Privileged & Confidential 24
No clarity on the fate of DTCCan mitigate risk through appropriate structuring, strong
commercial rationales and substance
Establishing Overseas Branch Offices
Under FERA: Regulated by Chapter 9 of Exchange Control Manual issued by RBI
No specific regulations or guidelines under FEMA Regime Section 1(3) of FEMA – Provisions apply to all branches, offices and
agencies outside India owned or controlled by a person resident in India Section 2(iv) of FEMA - a ‘Person Resident in India’ includes “any
office, branch or agency outside India owned or controlled by a person resident in India”
For setting up and operations of overseas branch offices, companies need to open bank account in such jurisdiction • Regulation 7(4A) of FEM (Foreign Currency Accounts by a Person Resident in
India) Regulations, 2000 read with Master Circular on Export of Goods and Services, July 1, 2014 – Permits opening of a foreign currency account with a bank outside India by an Indian entity, its overseas branch or representative posted outside India
Privileged & Confidential 26
Establishing Overseas Branch Offices
• Conditions include: − Branch is set up for normal business operations
− Remittances (for initial expenses and recurring expenses) made to all such accounts in an accounting year to be within specified ceilings, unless remittance out of EEFC Account or if overseas branch is set up by 100% EOU, or a unit in export processing zone, hardware/ software technology park (within 2 years of establishment)
− Such branch should not enter into contract or agreement in contravention of FEMA
− Branch should not create any financial liabilities, contingent or otherwise, for the head office in India
− Branch should not invest surplus funds abroad without prior approval of RBI
− Details of bank accounts opened overseas to be promptly reported to the AD Bank
Some AD Banks continue to require submission of Form OBR (issued under the erstwhile FERA regime) at the time of remittance for opening an overseas branch
Privileged & Confidential 27
Liberalized Remittance Scheme
Introduced in 2004 Available only to resident individuals Limit reduced from US$ 200,000 to US$ 75,000 in 2013 – Increased to US$
125,000 per financial year in 2014• RBI Sixth Bi-Monthly Monetary Policy (released in February, 2015) – proposed increase of
limit to US$ 250,000
Scheme available for minors Consolidation of LRS remittances of family members permitted Residents can open, maintain and hold foreign currency accounts with a bank
outside India Permitted to retain, reinvest the income earned on the investments overseas Jurisdictional restrictions – Facility not available for direct or indirect
remittances to:• Bhutan, Nepal, Mauritius and Pakistan• Countries identified by Financial Action Task Force as non-co-operative countries and
territoriesPrivileged & Confidential 29
Liberalized Remittance Scheme
End-use• Permitted current and/ or capital account transactions• Acquisition of shares, debt instruments, units of mutual funds, venture capital
funds, unrated debt securities, promissory notes, acquisition of ESOPs• Rupee gift/ loan to a NRI /PIO, who is a close relative • Acquisition of immovable property
− Prohibited in 2013 – Permitted again in 2014• Acquisition of JV/WOS overseas
− Lack of clarity until August, 2013» Permission available under LRS, but not under FEMA 120» Numerous instances of compounding
− W.e.f. August 1, 2013 individuals permitted to set up JV/WOS abroad− Linked to FEMA 120
» Permission only to set up operating companies» No step-down subsidiaries permitted» Sectoral restrictions same as that on Indian companies, and includes financial services
− Welcome move, but pragmatic?
Privileged & Confidential 30
Recent Developments and Issues
RBI’s capital control measures – 2013 • INR v. USD – Rupee’s free fall• August, 2013
− Total financial commitment of Indian party for JV/ WOS reduced from 400% to 100% of total net worth» Exceptions - Financial commitments made on or before August 14, 2013
− LRS limits reduced to US$ 75,000 per financial year
Reversal of capital control measures – 2014• ODI – 400% limit reinstated, albeit with condition• LRS limit – Increased to US$ 125,000
− Recent proposal for increase to US$ 250,000 per financial year
Individuals permitted to set up JV/ WOS overseas Creation of charges on shares of JV/ WOS/ Step down
subsidiaries, domestic assets in favour of overseas lenders, overseas assets in favour of domestic lenders – liberalized in 2014Privileged & Confidential 32
Recent Developments and Issues
Emerging issues in ODI• Use/ abuse of multilayered structures
− Two levels SPVs or structures involving Hold Co-Op Co-Hold Co structure permitted?
− “Matter under consideration” per RBI circular of December 29, 2014
− NBFC exception – specific prohibition on multi-layered structures (June, 2011)
− Section 186(1) of Companies Act, 2013
• RBI’s round tripping concerns
• Investments in financial services− Requirement to procure approval of overseas regulator for each investment
• Stock swap deals not easy – FIPB approval mandatory − Impact on timelines
• Increased disclosure requirements under Clause 36 of Listing Agreement – applicable only to listed companies
Privileged & Confidential 33
Recent Developments and Issues
Cross border mergers – Companies Act, 2013• Indian companies now permitted to merge into foreign companies, with
resulting company being a foreign company
• Prior RBI approval required
• Concept of notified territories made applicable to inbound and outbound mergers
• Provision not yet notified by MCA –1956 Act stands as of today
Privileged & Confidential 34