1. What is the general situation for foreign companies in your jurisdiction? (For example, common presence, difficulty to setup, restrictive system, open and welcoming jurisdiction)
Foreign companies generally enter into India by way of liaison office, branch office or wholly owned subsidiary or joint venture. Some of the features of each structure are as follows:
a. A foreign body corporate may open a liaison office in India
i. to represent the parent company/group companies in India
ii. to promote export/import from/to India promote technical/financial collaborations between parent/group companies and companies in India or
iv. to act as a communication channel between the parent company and Indian companies.
However, liaison offices are not allowed to carry on any business or earn any income in India and all expenses are to be borne by remittances from broad. The Reserve Bank of Indian grants permission for a period of three (3) years, which is eligible for renewal for a block of three (3) years.

From Income tax perspective, liaison office is a good option as there are no tax implications on a liaison office and there is no business activity undertaken by liaison office in India.

Reporting requirements: Liaison offices are required to file Annual Activity Certificate from the auditors with the Reserve Bank of India. Additionally, a liaison office is also required to file the financial statements with the Registrar of Companies on an annual basis.
Issues: It currently takes 6–8 months to set up a liasion office in India and approximately the same time to close its operations.
b. A foreign body corporate may open a branch office for the purpose of engaging in the activities in which its parent company is engaged.

Such activities may include
i. Export or import of goods or rendering of professional or consultancy services
ii. To conduct research, in which the parent company is engaged
iii. Promoting technical and financial collaborations between Indian and parent overseas group company or
iv. To represent the parent company in India and acting as buying/ selling agent in India
Under this structure, tax liability is relatively high in comparison to the wholly owned subsidiary of foreign companies in India.
Reporting requirements: Branch offices are required to file the Annual Activity Certificate from the auditors with the Reserve Bank of India and the financial statements with the Registrar of Companies on an annual basis.
Issues: It currently takes 6–8 months to set up a branch office in India and approximately the same time to close its operations.
c. A foreign company may enter into India by setting up wholly owned subsidiary or joint venture company in collaboration with Indian business house/company. Under this structure, overseas entities may infuse foreign funds into these companies subject to the restrictions as imposed by the Reserve Bank of India.

Tax liability and other company law related filings for wholly owned subsidiaries or joint ventures are at par with other Indian companies. Setting up a wholly owned subsidiary is relatively simpler in comparision to a liaison office or branch office and currently it takes approximately 2 to 4 weeks to incorporate a company depending on the availability of documents.

2. What are the key laws and regulations that govern company law in your jurisdiction?
Following are the governing laws for the companies:
a. The Companies Act, 2013 and Rules made there under for unlisted companies such as private companies, foreign companies, public companies, not-for profit companies
b. The Securities and Exchange Board of India 1992 and the Securities Exchange Board of India (Listing Obligations and Disclosure Requirement) Regulations, 2009 for companies listed on a stock exchange in India
c. The Foreign Exchange of Management Act, 1999 and Regulations made there under in case of a foreign subsidiary
d. The Reserve Bank of India Act, 1934 and Regulations made there under in case the company is a non-banking financial company

3. What are the most common types of companies in your jurisdiction?
Following are the most common types of companies:
a. a private limited company under the Companies Act, 2013 which can be incorporated with zero capital
b. a not for profit company (as a private company limited by guarantee or having no share capital) under the Companies Act, 2013. This structure is used mostly to promote charitable objects, corporate social responsibility (CSR) related activities, etc and
c. a public company under the Companies Act, 2013 which can be incorporated with zero capital

4. How long does it take to set up a company in your jurisdiction? (For example, it could be as fast as X amount of time, average setup time and then as slow as Y amount of time based on your experience – are there any mechanisms to fast track setup?)
The time to register a company very much depends on the type of the company the applicant chooses. Below are listed the time frames to incorporate the following companies:
a. Private / Public limited company: Registration of a private/public limited company generally takes around 2–4 weeks depending on the completion and availability of documents
b. Section 8 Company: Registration of a Section 8 company generally takes around 4–6 weeks to complete
5. What are the main registration requirements for companies in your jurisdiction? What are the fees?
The registration requirements for companies are as under:
a. Registration under the Companies Act, 2013 to incorporate a company, requirements of which are as follows

i. Identification of
(i) suitable name
(ii) location of the registered office
(iii) directors and
(iv) subscribers to the memorandum of association of the proposed company and
ii. Preparation of documents to be filed with the incorporation forms such as charter documents of the proposed company (i.e. memorandum of association and articles of association), declarations and affidavits in the prescribed form

Fee schedule is as under:

One Person Company and small company Other Companies
If nominal share capital is less than or equal to INR 10,00,000 – Nil

If nominal share capital exceeds INR 10,00,000, INR 2000 with the following additional fees:

i. for every INR 10,000 of nominal share capital or part thereof after the first INR 10,00,000 and upto INR 50,00,000 – INR 200.

If nominal share capital exceeds INR 10,00,000, INR 2000 with the following additional fees:

i. for every INR 10,000 of nominal share capital or part thereof after the first INR 10,00,000 and upto INR 50,00,000 – INR 200.

If nominal share capital exceeds INR 10,00,000, the fee of Rs 36,000 with the following additional fees:

i.   for every INR 10,000 of nominal share capital or part thereof after INR 10,00,000 upto Rs. 50,00,000 – INR 300;

ii. for every INR 10,000 of nominal share capital or part thereof after INR 50,00,000 upto INR 1 crore – INR 100; and

iii. for every Rs. 10,000 of nominal share capital or part thereof after INR 1 crore – INR 75.

6. What are the main post-registration reporting requirements for companies in your jurisdiction?
The post registration reporting requirements for companies are set out as under:
a. Filing of form AOC – 4 (for filing audited accounts) latest by October 30th of the relevant year and form MGT – 7 (Annual Return) latest by November 29th of the relevant year with the Registrar of Companies electronically on an annual basis

b. Filing of Annual Return on foreign liabilities and assets with the Reserve Bank of India by July 15th of every year in case the company has foreign exposure
c. Filing of Income tax return latest by September 30th of the year with the Income tax authorities electronically on an annual basis
d. Filing of GST returns electronically on monthly or quarterly basis and
e. Filing of various returns (quarterly/halfyearly/ yearly) in case the company is a non-banking financial company such as NBS – 1, NBS – 2, Statutory Auditor’s certificate, etc

7. Are there any controlling factors or restrictions on foreign companies in your jurisdiction?
Indian subsidiaries (Foreign Companies) are governed by the regulations or provisions of following laws
a. Companies Act, 2013 or Companies Act, 1956 (if applicable)
b. The Foreign Exchange Management Act, 1999 and
c. Reserve Bank of India, 1934. Indian Subsidiaries can be incorporated as a company under the Companies Act, 2013, as a Joint Venture or a Wholly Owned Subsidiary or can be set up as a Liaison Office/ Representative Office/Project Office/Branch Office in India, which can undertake activities permitted under the Foreign Exchange Management (Establishment in India of Branch Office or Other Place of Business) Regulations, 2000 and the same will be governed by the provisions of the Foreign Exchange Management Act, 1999

8. What is the typical structure of directors (or family management structure) and liability issues for companies in your jurisdiction?
The Companies Act, 2013 provides for the following categories of the directors
a. Executive director (including managing director or whole time director)
b. Non-executive director and
c. Independent director. The Companies Act, 2013 also provides the list of officers who may be held liable (with fine or imprisonment or both) in case the company has contravened the provisions of the said Act. Apart from the Companies Act 2013, directors may also be held liable under the other legislations such as the Negotiable Instruments Act, 1881, Insolvency and Bankruptcy Code 2016, Securities Exchange Board of India Act, 1992, Foreign Exchange Management Act, 1999, Income Tax Act, 1961, The Payment of Gratuity Act, 1972, environmental laws, etc
Non-executive directors (not being a promoter or key managerial personnel) and Independent directors may be held liable only in respect of such acts of omission which had occurred with their knowledge, consent or connivance or where they have not acted diligently. Companies are also liable to pay penalties along with the directors in default.

9. What is the minimum number of directors and shareholders required to set up a company in your jurisdiction? Are there any requirements that a director must be a natural person?
a. Minimum number of directors required for setting up a

i. Public company – three
ii. Private company – two
iii. One person company – one
Every company must have at least one director who stays in India for a total period of not less than one hundred and eighty-two days during the financial year.
The following class of companies must also appoint at least one woman director:
i. every listed company or
ii. every other public company having paid-up share capital of one hundred crore rupees or more; or turnover of three hundred crore rupees or more
Every listed public company is required to have at least one-third of the total number of directors as independent directors and following companies is required to have at least two directors as independent directors:
i. the Public Companies having paid up share capital of ten crore rupees or more or
ii. the Public Companies having turnover of one hundred crore rupees or more or
iii. the Public Companies which have, in aggregate, outstanding loans, debentures and deposits, exceeding fifty crore rupees
b. Minimum number of shareholders required for setting up a
i. Public company – seven
ii. Private company – two
iii. One person company – one

10. What are the requirements on how shares are offered in your jurisdiction?
Shares may be offered in the following manner as provided under the Companies Act, 2013:
a. To the general public by issuing a prospectus in case the company is intending to list its securities on the stock exchange
b. To the selected group of persons by issuing a private placement offer letter (generally opted by private companies to raise further funds) or
c. To the existing shareholders by issuing a letter of offer (rights issue)

11. What are the key laws and regulations on employment in your jurisdiction that companies should be aware of? Are there any aspects of employment law that are heavily regulated?
A company is generally required to comply with certain employment laws based on nature of activities, number of employees, type of products, etc. Following are some of the labour laws and regulations in India
a. Industrial Disputes Act, 1947
b. Industrial Employment (Standing Orders) Act, 1946
c. Shops and Establishments Act, 1954

d. Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013
e. Equal Remuneration Act, 1976
f. Minimum Wages Act, 1948
g. Payment of Bonus Act, 1965
h. Payment of Wages Act, 1936
i. Employee’s Compensation Act, 1923
j. Employees Provident Fund and Miscellaneous Provisions Act, 1952
k. Employees State Insurance Act, 1948
l. Maternity Benefit Act, 1961
m. Payment of Gratuity Act,1972
n. Apprentices Act, 1961
o. Child and Adolescent Labour (Prohibition and Regulation) Act, 1986
p. Contract Labour (Regulation and Abolition) Act, 1970
q. Environment (Protection) Act, 1986 and
r. Rights of Persons with Disabilities Act, 2016
In India, laws pertaining to social security benefits such as employees provident fund, gratuity, pension fund, employment termination related laws, and change in conditions of service of employees are the most critical aspects and hence highly regulated.

12. What is the nature of the corporate governance regime in effect in your jurisdiction? What agencies or government bodies regulate corporate governance?
Corporate governance is the system by which the interests of the stakeholders are protected. Basically, it is conducted for the benefit of the shareholders of the company. It refers to the accountability of the Board of directors towards the stakeholders. In India, the shareholders are considered the true owners of the company while the directors are considered as the trustees of the shareholders. The aim is to align the interests of the management with that of the stakeholders. The corporate governance mechanism in India is enumerated by the following government and regulatory bodies:

a. Ministry of Corporate Affairs (MCA): MCA regulates corporate affairs in India through the Companies Act, 2013 and other related Acts, rules etc. MCA formulates and governs various corporate laws in India. Few of the provisions under the Companies Act, 2013 which deals with corporate governance are as follows

I. Board of directors are required to lay down the annual financial statements at every annual general meeting of the company and it must give a true and fair view of the state of affairs of the company. The company is also required to file the annual audited financial statements with the concerned Registrar of Companies. Additionally, the Board’s report shall also to be presented before the shareholders which includes the company’s state of affairs, directors’ responsibility statement, and particulars of loans, details about the policy on corporate social responsibility etc

ii. Independent Directors: Public listed companies and specified unlisted public companies are required to have minimum one-third of the total number of directors as independent directors and they shall have a duty to act in good faith and in the best interests of the shareholders
iii. Audit Committee: Public listed companies and specified unlisted public companies are required to constitute an audit committee which shall review and monitor auditor’s performance, examine the financial statement and the auditor’s report, evaluate internal financial controls etc
iv. Stakeholders’ Relationship Committee: Every company that consists of more than 1,000 shareholders, debenture holders, deposit holders and other security holders shall constitute a stakeholders’ relationship committee. The chairman of the committee shall be a non-executive director. The main function of the committee is to resolve grievances of stakeholders. The grievances of the security holders of the company may include complaints related to transfer of shares, non-receipt of balance sheet, non-receipt of declared dividends, which shall be handled by this committee
b. Securities and Exchange Board of India (SEBI): SEBI is another important body that oversees corporate governance of listed companies. As per the listing agreement entered between a listed company and the concerned stock exchange, disclosures are required to be made with respect to Corporate Governance. The same also enumerates the whistle blower policy wherein the company is required to have mechanism for reporting unethical behavior

13. Does establishing a company in your jurisdiction grant any kind of residency rights? Are there any conditions that in order to receive these residency rights (if applicable) one must partner or establish a joint venture with a local (e.g. a citizen of your jurisdiction)?
A company incorporated in India by foreign shareholders shall be treated as an Indian company for all purposes including from the perspective of Companies Act or Income Tax Act. Further, a company is a separate legal entity irrespective of the nationalities of its stakeholders. A company holds its properties in its own name and not in its shareholders’ names.
Further, please note that Foreign Direct Investment (“FDI”) policy of the Government of India provides for various conditions for foreign ownership in Indian companies. 100% foreign direct investment is allowed in most of the sectors under automatic route without requiring any partnership with a local citizen or entity. In a few sectors, there is a cap on foreign ownership. In some cases prior government approval is required for foreign ownership beyond the specified threshold. The foreign companies would need to find local shareholders only in the sectors where 100% FDI is not permitted.

14. When is a company subject to tax in your jurisdiction? What are the main taxes that may apply to companies in your jurisdiction? A company will be liable for the following taxes:
a. Income Tax – This tax shall be payable by the company when the company is having taxable income in a particular financial year

b. Capital Gains Tax – The tax levied on any profit or gain that arises from the sale of a capital asset is known as capital gains tax and shall be payable as and when there is capital gain on sale of capital asset
c. Dividend Distribution Tax (DDT) – This tax is payable by the company on the amount of dividend distributed to the shareholders of a company

15. How does the Competition law in your jurisdiction regulate companies?
The Competition Act, 2002 (“Act”) is the legislation that regulates competition law in India. Practices having appreciable adverse effect on competition are strictly prohibited under the aforesaid Act. The main objectives of the Act are to promote competition in the business environment, to protect the interest of consumers and also to ensure freedom of trade carried on in Indian markets. The idea of the aforesaid Act is to discourage anti-competitive practices in India. Anti-competitive agreements, abuse of dominant position, and mergers, amalgamations and acquisitions are prohibited if they cause appreciable adverse effect on competition. It eliminates practices having adverse effect on competition and promotes freedom of trade. The Competition Commission of India (CCI) has been established to oversee the implementation of the Act. The Act prohibits the following three practices:-

a. Anti Competitive Agreements: No enterprise is permitted to enter into any agreement that may have an appreciable adverse effect on the competition in India. Activities that may determine purchase/sale prices of goods, limits/controls production/ supply of services, or activities that result in bid rigging are considered to be those that have an appreciable adverse effect on competition. Tie-in agreements, exclusive supply agreements, exclusive distribution agreements, refusal to deal, and resale price maintenance agreements are all prohibited under the Act

b. Abuse of Dominant Position: Dominant position means a position of strength for an enterprise in the relevant market that allows it to operate independently in the competition market and affects its consumers/ market in its own favor, imposition of unfair conditions on the purchase/sale of goods/ services or the prices of goods/services. It does not include such conditions which may be necessary to meet the competition like putting limitations on the production/provision of goods/services or some scientific development relating to the goods/services etc

c. Mergers, Amalgamations and Acquisitions: A combination that causes appreciable adverse effect on competition is void under the Act. Any enterprise/person entering into such a combination is required to give a notice to the CCI disclosing the details of the combination. If the CCI is of the view that the combination might cause an appreciable adverse effect on competition, it will direct the combination to not take effect. Where the CCI feels that certain modifications in the combination might prevent an appreciable adverse effect on the competition, it shall direct the enterprise/person to make such modifications. The enterprise/person may accept the modification or make amendments which will have to be approved by the CCI

Further, the CCI has the power to make inquiries in case of certain agreements, abuse of dominant position or any combination being so formed. Additionally, the CCI has the power to impose penalties in case of any offence under the Act

16. What are the main intellectual property rights companies should be aware of in your jurisdiction?
Amidst the increasing significance of the Intellectual Capital and growth of the legal jurisprudence in the Intellectual Property regime, awareness of the Intellectual property rights which may be available to a company in the Indian jurisdiction is crucial.
Broadly, following kinds of Intellectual Property Rights exist in India:

Trade Marks
A trade mark is a ‘mark’ that may include a device, brand, heading, label, ticket, name, signature, word, letter, numeral, shape of goods, packaging or combinations of colours and is protected under the Trade Marks Act 1999.

A Patent is an invention relating to a product or a process that is new, involves an inventive step and is capable of industrial application. The provisions of the Patents Act 1970, govern patents.

The Copyright Act, 1957, protects artistic work which comprises of a dramatic, literary and musical work, sound recording and/or cinematographic films.

Industrial Designs
Industrial Designs are governed by the Industrial Designs Act, 2000, and protect a shape, configuration, surface pattern, colour, or line which improve the visual appearance of the design.

Geographical Indications
A Geographical Indication is an indication in the form of a name of sign used on goods that have a specific geographical origin and reputation and is protected under the Geographical Indications Act, 1999.

Layout Designs of Integrated Circuits
The semi-conductor for Integrated Circuits Layout Act, 2000, accords protection to the Semiconductor Integrated Circuits which are products having transistors and other circuitry elements formed inseparably on a semiconductor material.

Plant Varieties
The Protection of Plant Varieties and Farmer’s Rights Act, 2001 provides for the development of new plant varieties and protection of farmers and breeders.

Data protection
Data protection refers to the set of privacy laws, policies and procedures that aim to minimise intrusion into one’s privacy and are primarily governed by the Information Technology Act, 2000.

17. Does your jurisdiction have laws or regulations that govern data privacy?
Data privacy refers to the laws and legislations which are aimed at minimizing invasion of one’s privacy caused by storage of data on a digital/electronic platform. There is no express legislation dealing with data privacy.

However, the Information Technology Act, 2000 (hereinafter referred to as ‘The Act’) does focus on privacy of data in digital format and provides for compensation to the victim in the case of unauthorized access and leakage of sensitive personal information. The Act provides for punishment for damaging the computer system without permission of the owner/person in charge of the computer system, which includes inter alia downloading of information, installing a virus, tampering or manipulation of data etc. Further, the Act talks about offences such as tampering with the computer source documents, hacking a computer system, and publishing of obscene information in electronic form. The Act also mentions that network service providers will not be made liable for any contravention made without his knowledge.

18. Are there any incentives to attract foreign companies to your jurisdiction?
There is no specific incentive for foreign companies intending to set up business in India.

19. What is the law on corporate insolvency?
The Insolvency and Bankruptcy Code 2016 (hereinafter referred to as ‘Code’) is the main legislation on corporate insolvency in India. The Insolvency and Bankruptcy Board of India is the regulatory body established under the Code. The object of the Code is to provide a resolution mechanism within the prescribed timeline and maximization of value of assets for the benefit of stakeholders. As per the Code, the Corporate Insolvency Resolution Process (hereinafter referred to as CIRP) can be initiated by a financial creditor (itself or with other financial creditors), an operational creditor or by the corporate debtor itself when a default is committed by a corporate debtor.

20. Have there been any recent proposals for reforms or regulatory changes that will impact company law in your jurisdiction?
There are certain amendments to the Companies Act, 2013 which are expected to be notified shortly. These amendments will further facilitate workings of the company.

21. Are there any features regarding company law in your jurisdiction or in Asia that you wish to highlight?
The Government of India has been trying constantly to introduce various changes in the corporate laws in India to create business friendly environment in India.

As published in the LexisNexis® Company Law Guide 2019.



1. What are the key laws and regulations that govern mergers and acquisitions in your jurisdiction?
Mergers and acquisitions in India are governed by the following main legislation:
a. The Companies Act 2013
b. The Competition Act 2002
c. The Foreign Exchange Management Act 1999 (In case of cross border merger).
d. SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011.
e. The Income Tax Act 1961
f. Indian Stamp Act 1899

2. What are the government regulators and agencies that play key roles in mergers and acquisitions?
Following government regulators and agencies play key roles in the process of merger and acquisition in India:
a. Registrar of Companies and Regional Director under Ministry of Corporate Affairs
b. National Company Law Tribunal (NCLT)
c. Competition Commission of India (CCI)
d. Securities and Exchange Board of India (SEBI)
e. Reserve Bank of India (RBI)
f. The Income Tax Department (ITD)

3. Are hostile bids permitted? If so, are they common in your jurisdiction?
A bid from an acquirer is considered to be hostile when the promoter does not wish to sell off its shares, voting rights and control to the acquirer whilst the acquirer is still making all the possible efforts to purchase the shares and the rights attached to the same. The above situation relating to takeovers in India is governed by the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations 2011 which mandates the acquirer to make several disclosures at various stages of acquisition of shares, voting rights and control of the listed company. Hostile bids are possible but the person acquiring shares will also have to comply with the aforesaid Regulations. Hostile bids are rare in our jurisdiction.

4. What laws may restrict or regulate certain takeovers and mergers, if any? (For example, anti-monopoly or national security legislation).
A transaction that causes appreciable adverse effect on competition is void under the Competition Act 2002 (“Act”). Any acquirer entering into a transaction above a specified threshold is required to give a notice to the Competition Commission of India (‘CCI’) disclosing the details of such transaction. If the CCI is of the view that the transaction might cause an appreciable adverse effect on competition, it will direct that the transaction not to take effect. Where the CCI feels that certain modifications in the transaction might prevent an appreciable adverse effect on the competition, it shall direct the acquirer to make such modifications. The acquirer may accept the modification or make amendments which will have to be approved by the CCI. Further, the CCI has power to make inquiries in case of certain agreements, abuse of dominant position or any combination thereof. Additionally, the CCI has the power to impose penalties in case of any offence under the Act.

5. What documentation is required to implement these transactions?
Documentation will depend on the nature of transaction. However, generally the following documentation will be required:
a. Documents for obtaining approval from the Board of Directors and Shareholders of both the acquirer and target company, wherever applicable
b. Scheme/Petition to be filed before the concerned authority
c. Notices to the shareholders and creditors
d. Consent from the shareholders and creditors
e. Notice to be published in newspaper
f. Public Announcement in case of acquisition of shares of a listed company
g. Various affidavits, declarations and other documents
h. Share subscription/ purchase agreement
i. Share Transfer form and
j. Reporting to stock exchanges in a prescribed format in case of a listed company, as applicable

6. What government charges or fees apply to these transactions?
The following government charges/ fees shall apply, as applicable:
i. Fee for filing merger petition before NCLT
ii. Share transfer stamp duty on consideration for acquisition of shares where shares are held in physical form
iii. Fee payable to the Regional Director/ Registrar of Companies on filings the forms/ application
iv. Stamp duty on Share Purchase/Subscription agreement, Affidavits, merger order, etc. as applicable
v. Fee payable to notary for notarisation of affidavits/ undertakings

7. Do shareholders have consent or approval rights in connection with a deal?
In case of a scheme of merger, approval from the shareholders of respective companies shall be required. However, where written consent of the shareholders has already been filed along with the merger petition before the NCLT, the NCLT may dispense with the requirement of convening a shareholders meeting at its discretion. In case of acquisition of shares, the Indian acquirer company may be required to obtain approval of the shareholders where its total investment is in excess of the threshold provided under Indian laws in this regard. Where the acquirer is a foreign company, the requirement of shareholders’ approval shall be governed by the laws of its overseas jurisdiction.

8. Do directors and controlling shareholders owe a duty to the stakeholders in connection with a deal?
The Companies Act 2013, casts a fiduciary duty on the directors of a company to act for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment. Directors are required to exercise their duties with due and reasonable care, skill and diligence and to exercise independent judgment. At the time of placing a deal for the approval of the shareholders, the directors are required to inform the shareholders of the company about the rationale, benefits and risks of the deal, to enable the shareholders to take a considered decision. Further, the directors are responsible for ensuring that the deal is in the best interest of the company as well as the stakeholders. Additionally, the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations 2011, requires the board of directors of a listed company to constitute a committee of independent directors to provide reasoned recommendations on each offer, which are required to be published by the company.
Further, the code for independent directors detailed under the Companies Act 2013 imposes an obligation on an independent director to safeguard the interest of all stakeholders, balance the conflicting interests of the stakeholders and acting within his authority, assist in protecting the legitimate interests of the company, shareholders and its employees.

The law imposes no obligation on the controlling shareholders of the company towards the stakeholders. However, balancing provisions have been provided for the minority shareholders to challenge the deal if the same is prejudicial to their interests.

9. In what circumstances are break-up fees payable by the target company?
Although break fees are not provided for under the law, they can be contractually agreed between the parties. The Indian Contract Act 1872, allows damages to the non-breaching party to a contract to the extent of losses as may be reasonably foreseeable as a natural consequence from the non-performance of the contract by the breaching party. The commonly agreed instances under which the obligation to pay break-up fees is triggered are as follows:
a. Break-up of the negotiations by one of the parties
b. A seller choosing a different buyer than the one named preliminary agreement
c. When a seller opts to open the investment opportunity to the public instead of the private investor named in the agreement
d. If a defect is discovered in the target company that had not been previously disclosed. In most cases, the party breaching the letter of intent or memorandum of understanding is required to reimburse the expenses incurred by the other party in connection with the transaction

10. Can conditions be attached to an offer in connection with a deal?
In India, it is open for the parties entering into a deal to negotiate and agree upon the terms and conditions of the deal. Some of the common conditions attached to an offer in connection with a deal are the fulfilment of the conditions precedent and subsequent (findings of the comprehensive due diligence exercise), lock-in period of the securities, restriction on transfer of shares and affirmative voting rights to be provided to the investor. In case of acquisition of a listed company, the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations 2011, requires the acquirer to make an open offer conditional as to the minimum level of acceptance.

11. How is financing dealt with in the transaction document? Are there regulations that require a minimum level of financing?

Mergers are generally different from acquisitions in the way they are financed. Mergers are generally cashless and involve share swaps. In case of acquisition of an unlisted company, the law is silent on the level of financing by the purchaser and the acquisition agreement records the terms of financing by the purchaser therein.

In the case of acquisition of a listed company where the acquisition triggers a mandatory public offer under the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations 2011, the said regulations contains provisions for securing the acquirer’s performance of the financial obligations. The acquirer is required to deposit a part of the consideration (as prescribed under the said regulation) payable under the open offer in an escrow account not later than 2 (two) working days prior to the date of the detailed public statement of the open offer for acquiring shares. The escrow account may be created by way of a cash deposit, a bank guarantee issued in favour of the manager to the open offer by any scheduled commercial bank, or a deposit of frequently traded and freely transferable equity shares or other freely transferable securities with an appropriate margin.

12. Can minority shareholders be squeezed out? If so, what procedures must be observed?
The Companies Act 2013, contains provisions for squeezing out of minority shareholders form the company.
The Act requires an acquirer holding 90% (ninety percent) or more of the issued equity shares in a company, to make an offer to the minority shareholders to buy the equity shares held by such minority shareholders in the company and the minority shareholders may sell their equity shares to the majority shareholders at the price determined on the basis of valuation by a registered valuer.
The procedure for the same has been detailed here under:

a. The acquirer holding at least 90% (ninety percent) of the shares will be required to notify the company of their intention to buy the minority shares
b. The majority shareholders will have to make an offer to the minority shareholders to buy their equity shares at the price determined on the basis of valuation by a registered valuer
c. The majority shareholders will have to deposit an amount equal to the value of the equity shares to be acquired by them, in a separate bank account to be operated by the company for payment to the minority shareholder
d. The payment is required to be disbursed to the minority shareholders by the company within a period of 60 (sixty) days which will be continued to be made to the minority shareholders who have not received the payment, for a period of 1 (one) year and
e. The company will be required to deliver the equity shares to the majority shareholders upon receipt of the same
Further, the said Act also gives a right to the minority shareholders to make an offer to the majority shareholders to purchase their shares.

13. What is the waiting or notification period that must be observed before completing a business combination?
For the purposes of business combinations, the Competition Act 2002 prescribes the following timelines for various actions to be undertaken by the applicant and the Competition Commission of India:






Notification to the Competition Commission of India by the party proposing to enter into a combination Within 30 (thirty) days of approval of the proposal relating to the merger or amalgamation by the board of directors of the enterprise concerned, or execution of any agreement or other documents for acquisition of shares, assets, voting rights or control, as the case may be.
Order or directions to be issued by the Competition Commission of India Within a period of 210 (two hundred and ten) days from the date of filing the notice with the Competition Commission of India.


14. Are there any industry-specific rules that apply to the company being acquired?
The industry specific rules that apply to the company being acquired depends on the particular sector to which the company falls. Typically, the said rules apply to highly regulated sectors or sectors of strategic importance, such as banking, financial services, insurance, media, telecommunications, defence, civil aviation, electricity etc. Accordingly, sector-specific regulators have been established to regulate some of the aforesaid industries, e.g. the Telecom Regulatory Authority of India and the Department of Telecommunications regulate the telecommunications sector, the Directorate General of Civil Aviation regulates civil aviation, the Reserve Bank of India regulates the banking and financial services sectors, the Insurance Regulatory and Development Authority regulates the insurance sector, and the Ministry of Information and Broadcasting regulates the electronic media sector.

Further, the Foreign Direct Investment Policy, the Foreign Exchange Management Act 1999 and its regulations contain industry specific rules such as the permissible limit of foreign investment, entry routes etc.

15. Are cross-border transactions subject to certain special legal requirements?
The Companies Act 2013 contains provisions pertaining to inbound and outbound mergers and amalgamations. The provision envisages a scheme of amalgamation providing for, amongst other things, payment of consideration, including by way of cash or depository receipts or a combination of both.

The Foreign Direct Investment Policy provides that foreign investment in India can be made either with or without the approval of the Reserve bank of India. Further, the rules and regulations framed by the Reserve Bank of India under the Foreign Exchange Management Act 1999 will be applicable to cross border transactions in India.

The Foreign Direct Investment Policy prescribes certain conditions for making investments in India in different sectors, such as maximum permissible limits on investment by a foreign party, pricing guidelines to be adhered to for making the investments, lock-in requirements of such foreign investment, etc.

16. How will the labour regulations in your jurisdiction affect the new employment relationships?
Where the ownership or management of an undertaking is transferred, every workman who has been in continuous employment for not less than 1 (one) year in that undertaking immediately before such transfer must be given a notice of transfer. Also, every such workman is entitled to 1 (one) month written notice or salary in lieu of notice and retrenchment compensation in accordance with the provisions of the Industrial Disputes Act 1947. Retrenchment compensation shall be an average pay of 15 (fifteen) days for every completed year of continuous service and a notice has to be served in the prescribed manner on the appropriate government or such authority as specified by the appropriate government.

No such compensation shall be payable by the employer to a workman in any case there has been a change of employer by reason of the transfer, if
a. the service of the workman has not been interrupted by such transfer
b. the terms and conditions of service applicable to the workman after such transfer are not in any way less favourable to the workman than those applicable to him immediately before the transfer and
c. the new employer is, under the terms of such transfer or otherwise, legally liable to pay to the workman, in the event of his retrenchment, compensation on the basis that his service has been continuous and has not been interrupted by the transfer

17. Have there been any recent proposals for reforms or regulatory changes that will impact M&A activity?
Foreign Exchange Management (Cross Border Merger) Regulations 2018 (“Merger Regulation”) was notified by the Reserve Bank of India on 20th March, 2018 which regulates the cross-border mergers in India. Cross border mergers are categorised as:
a. ‘In bound merger’ when an Indian company (“IC”) acquires assets and liabilities of a foreign company. Some of the essentials of an Inbound Merger are
i. Merger Regulations allow transfer of securities to a foreign shareholder, subject to compliances applicable to a foreign investor under the foreign direct investment regulations (“FDI Regulations”)
ii. Where the cross border merger results in transfer of securities of a joint venture (“JV”) or a wholly owned subsidiary (“WOS”) of an IC, situated in a foreign jurisdiction, the same is subject to compliance, such as pricing of shares in a specified manner, any outstanding’s owed to the IC being cleared prior to such transfer, etc. set out under the Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations 2004)
iii. If the cross-border merger results in acquisition of a step-down subsidiary (situated in a foreign jurisdiction) of the JV/WOS, by an IC, then certain additional conditions laid down in the Foreign Exchange Management (Transfer or issue of any foreign security) Regulations 2004 will have to be complied with
iv. The IC has to ensure that the overseas borrowings of the foreign company, proposed to be taken over by it, are compliant with the provisions of the overseas borrowing Regulations (“Overseas Borrowing Reg.”) under Indian law within a period of 2 (Two) years from the date of sanction of the scheme pertaining to such cross-border merger by the relevant authority. However, the IC cannot remit any monies from India for repayment of such overseas borrowings

v. Further, it is to be noted that the Overseas Borrowing Reg. inter-alia stipulates specified interest rates, maturity, end use restrictions, on borrowings, from overseas, by an IC (however, end use restrictions are not applicable to an IC per the Merger Regulations)
b. ‘Outbound Merger’ when a foreign company (“FC”) acquires assets and liabilities of an IC. Some of the essentials of an Outbound Mergers are
i. In such cases the law applicable in the jurisdiction where the FC is situated will regulate such cross-border merger
ii. Merger Regulations also stipulate certain conditions by which guarantees that outstanding borrowings of the IC shall, as a result of such cross-border merger, become guarantees or borrowings of the FC. This however is subject to the FC not acquiring any such guarantee or outstanding borrowing, in rupees payable to Indian lenders, non-compliant with the relevant foreign exchange law in India

As published in the LexisNexis® M&A Law Guide 2019.




Ravi Singhania & Schrachika Kulshrestha



It was in Bhatia International Vs. Bulk Trading S.A.[1] judgment that the Indian Supreme Court laid down the principle that courts in India would have a right to provide interim relief in foreign seated arbitrations also unless otherwise agreed in writing by the parties. Therefore, earlier the Indian Courts were competent to grant interim relief pending arbitration, set aside arbitral awards etc. even if the arbitration was conducted outside India unless the parties by mutual consent chose expressly or impliedly to exclude the applicability of Part I of the Arbitration and Conciliation Act, 1996. However, this position was overruled following the decision of the Hon’ble Supreme Court in Bharat Aluminium and Co. Vs. Kaiser Aluminium and Co.[2] (“BALCO”) but only prospectively. In the BALCO judgment, a five judge constitutional bench of the Hon’ble Apex Court held that Part I of the Arbitration and Conciliation Act, 1996 was applicable only to all the arbitrations which take place within the territory of India. However, the BALCO judgment was made applicable only for disputes arising out of arbitration agreements and/or arbitration agreements entered into after September 6, 2012.


After the BALCO judgment, there was a lot of clamour as Indian Courts had no jurisdiction to intervene in arbitrations held outside India and therefore, if the assets of one of the parties were located in India and there was a likelihood of alienation of those assets, the other party court not approach Indian Courts for interim relief.  With this objective in mind, the Arbitration and conciliation (Amendment) Act, 2015 (“Amendment Act, 2015”) was passed by the Parliament of India to help build India as a major investor friendly jurisdiction.  In particular, section 2(2) was amended which somewhat restored the principle pronounced by the judgment of Bhatia International by adding a proviso that provided the option of interim relief to a party even if the place of arbitration is outside India unless there was an Agreement to the contrary. Pursuant to the amendment, the courts in India have also duly hailed the legislative intent behind the amended section 2(2) and have held that keeping in mind the object of amended section 2(2), it is open to courts in India to grant interim relief even in respect of arbitral proceedings held outside India and even if the arbitration proceedings are governed by a foreign law[3]. However, the flipside of the amended section 2(2) is that the option of seeking an interim order is not available to two Indian parties who choose to arbitrate outside India. Also, post 2015 amendment the power of the courts to grant interim relief has been restricted to only those matters where arbitral tribunal has not been constituted and once an arbitral tribunal is constituted, the court cannot entertain any interim relief unless the court finds that circumstances exist  which may not render the remedy a provided under section 17 of the Act efficacious.


Another key feature of the Arbitration and conciliation (Amendment) Act, 2015 was the amendment to the definition of court as provided under section 2(1)(e). This amendment has provided a clear distinction between the forums which are to be approached in domestic arbitration and in international commercial arbitrations. While the definition of a court with respect to domestic arbitrations has remained unchanged, in case of international commercial arbitrations, the definition of a court has been included to mean all high courts exercising ordinary original civil jurisdiction  and in other cases, a high court having jurisdiction to hear appeals from decrees of courts subordinate to that high court.  This is a fundamental change in building India as a global arbitration hub as it has ensured that foreign parties are not required to approach Principal Civil Courts in remote districts and can approach the concerned high court. This amendment is a primary attraction for foreign parties involved in international commercial arbitrations who can now avoid the legal complexities involved in the Indian Judicial System at the District level. The legislative intent behind this amendment was to ensure that any application and/or petition in international commercial arbitrations, involving a foreign party, would be heard expeditiously and will not only boost confidence of foreign investors  but will also mitigate the risk faced by the government of India from claims by foreign investors under the relevant investment treaty.


The Arbitration and Conciliation Amendment Bill, 2018 was passed by the Lok Sabha (House of the People) on August 10th, 2018 with a view to strengthen the arbitration mechanism in Indian.  The Bill is yet to be passed by the Rajya Sabha (Council of States).

Time restriction for conclusion of arbitral proceedings not applicable to international commercial arbitrations

While the inclusion of section 29A by way of the Amendment Act, 2015  paved a way for a more structured and time bound arbitration proceeding which were otherwise marred by significant delays, however, in case of international commercial arbitrations, the time bound procedure as prescribed under section 29A was rather seen as a restriction especially in cases which involve complex questions of facts and law and in which detailed evidence needs to be led. The Arbitration and Conciliation Amendment Bill, 2018 has duly addressed this concern and seeks to exclude the applicability of Section 29A to international commercial arbitrations.

[1] [(2002) 4 SCC 105]

[2] (2012) SCC 9 552

[3] Raffles Design International Vs. Educomp Professional Education



Venture Capital Fund

Venture Capital Fund (VCF) is a privately pooled investment vehicle. It can be established or incorporated in the form of a trust, a company, a limited liability partnership, or a body corporate which collects funds from investors, for investing in accordance with a defined investment policy for the benefit of its investors.

Current scenario in India

As per the report of Bain and Company[1] “India Private Equity Report 2018”; 2017 was a good year for private equity in India as the country witnessed the highest investment of Private Equity (PE) /Venture Capital (VC) ever, i.e. an investment of around $26 billion.

Securities and Exchange Board of India (SEBI) regulates both domestic and offshore funds by the virtue of various regulations. Domestic VC funds are regulated under SEBI (Alternate Investment Fund) Regulations and offshore VC funds are regulated under SEBI (FVCI) Regulations, 2000.


Some of the preferred instruments for a VC fund outside equity are (a) compulsorily convertible preference shares are one such type of instrument as they carry a preferential right over dividend and gives investors a preferential right to recover investment in case the company is wound-up; (b) compulsorily convertible debentures are another, investment instrument that may be considered. It is a debt instrument compulsorily convertible into equity after a specified time period; (c) convertible notes[2] as an investment option is permitted for startup companies with effect from January 10, 2017. A foreign investor is permitted to invest in convertible notes up to twenty five lakh rupees or more in a single tranche.[3]


Typically, a VC fund enters into various documents in connection with its investment which includes (a) term sheet: capital financing is initially captured by a term sheet. It covers various important aspects such as valuation of the company, the constitution of the board, the right to veto, exit rights, future funding, right to financial information etc.; (b) Share subscription agreement: it provides for the issue of shares to the investor for subscription money, determined as per the valuation of the company. It provides the purpose for which the money may be used, representations and warranties by the founder pertaining to the startup, provides a safeguard against any liability which the investor may face due to legal, regulatory or tax related liabilities of the startup etc.; (c) Shareholders’ agreement: it provides for the structure of the board of directors, the appointment of the investor’s directors on the board, liability of the founder to provide investor with financial reports from time to time, pre-emptive right, right of first refusal,  the exit route available to the investors etc.

Exit Options/Routes available to the investors are as set out below:

One of the key aspects for a VC fund in connection with its investment is the right to exit the portfolio company. Typically the exit options include (a) initial public offering, (b) buyback of shares, (c) redemption of fully paid-up preference shares / debentures, (d) registration rights: a right of investor to register its securities for sale in case the company lists its securities on a foreign stock exchange, (e) tag along rights: investor can sell its share on the same terms and conditions as the shareholders exiting the company to a third party, (f) drag along rights: investor can compel the other shareholders  to sell their shares on the same terms and conditions as the investor to a third party, (g) put option :investor can sell shares back to the other shareholders at a predetermined price/terms and conditions (h) call option: investor can purchase the shares of another shareholder at a predetermined price/terms and conditions as specified under the shareholders agreement.

Judicial pronouncements

The Indian Courts with recent judicial pronouncements are likely to instil more confidence amongst the investor, creating a favourable climate for investments. The Delhi High Court in a recent judgment upheld an international arbitral award passed in favour of foreign investor, and against the promoters, of an India company for having concealed information about proceedings against them by American food and drug department while selling their shares. In another judgment of NTT Docomo v.Tata Sons Limited[4] the court by upheld the arbitral award in favour of Docomo. The court by this decision clearly brought out the need to create a favourable environment for foreign investment by holding the Indian parties liable to their commitments under the contracts disabling them to take defence of the Foreign Exchange laws.


Economic growth in any country depends upon the consistent growth of business and an environment which nurtures investor confidence. Investor confidence can be ensured when investors are able to exit the companies after accruing profits and without suffering any loss due to wilful default or misrepresentation of the other shareholders or promoters. With laudable judicial precedents and liberal laws India is likely to achieve high investment and business growth in the coming years.

[1]; last seen 21.08.2018

[2] Convertible Note’ means an instrument issued by a startup company evidencing receipt of money initially as debt, which is repayable at the option of the holder, or which is convertible into such number of equity shares of such startup company, within a period not exceeding five years from the date of issue of the convertible note, upon occurrence of specified events as per the other terms and conditions agreed to and indicated in the instrument.


[4] (2017) 241 DLT 65



Foreign Direct Investment (FDI) Policy of India permits foreign investment in India either under ‘automatic route’ or ‘approval route’. Under the ‘approval route’ prior approval of the Government of India is required for any foreign investment in an Indian company carrying on retailing business.

FDI Policy on retail trading classified retail trade as either Single Brand Retail Trading (‘SBRT’) e.g. companies like Marks & Spencer’s, Ikea, Uniqlo, Nike or Apple or Multi Brand Retail Trading (‘MBRT’) for retailers like Walmart, Carrefour or Tesco. Traditionally, there were restrictions in foreign investment in both SBRT and MBRT activities under FDI Policy.

Prior to January 2018 FDI Policy of India allowed 49% FDI in SBRT activities under automatic route and government approval was required for FDI beyond 49% which could go upto 100%. With a view of liberalizing FDI Policy, the Government decided to allow 100% FDI in SBRT activities under automatic route without requiring any government approval effective from January 2018.

The FDI policy for SBRT has laid down the following requirements:

  • Products to be sold should be of a ‘Single Brand’, which are branded during manufacturing.
  • Products should be sold under the same brand internationally i.e. products should be sold under the same brand in one or more countries other than India.
  • ‘Single Brand’ product-retail trading would cover only products, a non-resident entity, whether owner of the brand or otherwise, for the specific brand, either directly by the brand owner or through a legally tenable agreement executed between the Indian entity undertaking SBRT and the brand owner.
  • In respect of proposals involving foreign investment beyond 51%, sourcing of 30 percent of the value of goods purchased, will be done from India.
  • Such an Indian entity is also allowed to sell through e-commerce platform.

Although government allowed foreign investment in single brand retail a few years ago, but most of the foreign brands still operate in India through local franchises and distributors. For example, Genesis Luxury Fashion Pvt. Ltd., a marketing and distribution company of Reliance Group, has brought several global iconic brands such as Bottega Veneta, Giorgio Armani, Hugo Boss, Emporio Armani, Jimmy Choo, Paul Smith, Tumi, Burberry, etc. in India.

Due to restrictions and various conditions for retail trading under FDI policy, foreign companies were finding it more convenient to enter India through franchise route. Under a franchise or distribution agreement, a global retailer partners with an Indian company. Indian company pays a fee to the brand owner and invests in marketing and launching the brand in India. It was not uncommon that the brand owner would invest in the Indian retailer to expand it’s brand footprint into Indian retail sector rather than expecting to receive brand fees or royalty.  In the recent past Gap Inc., Aeropostale Inc. and Ipanema, are some of the companies who have entered India through franchise agreements.

Post January 2018, Indian entities of global retailers having FDI of more than 51% have been exempted from the requirement of local sourcing, for up to three years from commencement of the business if it is undertaking SBRT of products having ‘state-of-art’ and ‘cutting-edge’ technology, and where local sourcing is not possible, such as Apple. This requirement of local sourcing was challenging for entities trading in hi-tech products. There are brands which engage in manufacturing and trading of products which are produced from goods not sourced in India due to various factors and constraints. Whether a product will qualify as having ‘state-of-art’ and ‘cutting-edge’ technology, will be examined by a Committee formed by the government in this regard.

Further, there is no explanation of what constitutes ‘state-of-art’ and ‘cutting edge’, which creates ambiguity. The relaxation given is only for a period of 3 years, after which the SBRT entity would be required to meet the 30% sourcing norm. All these factors pose challenges for the foreign investor engaged in trading of such products.

Apart from franchise model, a way around the requirement of mandatory sourcing norm is to keep FDI upto 51% and find a local partner to hold the balance 49%. Under this structure the requirement of local sourcing is not applicable to the Indian entity in which FDI is being made by the foreign brand owner.

As far as multi brand retail trading is concerned, FDI is limited to 51%, with prior government approval. No automatic route of FDI is available in case of MBRT. Moreover, retail trading in any form by means of e-commerce would not be permissible for companies with FDI engaged in the activity of multi-brand retail trading. In the past Indian Government has frowned upon creative joint venture models to circumvent majority foreign ownership in MBRT.

There is another significant issue relating to retail trading which needs clarification – whether ‘sub-brands’ constitute a single brand. For example, Marks & Spencer (‘M&S’) sell goods under sub-brands such as M&S Women, Autograph etc. under the M&S Parent brand. So, it becomes important form the perspective of restrictions under FDI Policy whether these sub-brands can be treated as a single brand or will fall under MBRT.

To conclude, there are certain key areas such as sourcing norms in case of hi-tech products retailers, as well as the question of sub-brands, which need to be addressed. Till then foreign brands would prefer the franchise or distribution route to sell their products in India.



Liberalisation in India has resulted in significant inbound foreign investment. As Indian operations of foreign businesses grow, foreign shareholders grapple with the best ways to finance these operations and repatriate some of the profits – partly due to the Indian regulatory system, which strictly regulates capital account transactions. This article examines some key ways of financing Indian operations of foreign shareholders. But it will depend on the specific circumstances in each case to determine which option is best suited for a particular Indian subsidiary.

Investment through shares and convertible instruments. Foreign companies can finance their subsidiary’s operations through investment in shares and convertible instruments. The law allows investment through equity shares, compulsory convertible preference shares, compulsory convertible debentures and warrants.

The investment in the aforesaid instruments is treated as capital investment by the foreign investment law of India, but such capital investment is subject to certain conditions including: (1) Restrictions on the level of capital investment in specified sectors, e.g. permissible capital investment in multi-brand retail is up to 50%; (2) the need to specify the manner of pricing the instrument to ensure that the instrument is not issued/transferred at a lower price than its fair market value (pricing compliance); (3) a specified time for the allotment of such instruments; (4) reporting such capital investment within a specified timeline.

For example, when a foreign shareholder wants to fund its subsidiary for working capital needs, the foreign shareholder may want to evaluate, prior to the capital investment, the pricing compliance. Considering the pricing compliance mandates that the instrument be not issued at a price lower than its fair market value, the foreign shareholder will need to evaluate whether such pricing compliance will result in the capital investment being much more than what is needed.

However, there are some exceptions to the pricing compliance for a private company or a public unlisted company, e.g. issuing the instrument through a rights issue. Instruments issued through a rights issue can be issued at a price similar to the price offered to an Indian shareholder. For wholly owned subsidiary of a foreign shareholder, however, this exception may need to be examined given that the subsidiary may not have an Indian shareholder.

Considering the above, capital investments may not always be the optimum method for funding as foreign shareholders may not want to lock in huge capital for inordinately long periods. Further, repatriation of profits from such subsidiaries has certain restrictions under applicable law and is coupled with attendant tax leakages.

External commercial borrowings. A foreign shareholder can also fund through debt. However, third party loans are costly in India compared to borrowing overseas and are not easily available. But there are some viable debt alternatives which foreign parents can explore to finance their Indian subsidiaries, earn some interest and recover the money in due course.

Under the applicable law, an Indian subsidiary can raise debt from its foreign shareholder by way of external commercial borrowings (ECBs). In this context, a direct foreign equity holder with minimum 25% direct equity holding in the Indian subsidiary, an indirect equity holder with minimum indirect equity holding of 51% in the Indian subsidiary, or a group company with a common overseas parent, is permitted to provide an ECB to its Indian affiliate. The borrowings may fall under any of the three categories – either with or without approval of the central bank (RBI) – depending on the business of the Indian subsidiary, the end use of the ECB proceeds, the currency of borrowing and the average tenure of the ECB. Further, the applicable law stipulates that the Indian subsidiary is to maintain a debt equity ratio of 7:1. However, this ratio is not applicable if the total of all ECBs raised by an Indian entity is up to US$5 million or equivalent.

While the applicable law requires RBI approval for ECBs not satisfying certain conditions set out under the relevant regulation, such approval may be time consuming and may not meet the immediate needs of the Indian subsidiary.

Masala bonds. In September 2015, RBI permitted Indian corporates to issue rupee-denominated bonds (nicknamed as Masala bonds) under the ECB regime. The Masala bonds regime is more liberal than the ECB one. The pool of lenders is increased and any person from a Financial Action Task Force compliant jurisdiction can subscribe to such bonds. The requirement of holding a minimum equity percentage as per the ECB guidelines for foreign equity holders is not applicable, and an equity holder with less than 25% equity in the Indian company would also be eligible to subscribe to such bonds.

Non-convertible debentures. Another avenue available is the corporate debt market. A group company of a foreign shareholder can register as a foreign portfolio investor (FPI) under the Securities and Exchange Board of India’s prescribed regulations. The registration process is straightforward and typically an FPI registration can be completed within a few weeks. An FPI is permitted to invest in listed or unlisted non-convertible debentures (NCDs). The minimum residual maturity of such NCD’s should be 1-year subject to certain conditions set out under the applicable law. The NCDs can be secured or unsecured. The issuer has considerable flexibility on how to use the proceeds and the amount of interest or redemption premium to be paid on such instruments.

This route has been used amply, especially by foreign funds, to finance Indian portfolio companies. This option provides more flexibility than the ECB option in raising funds from foreign shareholders. However, there would be certain disclosure requirements that need to be considered.

By way of business arrangements. Today a good number of Indian subsidiaries, commonly in the IT sector, have been set up to provide services only to its foreign shareholder based in a jurisdiction outside India. These Indian subsidiaries enter into service arrangements with its foreign shareholder and receive funds as part of their business income for providing services to such shareholder. The applicable law does not stipulate a cap on funds received from a foreign shareholder as part of a service contract between the Indian subsidiary and the foreign shareholder. Therefore a foreign shareholder can raise funds for his subsidiary through such an option. However, certain tax implications, such as transfer pricing, may need to be examined.