The last few months have seen a number of developments in the foreign investment regime for India, and for transaction in respect of Indian listed companies, including the introduction of the new Indian takeover code. We set out below a summary of some of their more salient aspects.
FDI Policy Revised
The Indian Department of Industrial Policy and Promotion (DIPP) had previously issued the fourth edition of the Consolidated Foreign Direct Investment (FDI) Policy (the “Policy”) or Circular 2 of 2011. The Policy has now entered into effect and includes a number of significant changes, including:
The consolidation of recent changes such as:
- allowing FDI in Limited Liability Partnerships (subject to specified conditions),
- allowing AD Category – I banks (AD Banks) to open and maintain non-interest bearing escrow accounts in Indian rupees without prior approval of the Reserve Bank of India,
- permitting promoters of Indian companies that have issued external commercial borrowing to pledge the shares of the borrowing company/its associated resident companies to secure such borrowing – which should facilitate foreign lending to Indian companies;
- a clarification that whenever there is a requirement of minimum capitalisation, “share premium” would be included within the meaning of minimum capitalisation when received by the company against issue of shares.
Changes to the sectoral policy including:
- construction and development activities in the education and old age/retirement sectors,
- basic and applied R&D on biotechnology pharmaceutical/life sciences included within the scope of “industrial activity” under industrial parks for which 100% FDI under automatic route is allowed, and
- 26% foreign investment allowed in terrestrial broadcasting/FM radio as compared with the earlier 20%
Some of the new wording creates the potential for uncertainty, and advice should therefore be sought on its application to specific transactions. It may be appropriate to seek clarification from DIPP in some cases.
New Takeover Code
The Securities and Exchange Board of India (Substantial Acquisitions of Shares and Takeovers) Regulations 2011 (the “New Code”) has now been notified by the Securities and Exchange Board of India and is in force.
The New Code is based on the recommendations of the Takeover Regulations Advisory Committee. Some of the significant changes that the New Takeover Code introduced include:
- Threshold limit: Acquisitions of 25% or more in the target Indian listed company (the “Target”) will now trigger the open offer requirements of the Takeover Code.
- Triggered offer size: Open offers made pursuant to a substantial acquisition of the Target would have to be for [at least] 26% of the Target’s share capital.
- Voluntary offers: Offers that are not triggered by an acquisition are to be made for a minimum of 10% of the total share capital of the company but are capped at 75%.
- Creeping up to 75%: 5% consolidation of shareholding in a financial year (on gross basis) is to be allowed up to 75% for shareholders holding 25%.
- Effecting the agreement: Execution of the terms of the agreement triggering the open offer will be allowed after expiry of 21 working days, if 100% of the consideration payable pursuant to the offer is deposited in escrow.
- Timeline: A short public announcement is to be made on date of entering into agreement. The overall timeline would be substantially reduced.
- Competitive offers: Competitive offers have to be made within 15 days of the detailed public statement.
- Change in Control: The only route now available for change in management and control is through an open offer to the shareholders of the Target.
- Exemptions relating to rights issues: Exemptions are provided from open offer requirements in case of acquisition of shares of the Target upon a shareholder subscribing to shares up to their entitlement in a rights issue.
- Mode of payment: Clarity has been provided on the use of securities as an alternate mode of payment of consideration.
- Indirect acquisitions: Separate announcement and pricing requirements have been specified for indirect acquisitions (but note, in certain circumstances, an indirect acquisition can be regarded as a direct acquisition).
- Non-compete fee: Payment of a non-compete fee to promoters is now disallowed.
- Target Company obligations: The provision of a reasoned recommendation on the open offer to the Targets’ shareholders by a committee of independent directors is now mandatory.
Delisting Offer: No voluntary delisting offer is permissible for 12 months from date of open offer pursuant to which maximum permissible non-public shareholding was breached.
SEBI (Issue of Capital and Disclosure Requirements) (Second Amendment) Regulations 2009
The Securities and Exchange Board of India (SEBI) pursuant to the notification dated 23 September 2011 has issued the SEBI (Issue of Capital and Disclosure Requirements) (Second Amendment) Regulations, 2009 (Amendment).
The Amendment has introduced a number of changes to the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (ICDR) that include:
The deletion to the provisions relating to a 10% minimum dilution of the paid up share capital to the public.
- Changes to the eligibility criteria.
- The introduction of a legal framework allowing for a rights issue of Indian Depository Receipts (IDR).
- Allowing an issuer company to issue IDRs through rights basis on a fast track mechanism.
- Changes to the requirements for disclosures in an abridged prospectus.
The introduction of disclosures to be made in the offer document and the abridged offer document in the case of a rights issue of IDRs.
The changes to the FDI Policy do show a willingness of the Indian Government to seek to further open up their economy to international investors.
FDI in single brand retail trading
Separately, following months of speculation, the DIPP has now permitted 100% FDI in single brand retail trading, subject to conditions including that:
- the relevant products should be of a “single brand”, and sold under the same brand internationally;
- the foreign investor should be the owner of the brand; and
- where the investment exceeds 51%, compliance with mandatory Indian sourcing requirements.
This is a significant change to the investment regime for the Indian retail sector, which until now has been confined to wholesale cash and carry distribution in India, but is subject to strict conditions.
We are very grateful to Khaitan & Co, the leading Indian law firm with offices in Mumbai, New Delhi, Kolkata and Bangalore, for allowing us to use their newsletters to prepare this briefing note.
Khaitan & Co have recently produced the chapter for India in the 2011 international guide to mergers and acquisitions published by Getting the Deal Through. Mergers and Acquisitions 2011 is available from Getting the Deal Through.