Acquisition/Investment in Indian Companies by way of Foreign & Domestic Investors – Six Steps Mantra
Joint ventures, strategic alliances, and acquisitions are the flavors of the day that permits rapid growth targeted groups to have fast inorganic growth and enlargement in new sectors. However, prior to engaging in a joint undertaking courting or acquisition of an working Indian employer (“Investee business enterprise”), either through way of private placement, or secondary marketplace, or subscription of great fairness share capital, it’s miles really helpful for the Investor to cautiously and stringently undertake the following six-step mantra to keep away from future surprises and heartburns:
(i) Due Diligence/Operations Audit: Extensive prison and financial due diligence of the Investee employer is beneficial to evaluate Investee employer’s track report in compliance with Indian laws, statutory duties and regulations relevant to it. The due diligence workout (which usually takes among three (3) to four (four) weeks relying on availability of documents) now not most effective permits the Investor to evaluate capability liabilities, evaluate unknown and potential, disclosed or undisclosed liabilities however additionally enables the Investor to evaluate the feasibility and viability of the proposed acquisition and rationalize company valuation. If required, Investor can demand the introduction of an escrow account for the safe deposit of part of the acquisition cost, parked for an agreed period to mitigate against any future liabilities of the Investee company.
(ii) Resolution of Preliminary Issues: Preliminary troubles, if any, arising pursuant to the conduct of the Due Diligence exercising might need to be resolved and a choice is taken whether or no longer to proceed with the purchase. For instance, whether or not a change of manipulating could have an effect on the capacity of the Investee agency to carry on its enterprise operations below the cutting-edge regulatory framework and the approvals and licenses required. Unresolved issues that are not deadly to the acquisition can be diagnosed and negotiated.
(iii) Regulatory/Pricing/Tax Issues: Identification of regulatory and tax issues which could affect the transaction is critical. In case the Investor is a non-resident, foreign direct funding (“FDI”) recommendations may even want to be assessed.
FDI either via manner of acquisition/transfer of issued equity capital or fresh subscription to the fairness capital of Investee business enterprise in maximum sectors is presently unregulated and most sectors barring a few do now not require the FDI approval from the Foreign Investment Promotion Board. However, the rate at which the transfer takes vicinity will want to conform to the pricing recommendations prescribed by means of the Reserve Bank of India (“RBI”), i.E., the honest valuation of stocks have been carried out through a chartered accountant as in step with the prescribed hints; and the charge consistent with proportion arrived at has been certified by using a chartered accountant. The proportion attention in recognition of the stocks purchased through Investor will need to be remitted to India via the banks legal to deal in forex.
In case of transfer of stocks to the Investor the transaction could be the problem to the levy of stamp responsibility starting from 0.25% to 0.75% of the value of the shares transferred and payable according to with the relevant rates prescribed via the respective State in which is the Investee business enterprise is registered. The transferor usually bears the stamp responsibility for the switch of stocks inside the absence of a contract to the opposite. Alternatively, Investor can do not forget to enroll in the equity proportion capital of the Investee Company by means of a manner of preferential allotment and keep away from the stamp duty payable on the transfer of stocks.
Capital profits arising from a transfer of shares (in the occasion of an acquisition instead of an trouble of clean fairness) might attract tax inside the palms of the vendor, i.E., the present shareholder of the Investee Company.
(iv) Contract Documentation Preparation: Upon successful resolution of initial troubles and an affirmative choice to continue with the purchase, events might need to identify and prepare commercial documentation to document their expertise of the transaction and the manner wherein such transactions could be closed.