Acquisition/Investment in Indian Companies by Foreign & Domestic Investors – Six Steps Mantra. Joint ventures, strategic alliances, and acquisitions are the flavors of the day that permit rapid growth for targeted groups to have fast inorganic growth and enlargement in new sectors. However, before engaging in a joint undertaking courting or acquisition of a working Indian employer (“Investee business enterprise”), either through the way of the private placement or secondary marketplace or subscription of significant fairness share capital, it’s miles 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 are beneficial in evaluating the Investee employer’s track report in compliance with Indian laws, statutory duties, and relevant regulations. The due diligence workout (which usually takes between three (3) to four (four) weeks, depending on the availability of documents) now not most effectively permits the Investor to evaluate capability liabilities, evaluate unknown and potential disclosed or undisclosed weaknesses; however, additionally enables the Investor to assess the feasibility and viability of the proposed acquisition and rationalize company valuation. If required, the 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:
If any, Preliminary troubles arising under the conduct of the Due Diligence exercise might need to be resolved, and a choice is made whether or not to proceed with the purchase. For instance, whether or not a change in manipulating could affect 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 that could affect the transaction is critical. If the Investor is a non-resident, foreign direct funding (“FDI”) recommendations may even want to be assessed. FDI is presently unregulated, either via acquisition/transfer of issued equity capital or new subscription to the fairness capital of Investee business enterprise in maximum sectors. Most sectors, barring a few, do not require the FDI approval from the Foreign Investment Promotion Board.
However, the rate at which the transfer takes place will want to conform to the pricing recommendations prescribed by the Reserve Bank of India (“RBI”), i.e., the honest valuation of stocks has been carried out through a chartered accountant in accordance with the prescribed guidelines, and the charge consistent with the proportion arrived at has been certified by using a chartered accountant. The balance of attention in recognizing the stocks purchased through the investor must be remitted to India legally via the banks to deal in forex.
In the case of transferring stocks to the Investor, the transaction could be problematic due to the levy of stamp responsibility starting from 0.25% to 0.75% of the value of the shares transferred and payable according to the applicable rates prescribed by the respective State in which the Investee business enterprise is registered. The transferor usually bears the stamp responsibility for switching stocks in the absence of a contract to the opposite.
Alternatively, the Investor can not forget to enroll in the equity proportion capital of the Investee Company using a preferential allotment and avoid the stamp duty payable on the transfer of stocks. Capital profits arising from a transfer of shares (on the occasion of acquisition instead of the trouble of clean fairness) might attract tax inside the hands 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 in which such transactions could be closed.
