RBI's recent amendment permitting deferment of purchase
consideration and relaxing escrow requirements in cross border
share purchase transactions is a positive step towards promoting
the ease of doing business in India and encouraging foreign
investment into India.
The Reserve Bank of India (RBI), in a bid to
rationalize the existing regime under the Foreign Exchange
Management Act, 1999, has recently relaxed the restriction on the
payment of deferred consideration in share transfer transactions
between an Indian party and a non-resident. This amendment has come
into effect from 20 May 2016.
Prior to the amendment, consideration in a transaction for the
purchase of shares between a resident and a non-resident party was
required to be paid up-front and deferment of any portion of the
total consideration required the prior approval of the RBI.
Further, the escrow mechanism for payment of share purchase
consideration was permitted under the automatic route for a maximum
period of six months, subject to various restrictions.
The amendment provides that in a transaction involving purchase
of shares of an Indian company by a non-resident buyer from a
resident seller, or vice versa, the consideration may be paid on a
deferred basis subject to the following conditions:
The deferred component of consideration must not exceed 25% of
the total consideration.
Such deferred payment must be made within a maximum period of
18 months from the date of the share transfer agreement.
The amendment provides that such deferred consideration may be
structured either through an escrow arrangement or through a seller
indemnity (in a case where the entire purchase consideration has
been paid up-front).
Any deferred consideration mechanism which does not meet the
restrictions as to the amount (i.e. up to 25% of the total
consideration) or duration (i.e. no longer than 18 months) would
continue to require the approval of the RBI. It should be noted
that the 18 month period commences from the date of the share
transfer agreement and not from the date of closing the transaction
and therefore effectively, the deferred period for payment of
consideration is shorter. In cases where the full consideration is
paid up-front and a seller indemnity is obtained, the maximum
period of the indemnity would be 18 months from the date of closing
Impact of the Amendment
This change in the regulatory position will allow greater
flexibility for structuring purchase consideration in share
transfer transactions as a mechanism for risk-allocation between
the parties. This would also facilitate post-closing purchase price
adjustments in M&A transactions, which, in general, are
commercially intended to insulate the buyer against any significant
changes in the financial condition of the target in the period
between execution and closing. Post-closing purchase price
adjustments are usually based upon a verification of the net asset
value and working capital of the target subsequent to closing,
which may result in either a refund of part of the consideration
from the seller to the buyer (downward adjustment) or the payment
of additional consideration by the buyer to the seller (upward
adjustment). Pursuant to this amendment, such price adjustments may
be possible in the automatic route subject to the limits on amount
and duration for deferred consideration.
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guide to the subject matter. Specialist advice should be sought
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The Ministry of Corporate Affairs notified on June 5, 2015 that certain provisions of the Companies Act, 2013 shall not apply to private limited companies or shall apply with such exceptions or modifications as directed in the notification.
Whilst trade and barter have existed since early times, the modern practice of forming business relationships through the means of contract has come into existence only since the industrial revolution in the West.
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