India: Cutting A Long Story Short… FMO's Structured Investment Transaction Affirmed

High-level takeaways

  • In a positive decision for foreign investment into India, the Supreme Court in a recent decision (IDBI Trusteeship Services Ltd v Hubtown Ltd) affirmed the validity of a structured equity transaction secured on the basis of debt obligations and guarantees of Indian obligors.
  • The Bombay High Court had previously held that the transaction in question, which was originated on the basis of convertible instruments issued to Nederland se Financierings Maatschappiji Voor Ontwikkelingslandeo N.V. (FMO), amounted to a "colourable transaction", and was designed to circumvent Indian exchange control regulations. On the basis that FMO's investment in convertible instruments was in compliance with exchange control norms, the Supreme Court ordered the defaulting Indian obligor to deposit INR 4.2 billion of guaranteed principal to protect FMO's interests.
  • The decision is likely to boost confidence of foreign investors on the enforceability of their rights in India, as well as discourage Indian issuers and obligors from trying to renege investment contracts by misusing the court process. More importantly, the decision provides significant comfort to foreign investors who wish to rely on appropriate transaction structuring for downside protection.


  1. FMO subscribed to equity securities in Vinca Developer Private Limited (HoldCo) comprising 10% of HoldCo's equity capital and convertible debentures, which in aggregate and upon conversion of the convertible debentures would entitle FMO to a 99% shareholding interest in the HoldCo. The remaining equity in the HoldCo was held by Hubtown Limited (Sponsor).
  2. Proceeds from the FMO investment were utilised by the HoldCo to subscribe to optionally partially convertible debentures (OPCDs) of its subsidiaries, who were engaged in real estate development. The full redemption of such OPCDs was guaranteed by the Sponsor1.
  3. IDBI Trusteeship Services Ltd (IDBI Trustee) was the debenture trustee of these OPCDs. Upon failure of the subsidiaries to redeem the OPCDs, IDBI Trustee (on behalf of the HoldCo) invoked the guarantee provided by the Sponsor.

Sponsor arguments to resist the guarantee payment

  1. In order to avoid its guarantee payment obligations, the Sponsor argued that Indian exchange control regulations only permit offshore investors to make equity investments without any assured return, and since the investment by FMO was structured to circumvent this requirement, it was illegal.
  2. The Sponsor also argued that since it raised defences which require determination at a trial, full freedom be granted to the Sponsor to unconditionally pursue its defence – pending which it was not liable to pay over the guaranteed amounts.

Key Supreme Court rulings / observations

  1. While the Supreme Court did not provide final judgment on the merits of the dispute (which would be adjudicated at trial before the Bombay High Court), it was of the view that:

    1. the guarantee was between two Indian entities - IDBI Trustee and the Sponsor – and therefore, the guarantee and its invocation was valid; and
    2. the transaction structure, pursuant to which: (i) the HoldCo would be entitled to receive funds from the subsidiaries upon OPCD redemption; and (ii) FMO would be entitled to 99% ownership of the HoldCo, did not prima facie violate Indian exchange control regulations (even though FMO could have become a 99% shareholder of the HoldCo at the relevant time).
  2. Based on the above, the Supreme Court held that the defence raised by the Sponsor is at best 'plausible but improbable', and hence to protect IDBI Trustee (acting on behalf of the HoldCo), the Supreme Court required the Sponsor to deposit the principal sum of, or provide security of, INR 4.18 billion in the Bombay High Court, in case the Sponsor intended to contest its obligations.

Some implications for existing and going forward structured transactions.....

  1. Apart from the obvious benefits to structured private equity transactions, where underlying cash flows of subsidiaries (coupled with appropriate sponsor security) can once again be evaluated for downside protection in equity transactions, the decision should provide much more legal certainty in relation to:

    1. Indian owned and controlled (IOCC) deal structures, with downstream investments;
    2. the usage of synthetic instruments and deal structures e.g. debentures which mimic equity like returns; and
    3. deal structures where foreign investors were hesitant to go with a literal interpretation of exchange control regulations, on the risk assessment that their transaction structures may be at cross-purposes with policy objectives. For instance, this reinforces the legitimacy of targeted foreign investments via onshore alternative investment funds (AIFs), as the AIFs' deployment of funds will not be subject to any restrictions which otherwise apply to foreign investors (so long as the sponsor / investment manager remains Indian owned and controlled).
  2. Finally, the requirement imposed on the Sponsor to deposit the principal amount before disputing its guarantee obligation, should act as a disincentive for obligors who are considering using the Indian legal process to circumvent their payment obligations to foreign investors.


1 Current regulations prohibit offshore entities from subscribing to OPCDs, but there is no corresponding restriction on Indian owned and controlled companies.

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at

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