Abstract
On January 2025, the Reserve Bank of India ("RBI") published revised Master Direction on Foreign Investment in India ("Master Directions"), issued in a key move for India-bound mergers and acquisitions (M&A) transactions. This Master Direction clarifies and explicitly permits deferred consideration and indemnity payment mechanisms in mergers and acquisitions ("M&A") involving Foreign-Owned and Controlled Companies ("FOCCs"). Under the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 ("NDI Rules"), this development clarifies long-standing regulatory uncertainty around FOCC deal structures. It aligns FOCCs with direct foreign investors by allowing deferred payments, escrow accounts, and indemnity holdbacks subject to specified conditions. With an eye towards compliant cross-border M&A transactions involving FOCCs especially private equity and venture capital-backed Indian subsidiaries this article explores the conceptual framework, regulatory evolution, key conditions, and pragmatic implications for structuring.
Introduction: Deferred Consideration and Its Commercial Significance
Common instruments to control valuation gaps, share risks, and encourage post-closing performance in cross-border M&A are deferred consideration agreements. Earn-outs based on future benchmarks or financial targets as well as post-closing price changes depending on operational results or financial due diligence comprise deferred consideration mechanisms. These mechanisms help buyers and sellers to reduce uncertainty, align interests beyond the closing date, and bridge variances in valuation expectations.
In the Indian regulatory setting, particularly in cases of foreign ownership, such deferred payment methods have to navigate complex foreign exchange restrictions. Until recently, it was unclear whether the Indian subsidiaries of foreign companies (FOCCs) acquiring shares of Indian companies from Indian sellers can take advantage of this deferred provision as the NDI Rules did not explicitly mentioned about its applicability on the FOCCs. RBI's Master Direction has provided light to the grey area and resolved the long pending ambiguity.
| Status Pre Master Directions | Status Post Master Directions |
|---|---|
| Although the Rule 9 (6) of the NDI Rules allowed non-residents to defer up to 25% of the consideration for a maximum of 18 months post-closing, there was no clear reference of whether this flexibility applied to FOCCs. Strict interpretations and limited deal structuring emerged from this regulatory silence. |
The Master Direction has filed the gap on Foreign Investment in India. It clearly acknowledges that FOCCs can now structure downstream investments using tools including:
It is also important that these provisions are explicitly mentioned in the share purchase or shareholder agreements and complies with the pricing guidelines specified under Schedule I of the NDI Rules. |
To understand Rule 9 (6) of the NDI Rules, lets consider the following illustrations-
Scenario 1: A non-resident Buyer wishes to acquire 25% shares of an Indian company from a resident Seller for INR 100 crore.
Explanation: The Share Purchase Agreement is executed on 1st July 2025. If the Parties wish to defer the consideration, the consideration can be structured in the following manner-
INR 75 crore shall be paid upfront while INR 25 crore (deferred portion) shall be paid within 18 months from the date of execution of the transfer agreement i.e. all deferred amounts must be paid or settled by 31st December 2026.
Scenario 2: A non-resident Buyer wishes to acquire 25% shares of an Indian company from a resident Seller for INR 100 crore. The Parties agree to pay the entire consideration amount upfront however; the Buyer wants indemnity clause.
Explanation: The Share Purchase Agreement is executed on 1st July 2025. The Seller can indemnify the buyer up to 25% of the total consideration till 18 months i.e. till 31 December 2026.
Scenario 3: A non-resident Buyer agrees to acquire 25% of the shares of an Indian company from a resident Seller for a total consideration of INR 120 crore. 80% of the consideration is paid upfront, while the remaining 20% is contractually deferred and payable within six months. In addition, indemnity obligations are agreed.
Explanation: The Share Purchase Agreement is executed on 1st July 2025. On the execution date, the Buyer pays INR 96 crore (80% of INR 120 crore) to the Seller. The remaining INR 24 crore (20%) is scheduled to be paid on 1st January 2026 as deferred consideration. In addition to this, the agreement provides that INR 30 crore (25% of the total consideration) shall be subject to indemnity protections, and such indemnity rights will commence only after full consideration has been paid i.e. start date for Indemnity Period will be 1st January 2026 (date of final payment) and the end date for Indemnity Period will be 30th June 2027 (18 months from the final payment date).
These mechanisms have enhanced the flexibility available for structuring foreign investments in India, however, simultaneously they have created some grey areas. One such grey area pertains to the indemnity provisions which are discussed below.
Conundrum attached with Indemnity
Does this 18-month timeline and 25% cap stipulated under Rule 9 (6) (iii) of the NDI Rules apply to all indemnities (including for fraud, statutory breaches, and representations & warranties), or only to price-linked indemnities?
While a black and white interpretation of the provision is yet to be provided by the regulator but in our assessment it is important to note that historically, indemnities in M&A deals are governed by the following aspects-
- Limitation periods under statutory law (e.g., income tax, GST, labour, environmental);
- Fraud and misrepresentation exposure, which may survive beyond closing; and
- Contractual timelines running for 3–7 years depending on the nature of the claim
Rule 9(6)(iii) does not intend to override all forms of indemnity. Rather, it regulates only those indemnity claims that are structured as substitutes for deferred consideration, i.e., post-paid indemnity without escrow or holdback. This distinction is important because if every indemnity was limited to 18 months and 25%, buyers would be severely disadvantaged, especially in complex transactions with long-tail liabilities.
It is also crucial to understand that the RBI's regulatory mandate, anchored under the Foreign Exchange Management Act ("FEMA") is fundamentally monetary and capital account-focused, dealing with inflow and outflow of foreign exchange, not with broader contract enforcement or post-closing commercial liability frameworks. Moreover, it is important to understand that no financial sector regulator, including the RBI, would be expected to or presumed to issue a provision that tacitly legitimizes evasion of fraud liability or encourages bad-faith conduct.
Regulatory Conditions and Practical Limits
The RBI's easing does not provide a blanket license and the following key limitations would be applicable:
- Amount and Timeline: According to the RBI and Rule 9(6) of the NDI Rules, not more than 25% of the consideration can be deferred and it must be paid within 18 months of the execution of the share transfer agreement.
- Pricing Compliance: Pricing guidelines are
sacrosanct and should be followed even in case of deferred
consideration. The NDI Rules stipulates pricing guidelines for
issue or transfer of equity instruments. For instance:
- In case of a transfer from a resident to a non-resident, the price must not be less than the fair market value.
- In case of transfer from a non-resident to a resident, the price must not be more than the fair market value.
- For listed companies, SEBI guidelines on pricing apply.
- No Set-Offs: NDI Rules forbid set-offs of deferred payments against unrelated liabilities.
- Listed Companies Excluded: Deferred payment systems are not permissible for listed public companies because Section 2(i) of the Securities Contracts (Regulation) Act, 1956 requires spot delivery contracts.
- Primary Transactions Excluded: Deferred consideration is only allowed in secondary share transfers, not for subscription to new shares (Primary Transactions).
Scope of Deferred Consideration: Transfers vs Subscriptions
With up to 25% of the consideration deferred for a maximum of 18 months, Rule 9(6) of the NDI Rules specifically addresses transfers of equity instruments that is, secondary sale between residents and non-residents. However there is no corresponding provision allowing deferment in primary transactions wherein an Indian company issues fresh shares to a foreign investor.
The rationale is regulatory certainty, RBI mandates the complete consideration to be received upfront for the allocation to be valid in share subscriptions as monitored through Form FC-GPR. In these situations, deferred payments would create uncertainty about valuation, ownership, and timing of foreign exchange inflows, so influencing compliance with sectoral caps, pricing guidelines, and anti-money laundering policies.
Conclusion
The 2025 RBI clarification is a welcome reform, offering foreign investors the confidence to deploy complex but commercially common deal structures in India. While it resolves past ambiguities, it simultaneously reaffirms the need for meticulous compliance with underlying FEMA and NDI rules.
India's FDI regime continues to evolve towards greater transparency and global alignment but investors and counsel must tread carefully, ensuring that the newfound flexibility is exercised within the prescribed guardrails. For legal practitioners, this development presents an opportunity to innovate while ensuring full regulatory conformity.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
