The RBI master direction of January 2025 clarifies that if a certain transaction structure is permitted for direct foreign investments, the same structure will also be permitted for downstream (indirect) investments. With the change introduced, a downstream investment can now also be structured as a stock swap transaction, and need not necessarily be an all-cash transaction. A downstream investment can now have provisions of deferred consideration of upto 25% of the total consideration with the deferred payment permitted up to 18 months from the date of the transfer agreement, or settled via an escrow mechanism of up to 18 months as above. Further, indemnity payments up to 25% and the 18-month period will also be permitted provided the total consideration has been paid. The overarching condition is that in all cases, the total consideration finally paid to the Indian party should be compliant with applicable pricing guidelines. One of the restrictions that remain is that downstream investments cannot be made by a foreign owned and controlled company (FOCC) in India by borrowing in the domestic Indian market.
Since these structures have been permitted for direct foreign investments, it seemed jurisprudentially logical that the conditions and provisions should also apply to indirect foreign investments – which comprise of investments by FOCCs.
Although the intent of the downstream regulations was to ensure that if a certain restriction was imposed on a foreign entity/ party in connection with a transaction with an Indian party, the foreign entity/ party should not side-step the regulation by engaging in the same transaction through its subsidiary/ FOCC in India ('quando aliquid prohibetur ex directo, prohibetur et per obliquum', i.e. 'what cannot be done directly, should not be done indirectly'), the interpretation of the prior regulations and the actions of the authorities caused a lot of anxiety and confusion amongst the various stakeholders, but was accepted as fait accompli. Several transactions which involved such commercial considerations, had to be structured with the foreign entities being part of the transaction although they had Indian subsidiaries (FOCCs) in place.
The RBI master direction now also clarifies that the tenor of compulsorily convertible debentures or compulsorily convertible preference shares can be modified, provided the price at the time of conversion is not lower than the price/ conversion formula determined at the time of the issue of such instruments.
In cases of rights issues, where the pre-emptive rights are not exercised by the shareholders or declined by certain shareholders, the Board is permitted to dispose of the shares in a manner that is not disadvantageous to the shareholders of the company, but ensuring compliance with pricing norms.
All these changes in response to stakeholders' demand for a level playing field for downstream investments seem well positioned to provide much-needed clarity and ease in the transactional space.
The letter of the law, now, seems to confirm the spirit of law, and stakeholders should feel relieved.
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.
