The Corporate & Commercial Law Society Blog, HNLU

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  • Navigating RBI’s Revised Framework for Downstream Investments by FOCCs

    Navigating RBI’s Revised Framework for Downstream Investments by FOCCs

    BY PURNIMA RATHI, FOURTH-YEAR STUDENT AT SYBIOSIS LAW SCHOOL, PUNE

    On January 20, 2025, the Reserve Bank of India (‘RBI’) released a comprehensive revision of the Master Direction on Foreign Investment in India (‘Master Direction’). The update represents a landmark regulatory revision, particularly for Foreign Owned and/or Controlled Companies (‘FOCCs’) pursuing downstream investments. The updated Master Direction has attempted to resolve a number of ambiguities, align regulatory treatment with the Consolidated Foreign Direct Investment (‘FDI’) Policy, 2020 and the Foreign Exchange (Non- Debt_ Instruments) Rules, 2019 (‘NDI Rules’) and thus, stream lining the compliance requirements for both investors and companies.

    The blog shall analyse key regulatory changes made through the Master Direction and its effects on downstream investments made by FOCCs. This analysis is made by comparing the recent update to the earlier versions of the Master Direction.

    WHAT ARE FOCCs AND DOWNSTREAM INVESTMENTS ?

    To understand the significance of the Master Direction, it is first necessary to understand the meaning and the context in which FOCCs and downstream investments operate. A FOCC is defined in the Foreign Exchange Management Act, 1999 (‘FEMA’) and the NDI Rules as an Indian entity that is:

    •  Owned by non-resident entities (more than 50% shareholding); or

    •  Controlled by non-residents (in the sense of a non-resident entity or person is empowered to appoint a majority of directors or is empowered to influence decisions which are deemed to be strategic business decisions).

    Downstream investment is defined collectively, in this context, as an investment in capital instruments (equity shares, compulsorily convertible preference shares, etc.) made by said FOCC in another Indian entity. It is essentially an investment made by a company already partly or wholly owned by foreign investors, into another Indian entity.

    Analysis of Key Changes

    The updated Master Direction has important amendments which are aimed at reducing compliance complexities, providing legal clarity, and allowing flexibility with transaction structures. Analysed below are the key revisions from the Master Direction:

    1. Consistency with General FDI Norms

    The most important change is the explicit consistency of downstream investments by FOCCs with general FDI norms. Downstream investments are treated as a different investment category and require separate compliance obligations.  However, now it requires that FOCCs must comply with the same entry routes (automatic or government), sectoral restrictions, price restrictions, and reporting requirements as any direct foreign investment investor. The guiding principle of “what cannot be done directly, shall not be done indirectly” has the intention to place downstream investments on an equal level with FDI.

    This is particularly advantageous in sectors where the automatic route is available and removes unnecessary bureaucratic hurdles. For example, if a FOCC is investing in an Indian startup that provides services to the technology sector, they may now invest and treat it the same as a direct foreign investment provided that the sector cap and conditions are adhered to.

    2. Share Swaps Approved

    Another important change is the recognition of share swap transactions by FOCCs. Before the recent change, it was unclear whether share swaps were permitted for FOCCs at all, and companies tended to either seek informal clarifications or err on the side of caution.

    The updated direction explicitly provides that FOCCs can issue or acquire shares in lieu of shares of another company (either Indian or foreign) subject to pricing guidelines and sectoral limitations. This is an important facilitative measure for cross-border mergers, joint ventures, and acquisition deals where share swaps are the predominant form of consideration.

    This reform enhances transactional flexibility, encourages capital growth and will reduce friction in structuring deals between Indian FOCCs and foreign entities, thereby promoting greater integration with global capital market. 

    3. Permissibility of Deferred Consideration

    The RBI now formally recognizes deferred consideration structures such as milestone-triggered payments, escrows, or holdbacks. However, they are still governed by the ’18-25 Rule’, which allows 25% of total consideration to be deferred, which must be paid within 18 months of execution of the agreement. This represents a pragmatic acceptance of the commercial acknowledgment that not all transactions are settled upon completion.

    RBI shall have to give additional clarifications as the Master Direction still does not specify the extent to which provisions are applicable to downstream investments in comparison to the FDIs.

    4. Limitations on the Utilisation of Domestic Borrowings

    In an effort to safeguard the integrity of foreign investment channels and to deter round-tripping, or indirect foreign investment through Indian funds, the RBI continues to restrict FOCCs from utilising domestic borrowings for downstream investment. This implies that FOCCs can only downstream invest with foreign funds introduced through equity investments or through internal accruals. The restriction aims that downstream investments are made through genuine foreign capital introduced in the country through abroad, rather than through domestic borrowings.

    Practically this means that if the FOCC receives a USD 5 million injection from the parent organization abroad, then they can utilize such funds for downstream investment, but not if they were to borrow the same amount in INR through a loan from an Indian financial institution. This maintains investor confidence and enhances transparency in capital flows.

    5. Modified Pricing Guidelines for Transactions

    The revised framework reiterated pricing guidelines in accordance with the different types of company:

    •  For listed companies: The pricing must comply with the Securities and Exchange Board of India (‘SEBI’) guidelines,

    •  By unlisted companies: The price cannot be lower than the fair market value determined by internationally accepted pricing methodologies.

    Additionally, in all rights issues involving non-residents, if the allotment is greater than the investor’s allotted entitlement, price has to comply with these guidelines. In this case, the rights issue would protect minority shareholders and mitigate the dilution that would occur by no listings from unlisted companies.

    6. Reporting and Compliance via Form DI

    An excellent innovation is the new compliance requirement of filing on Form DI within 30 days of the date an Indian company becomes a FOCC or makes a downstream investment. This will assist the RBI in maintaining regulatory visibility and better tracking of foreign investment in India. Companies will have to implement stricter internal compliance mechanisms and timely reporting as failure to do so could result in penalties under FEMA. The RBI’s emphasis on transparency reflects a continuing trend toward digitization and live reporting of capital flows by Indian regulators.

    7. Clearer Application of the Reporting Forms (FC-GPR, FC-TRS, DI)

    In addition, the RBI has further clarified the documents to use the following forms:

    • Form FC-GPR: is for reporting the issuance of shares by an Indian entity to a FOCC. • Form FC-TRS: is for any transfer of shares involving FOCC as the non-resident and between residents and non-residents.

    • Form DI: is for downstream investments made by FOCC into any other Indian entity.

    This clarity will help eliminate confusion around these procedures and synchronize the reporting regime of the RBI with the reporting systems of the Ministry of Corporate Affairs (‘MCA’) and SEBI. FOCC should implement strong internal controls to monitor and track when these filings will become due.

    8. Classification of FOCCs based on Share Movement

    The new regulations will also provide clarity on how the status of a FOCC will influence a regulatory classification. Specifically:

    •  if a FOCC receives shares from an Indian entity, it will be treated as a ‘Person Resident Outside India’; and

    •  if it transfers shares to an Indian entity, it will be deemed to be domestic in nature but needs to comply with the repatriation norms.

    These classifications have an important bearing on the route and pricing of transactions especially in exits or complex internal restructuring transactions. Through these classifications, RBI intends to clarify the confusion from mischaracterizing transactions and reducing risk for the investors in the event of any enforcement action.

    Conclusion

    The amendments to the Master Direction represent a measured and thoughtful change in the foreign investment regulatory framework in India. The RBI has set the tone in favour of enabling policy predictability and investor confidence by clarifying FOCC structures’ downstream investment norms to be consistent with FDI, allowing for more sophisticated structures like share-swap transactions and deferred consideration, and imposing effective operational compliance requirements. Going forward, these refinements have set the foundation for deeper capital integration and increased investor trust in India’s FDI regime.

  • Bridging Borders: SCRR Amendment 2024 and India’s Gateway to Global Capital

    Bridging Borders: SCRR Amendment 2024 and India’s Gateway to Global Capital

    BY MANAV PAMNANI AND SHOURYA SHARMA, THIRD-YEAR STUDENTS AT NALSAR HYDERABAD AND JINDAL GLOBAL LAW SCHOOL, SONIPAT

    INTRODUCTION

    The Department of Economic Affairs, Ministry of Finance (‘MoF’), has recently amended the Securities Contracts Regulation Rules, 1957 (‘SCRR’). This Amendment attempts to make it easier for Indian public companies to list their equity shares within International Financial Service Centres (‘IFSCs’) such as the Gujarat International Finance Tec-City (‘GIFT City’), under the framework of Direct Listing of Equity Shares Scheme and the Companies (Listing of Equity Shares in Permissible Jurisdictions) Rules, 2024. One of the significant changes under the Amendment is the reduction of minimum public shareholding thresholds from 25% to 10% for listing made in IFSCs, making international listings more accessible, especially for start-ups and technology-driven enterprises. This move mirrors the government’s broader commitment towards placing India among the world’s competitive investment-friendly destinations and financial hives. This article attempts to analyse the legal framework of this Amendment, alongside exploring its practical implications for the Indian financial landscape.

    REGULATORY FOUNDATIONS AND LEGISLATIVE DEVELOPMENTS

    The SCRR was notified by the Central Government to help achieve the objectives of the Securities Contracts (Regulation) Act, 1956 (‘SCRA’) effectively. The preamble clause of the SCRA states that the objective of the statute is to regulate undesirable transactions in securities by overseeing the dealing in securities and monitoring other ancillary business activities. The Amendment aligns the SCRR with this overarching objective. The legal foundation of this Amendment lies in section 30(h)(A) of the SCRA, which gives the Central Government the power to introduce rules stipulating the specific requirements that companies have to follow to get their securities listed on any stock exchange. The word “any” here has to be given a wide interpretation to align with the framers’ intention which was to bestow supervisory and regulatory authority upon the Government to foster the maintenance of a reliable and efficient securities business framework. Therefore, the regulation of listing of securities on IFSCs squarely falls within the competence and authority of the Government.

    Earlier in 2024, the MoF, through a notification amending the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (‘NDI Rules’), explicitly enabled the listing of securities of public Indian companies on international exchanges recognized in Schedule XI of NDI Rules. This, termed as the Direct Listing Scheme, governed several intricacies such as permissible investors, compliance with sectoral caps, regulations regarding prohibited sectors, and pricing guidelines. Simultaneously, the Ministry of Corporate Affairs (‘MCA’) had also introduced the Companies (Listing of Equity Shares in Permissible Jurisdictions) Rules, 2024 by virtue of its power under section 23(3) r/w section 469 of the Companies Act, 2013 to regulate the entities that can list and jurisdictions where the listing can take place.

    However, both these enactments, along with the Companies (Amendment) Act, 2020 which prescribed certain similar requirements pertaining to listing in international exchanges, served as mere regulatory tools rather than efficient operational guidelines. They prescribed an overarching framework that has to be adhered to during such listing and discussed the eligibility criteria but failed to provide or clarify points regarding specific thresholds and other operational mechanisms specified under the SCRR.

    LEGAL ANALYSIS

    The recent Amendment fills the void identified above by introducing a few but impactful changes in the securities listing regime, thus reflecting its commitment to fostering a globally competitive and investor-friendly framework while aligning domestic practices with international standards. These international standards include the minimum public float thresholds in jurisdictions like Singapore, the International Organisation of Securities Commissions’ principles of efficiency, transparency and fairness in cross-border listings, the securities regime in the Dubai International Financial Centre, the Financial Action Task Force’s Anti-Money Laundering /Combating the Financing of Terrorism recommendations, and the pricing mechanisms and sectoral compliance thresholds present in the European Union Capital Markets Union and the United States Securities and Exchange Commission Regulations.

    The widespread benefits accruing to investors and other stakeholders through the effectuation of this Amendment not only covers the inflow of higher foreign capital and a more efficient and dynamic securities framework but also extends to direct tax advantages. section 10(4D) of the Income Tax Act, 1961 provides a significant tax exemption on income arising from transactions conducted on recognized stock exchanges within IFSCs, including GIFT-IFSC. This incentivizes participation, reduces transactional costs for investors, and creates a persuasive financial rationale for businesses contemplating listing on foreign exchanges. It is also in line with the numerous Double Taxation Avoidance Agreements (‘DTAAs’) entered into by India to prevent non-resident Indians from being taxed twice, in both, India and their country of residence, thus significantly alleviating their tax burden. Additionally, the Securities and Exchange Board of India (‘SEBI’) has considerable control over listing and transactions in the IFSC, as is evident from the scheme of the SEBI (International Financial Services Centres) Guidelines, 2015. This reiterates the commitment of SEBI to safeguard the interests of investors and other stakeholders, alongside maintaining an effective securities landscape.

    An important caveat to consider with respect to this Amendment is that the reduction of thresholds from 25% to 10% extends only to listings made in the IFSC. This implies that as per domestic subscription requirements, the extent of public shareholding is still fixed at the previous 25%. This distinction creates a dual regulatory framework, potentially leading to compliance complexities for companies seeking listings in both domestic and IFSC exchanges. This may limit the seamless integration of domestic and international listing strategies, requiring companies to carefully navigate the differing regulatory requirements to maximize benefits and avoid potential conflicts. Although the text of the Amendment alters Rule 19(2)(b) of SCRR, which covers domestic listings, the primary intention of the legislature was to effect changes in the IFSC listing framework. This ambiguity necessitates a clarification, which will most likely uphold uniformity by stating that the reduction also extends to listings made on domestic stock exchanges by companies wishing to obtain listing on permitted international exchanges. The importance of such uniformity and standardization is also evident from the two definitions (IFSC and International Financial Services Centre Authority (‘IFSCA’) that have been introduced which do not impose their own requirements but simply suggest an alignment with the definitions incorporated in existing legislations. The Amendment while defining these terms states that an IFSC means an IFSC as defined under section 3(1)(g) of the IFSCA Act, 2019 and an IFSCA means the Authority established under section 4(1) of the IFSCA Act. This significantly reduces complexity and fosters consistency and clarity in the navigation of relevant legalities pertaining to share listing and other compliance requirements.

    PRACTICAL IMPLICATIONS

    This Amendment marks a shift in India’s financial regulatory regime by redefining the entry of companies into global capital markets. In its amplitude, it is not an ordinary technical change but a strategic recalibration of structures of investment. The reduction of public shareholding thresholds from 25% to 10% for foreign listings creates an easier route for start-ups, emerging businesses, and small, mid and large capitalisation companies to access global capital, a phenomenon that is already experiencing an upward trajectory. For example, the gross foreign portfolio investment (‘FPI’) in India was massively estimated at around US$ 41.6 billion in the year 2023-24, which is bound to increase manifold due to this Amendment. The business insights from  companies like Reliance Industries Limited and HDFC Bank Limited, among others, reflect clear examples of corporations successfully accessing large amounts of global capital due to international financial listing. This consequentially places Indian business enterprises in a robust position as reduction in public shareholding compliance requirements is an attractive proposition for investors.

    Interestingly, the lowering of the barriers to international capital access also provides the same growth opportunities to a wider spectrum of sector-specific enterprises, including deep technology, renewable energy and biotechnology. These are crucial sectors requiring large investments. Furthermore, this change may even decentralise India’s economic hubs by allowing international capital to penetrate smaller companies located in tier-2 and tier-3 cities. As an offshoot, regions other than the economically prospering metro cities would witness increased industrialisation and employment generation since more local companies would gain access to foreign investments.

    A research conducted by the International Monetary Fund on emerging markets provides a broader context in which this Amendment fits into a global trend, towards more accessible and flexible capital markets. It represents the benefits of India’s strategic approach to positioning itself as an attractive destination for global investors. Indian firms may be better positioned to raise capital in foreign currencies with a more straightforward pathway to listing abroad while hedge-protecting firms reliant on imports for raw materials or technology from the capricious market exchange rate.

    Contrary to the apprehensions of capital outflow, this Amendment may benefit India’s domestic markets since an international listing enhances reputation of a company, provides international exposure, and encourages investor confidence. Companies will attract a larger pool of sophisticated retail and institutional investors, leading to increased credibility and brand value through such listings. This will enhance liquidity, valuation, expertise, innovation and overall market efficiency.

    However, the opportunity comes with nuanced challenges, particularly for companies that aim to be listed on both domestic and international exchanges. In a dual-listed company structure, the requirement for multi-jurisdictional shareholder and board approvals introduces complexities to decision-making and company operations. This substantially increases audit and compliance costs, necessitating detailed planning and high investments in financial and legal advisory services.

    CONCLUDING REMARKS

    This Amendment is more than a routine regulatory change because it aims to manifest India as a global financial hub by significantly relaxing listing requirements in the IFSC. It serves as a forward-looking measure with the objective of modernising the Indian securities law landscape and aligning it with international best practices by furthering a more inclusive access to global capital markets. With the introduction of this Amendment, the legislature has taken a significant step in the right direction and it will be interesting to observe the future course this Amendment adopts, particularly concerning its effective implementation.

  • The Legal Conundrum: Is A New Mandatory Offer Possible During An Existing One? – II

    The Legal Conundrum: Is A New Mandatory Offer Possible During An Existing One? – II

    BY TANMAY DONERIA, FOURTH YEAR STUDENT AT RGNUL, PATIALA

    This article is published in two parts, this is the Part II of the article.

    Having discussed the key provisions under the Takeover Regulations and the conundrum arising therefrom, the following part delves into the interplay of Regulation 3, Regulation 20 and Regulation 26 of the Takeover Regulations while exploring the possible situations that might arise during such a transaction and suggest recourses available to the third party.

    II. Possible situations arising out of the interplay between regulation 20 and 26. 

    As highlighted earlier, we have two possible situations to examine with respect to the issue at hand. Firstly, when the conversion occurs during the period of 15 days and secondly, when the conversion occurs after the period of 15 days but before the completion of the offer period. Let us analyse these two situations in detail.

    –       When the Conversion Occurs During the Period of 15 Days i.e., 12.10.2024

    We shall assume a situation where the conversion of securities held by XYZ Ltd. occurred on 12.10.2024 i.e., during the 15 days provided for competing offers. If we were to undertake a hyper-technical interpretation of Regulation 20(5), we find that it only creates a bar on the announcement of an open offer after the expiry of 15 days provided for competing offers till the completion of the offer period. It does not take into account a situation wherein the obligation to make an open offer arises during the abovementioned 15 days period. But because the intent behind the provision is to prevent overlapping or simultaneous offers, we find that even in situations where the obligation to make an open offer arises during the 15 day period this restriction would be applicable. Hence, we are arriving at the same question, what should the third party do in such a scenario?

    At this juncture, it is important to appreciate the definition of ‘convertible securities’ under Regulation 2(1)(f) of the Takeover Regulations, which provides that the conversion may occur “with or without the option of the holder”. This is extremely relevant to understand as it will help us in determining whether the third party has breached the threshold under Regulation 3(1) willingly or not. This would further result in two different situations i.e., when the conversion happens without the option of the holder (compulsory conversion) and when the conversion happens with the option of the holder (optional conversion). 

    –       Compulsory Conversion

    • Compulsory conversion may occur in the case of mandatory convertible bonds, compulsorily convertible debentures (‘CCDs’), or preference shares (‘CCPS’). These types of securities get converted at a predetermined time without the option of the holder of such securities. This would mean that the third party had not voluntarily triggered the requirement to make a mandatory open offer under Regulation 3(1).
    • In such a situation, it would be appropriate to allow the third party to fulfil its obligation under Regulation 3(1) without engaging in involuntary competition with the original acquirer regarding offer size and offer price. Such an interpretation would be business-friendly and promote ease of doing business. 
    • In this context, it is suggested that the third party should be given a deference or relaxation and be allowed to make a mandatory open offer after the completion of the offer period. Such relaxation can be given to the third party within the ambit of Regulation 11 of the Takeover Regulations, which provides SEBI with the discretionary authority to exempt or provide relaxation from procedural requirements in the interest of the securities market. Regulation 11(2) specifically allows SEBI to “grant a relaxation from strict compliance with any procedural requirement under Chapter III and Chapter IV” upon the receipt of an application from the third party in terms of Regulation 11(3). Since Regulation 13under Chapter III dictates the time when the announcement for the open offer is to be made for Regulation 3, it is possible to grant such relaxation. The same is evident from the TRAC report which states that “SEBI would also continue to have the discretion to give relaxation from strict compliance with procedural requirements”. 
    • For example, in our situation, if XYZ Ltd. acquires shares on account of compulsory conversion and breaches the threshold limit under Regulation 3(1) it shall make an application under Regulation 11(3) to seek appropriate relaxation under Regulation 11(2).

    –       Optional Conversion

    Optional conversion may occur in the case of optionally convertible debentures (‘OCDs’) or optionally convertible debt instruments and other similar types of securities. These types of securities get converted voluntarily at the option of the holder in pursuance of their express choice and not at any predetermined time. Optional conversion is indicative of the holder’s willingness to trigger the provisions under Regulation 3(1).

    In such a situation, it would be appropriate that the third party who has voluntarily triggered the provisions of a mandatory open offer should be obligated to engage in raising a competing offer and conditions with respect to offer size and offer price should apply accordingly. In other words, the requirement of making a mandatory open offer should be complied with by making a competing offer and conditions concerning offer size and offer price as applicable on a competing offer should also apply to the third party.

    This raises another legal question, whether a mandatory open offer can be considered as a competing offer. In this regard, it is pertinent to note that Regulation 20(3) creates a legal fiction that a voluntary open offer made within the 15 day period should be considered a competing offer. The substance of the provision dictates that if an open offer by whatever name it may be called is made voluntarily/willingly within 15 days it should be treated as a competing offer. In furtherance of the same, it is possible to argue that if the requirements of the mandatory open offer are being triggered voluntarily/willingly by the third party on account of optional conversion, the same can be considered within the scope of Regulation 20(3), rendering the mandatory open offer as a competing offer. It is to be noted that in order to accommodate this interpretation appropriate amendments to the Takeover Regulations will be required. 

    Hence, in this context, if XYZ Ltd. acquires shares and breaches the threshold limit under Regulation 3(1) on account of optional conversion, it can be said that XYZ Ltd. had willingly breached the threshold hence, the spirit of the law would dictate that XYZ Ltd. should make a competing offer and conditions with respect to offer size and price shall apply to them accordingly. 

    –       When the conversion occurs after the period of 15 days i.e., 18.10.2024

    If the conversion, whether option or mandatory, occurs after the expiry of 15 days and the obligation to make a mandatory open offer is triggered, the third party who had acquired shares on account of convertible securities cannot make a public announcement for an open offer due to the statutory bar imposed by Regulation 20(5). 

    In such a situation, the third party may take recourse under Regulation 11 as mentioned earlier and make an application to SEBI in accordance with Regulation 11(3) to seek appropriate relaxation and deference in terms of Regulation 11(2) to make the mandatory open offer and comply with Regulation 3 after the completion of the offer period. This will ensure that the third party does not contravene the Takeover Regulations and fulfil their obligation imposed by Regulation 3(1). The same will be consistent with the intent of the provision as it will prevent any overlapping or simultaneous open offers and avoid any unnecessary troubles for the shareholders as well.

    III. Conclusion

    In light of the aforementioned discussion, it can be said that our legal conundrum cannot be expressly solved by simply applying the provisions contained in the Takeover Regulations. But, we can state that the conundrum arising out of the interplay between Regulation 3(1), Regulation 20(5) and Regulation 26(2)(c)(i) can be solved by understanding the underlying intent of the provisions, and applying the rule of contextual interpretation and harmonious construction.

    The interpretation as advanced in the previous sections will accommodate better investor protection, provide exit opportunities to the shareholder and promote ease of doing business in the country by protecting the interests of the acquirer. Currently, such a situation is purely academic in nature but it is not improbable for such a situation to emerge in real-world transactions.