SCOPE
Overview of Cross-Border M & A transactions
Process involved
Deal structuring issues
Due Diligence issues
Legal aspects
FEMA Provisions
Transaction Documents
Emerging Trends
Key Challenges
Cross Border Transaction
• Cross Border Transaction services means services
related to transaction which involve two or more
countries. In India there are two Acts which
primarily seems to show concern when a person
(Indian Resident or foreign Resident) undertakes
cross border transactions that is:
•
• Foreign Exchange Management Act, 1999 and
• Income Tax Act, 1961
Definitions
• Capital: Equity share, fully , compulsorily or
mandatory convertible preference shares,
debentures,
• Capital account transaction: Transaction which
alters assets or liabilities.
• Control: Right to appoint majority of directors,
or control of management or policy decisions
• FDI: Investment by Non-Resident which alters
capital
• Joint Venture: Indian Company in which a
foreign company makes investment
• OCB: Overseas Corporate Bodies
• QFI: Qualified Foreign Investors
• VCF: Venture Capital Funds
Who Can Invest In India
• Non Resident subjct to FDI policy expect in
prohibited sector.
• NRI resident in Nepal and Bhutan
• OCB: Overseas Corporate Bodies
• FII: Registered
Where to Invest
•
•
•
•
•
•
Companies
Partnership Firm
VCF
Trust : Prohibited
LLP
No other entities
Prohibited Sectors
•
•
•
•
•
•
•
Lottery
Gambling and betting
Chit Funds
Nidhi Companies
Trading in TDR
Real Estate
Other prohibited
Permitted
• Agriculture including floriculture, horticulture,
seed development, agro services- 100%
• Tea: 100%
• Mining: 100%
• Petroleum and Natural Gas: 100%
• Defense: 49%
• Aviation : 100%
• Courier: 100%
Sectors
•
•
•
•
•
•
•
•
•
Construction: 100% Automatic
Telecom: 100% Automatic
Trading : 100% Automatic
Single Brand retail: 100% Automatic upto 49%
Multi Brand Retail: 51% Government
Railways: 100% Automatic
Banking 74% Automatic
NBFC: 100% Automatic
Pharma: 100% Automatic
OBJECTIVES
Greater Economies
of Scale
Access to
Raw Material
Access to Markets
Diversification
of Business
IMPARATIVES
Business
Environment
Cultural
Issues
Business
Dynamics
Accounting
treatment
Legal & regulatory
framework
Tax regimes &
treaties
Identifying and
delivering synergies
TAX AND FINANCE ISSUES
2
1
Entry
Strategy
3
Financing
options
Income flows and
their taxability
4
6
Exit
considerations
Debt
Structuring
Cash repatriation
CATEGORIES
•
•
•
•
•
•
•
Corporate Partnering
Public to Private
Supporting Management Buy Outs
Leveraged Buy Outs
Strategic Investments
Earn Out Acquisitions
Distress Sale
APPLICABLE LAWS
 India
 Companies Act – Section 372A,
 FEMA Regulations
 Tax
 Target jurisdiction
 Company Law & Competition law
 Exchange Control Regulations
 Takeover Regulations
 Tax
PROCESS
•
•
•
•
•
•
•
•
•
Assemble Team
Limited Due Diligence
Purchaser obtains financing commitment
MoU / LoI
Detailed due diligence
Definitive Purchase Agreement
Purchaser’s firm financing
Seller and Purchaser comply with covenants
CLOSING
STRUCTURE ISSUE
•
•
•
•
Tax
Financing
Corporate Veil
Regulatory constraints (host & target
countries)
• Exchange Control Regulations
FIRST STEP

Appointment of Advisor
 Investment Banker
 Attorneys (Local and Offshore)
 Public Relations Agents

Identify Due Diligence Areas
 To achieve commercial objectives
 Acquisition
 Strategic Investment

Preliminary Documentation
 Review of Information Memorandum
 Entering into mandate letter with Advisors
 Executive Non-Disclosure Agreement
 Exclusivity Arrangements
LOI or MOU
• Pros
– Binding v/s. Non-binding
– Reduces basic understanding to writing
– It may look different in written form
– From buyers perspective
• Exclusivity may cut-off seller’s negotiations with third
party
• Provides basis for expense reimbursement
• Cons
– Leaks
– Duty to disclose
• Contents
Due Diligence
• Physical Data Room
• Virtual Data Room
• DD list needs to be carefully tailored to meet
the needs of specific transaction and
jurisdiction
• Specific inputs needed from local lawyers and
tax advisors
Due Diligence
• Effective Due Diligence Process should address the
following– Strategy Assumptions
– Identify operational, legal, financial and other significant
issues
– Assessment of Risks
– Effect of assessment on Valuation (e.g. Fair Price for the
Target Company)
Illustrative Due Diligence issues (1)
•
•
•
•
•
Onerous obligations/covenants
Payment of ongoing fee/royalty
Restriction on activities
Rights of first refusal/put/call option
LDs/ penal provisions/any liability which
flows through
• Exclusivity provisions
• Confidentiality
• Assignability / change of control/ consent of
the counter party for transactions
• Regulatory Approvals
Impact of DD
• Impact on M&A Agreements
–
–
Representations, warranties, indemnities, covenants
Conditions precedent, conditions subsequent
• Holdback / escrow (mechanism for retention) of
purchase price, bank guarantee, milestones for
payment
• Functions as an internal audit for post
acquisition strategy
• In cross-border deals - Impact of applicable law
to Transaction (Competition Law issues,
Dominant Undertaking, Takeover Regulations,
Insider Trading, etc.)
Results of Due Diligence
 What can the purchaser do?






Require the seller to remedy the problem
Obtain an indemnity/other contractual protection
Restructure deal to exclude asset or liability
Reduce purchase price
Insurance in respect of risk – “price” – the risk
Pull out
 Limitations of liability





Cap on liability
Threshold – “basket”
De-minimis
Others
What should limitations apply to?
 Creditworthiness of person giving
warranties – consider guarantee
 Allocation of Risks
 Representations and
Warranties
 Who gives?
 All shareholders
Institutional
shareholders
 Involvement of
management
 Extent
Cross Border Deals - Agreements
Stock Purchase/
Subscription
Agreement
Technology
Collaboration
Agreement
Product
Supply
Agreement
Employment
Agreement
Shareholders’
Agreement
Brand
Licensing
Agreement
Loan/
Security
Agreement
Feeder Stocks
Supply
Agreement
Exclusivity
Arrangement
Code of Ethics
Information
Memorandum
Labour Union
Settlement
Regulatory Approval
•
•
•
•
•
•
Competition Authority
Stock Exchange
Board of Target Company
Lenders
Foreign Investment Authority
Sector Regulators
Companies Act, 1956
• Section 372A – Inter corporate loans &
investment beyond 60% of paid up capital
and free reserves or 100% of reserves to be
approved by shareholders
• Complications in International bidding due to
disclosure requirements
FEMA
Overseas Direct Investment (‘ODI’)
• Permissible in:
• overseas Joint Venture (‘JV’); or
• overseas Wholly Owned Subsidiary (‘WoS’)
• ODI not permitted in real estate business or
banking business
• Conditions for investment under the
automatic route
• Total permissible financial commitment ≤
200% of the net worth
• Bona fide business activities
• Eligibility norms for Investor:
• not on RBI’s exporters’ caution list / list of defaulters
• not under investigation by investigation / enforcement agency or
regulatory body
• Filings in respect of ODI (in Form APR) to be
up-to-date
• All transactions with the JV/WoS to be routed
through 1 AD branch
• Form ODA (with details of ODI under
automatic route) to be submitted to the AD
• Total Permissible Financial Commitment
(post August 12, 2005)
• ECBs – different views
• Cash remittance by market purchase
• Capitalization of:
• export proceeds, and
• fees, royalties, commissions or other entitlements due
from foreign entity for supply of technical know-how,
consultancy, managerial or other services
• 50% of the value of guarantees issued to or
on behalf of the JV / WoS
• Direct and indirect investment in agricultural
operations
Financing an Acquisition
Funding
• Methods
•
•
•
•
•
Drawal of foreign exchange from AD
Swap of ADRs/GDRs
Utilization of proceeds of ECBs / FCCBs
Balances in EEFC account
Utilization of foreign currency funds raised through ADR /
GDR issues
• 200% net worth ceiling not applicable in case of
funding by:
• Balances in EEFC account
• Utilization of foreign currency funds raised through ADR /
GDR issues
Post Investment Changes
Step Down Subsidiary
JV / WoS
Post investment changes
/ additional investment in
existing JV / WoS

Step Down
Sub (1)
Step Down
Sub (2)
Step Down
Sub (3)



Parent Co

Post investment changes /
additional investment in
existing JV / WoS
JV/WoS may diversify its
activities
Set-up step down
subsidiaries
Alter shareholding pattern
in the overseas entity
Reportings to be made to
the RBI in Form APR
Share Purchase Agreement
• Key issues
–
–
–
–
–
–
–
Reps and Warranties based on due diligence reports
Conditions Precedent & Subsequent
Closing mechanism
Indemnity from seller
Statutory approvals – CPs to closing
Hold back, brand usage and non-compete
Competition law issues
Governing Law and Dispute Resolution

Choice of Law - Domestic/Neutral

Mediation
 Informal
 Institutional

Mechanism: Courts v. Arbitration





Domestic/Neutral
Costs
Interim relief
Appeal rights
Enforcement
QUESTIONS
• Thanks
• 
Rajvendra Sarswat
Advocate
Rajasthan High Court
+91-98290-98210
sarswat.r@gmail.com