Oct 9, 2013

Sebi Amendments facilitating M&A transactions and foreign investments

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Put and Call options, ROFR and Pre-emptive Rights now allowed in Share Purchase Agreements facilitating M&A transactions

In accordance to the powers conferred upon SEBI by Securities Contracts (Regulation) Act, 1956 (SCRA), SEBI has come out with new notification dated 03 October 2013 wherein, the earlier notification dated 01 March 2001 stands rescinded with immediate effect (except as respect to things done or omitted to be done before such rescission).

As per the new notification, now, in addition to the “contracts for spot delivery; and securities contracts & contracts in derivatives which are permissible under the SCRA, SEBI Act, and the rules, regulations and bye laws of recognized stock exchanges”, the inclusion of following contracts are also validated in a Shareholders Agreements:

  1. Contracts for pre-emption rights like Right Of First Refusal (ROFR), Tag Along Rights or Drag Along Rights, one of the important composite of Shareholders’ Agreements and subsequently in AOA of companies;
  2. Contracts for purchase/ sale of securities by the virtue of an option contained in shareholders’ agreements or AOA of Companies. This clause is validated subject to the fulfillment of following pre-conditions:
    1. Title and Ownership of the underlying securities are to be held continuously by the selling party for one year from the date of entering the contract
    2. Consideration for sale/ purchase of underlying securities pursuant to exercise of the option is in compliance with all the laws in force and applicable
    3. The contract is settled by actual delivery

Further, all such contracts shall have to be in consonance with the provisions of the FEMA, 1999 and rules and regulations made thereunder.

Apart from the contracts mentioned above, no other contract for sale or purchase or otherwise dealing in securities shall be allowed to be entered in the territory of India.

Pre-emption rights, put and call options and other such arrangements are often inserted in contracts, especially those related to strategic alliances, private equity investments, joint ventures, etc for the protection of the Investors and easing exit rights. However, such contracts till now have experienced objections from regulatory authorities as happened in cases of Vedanta – Cairn and Diageo – United Spirits where SEBI had instructed the companies to drop any pre – emption rights or put/ call options if they wanted the deal to be put through.

SEBI allowing such arrangements will provide comfort to Investors entering into Joint Ventures, Private Equity or other M&A transactions, specially for foreign Investors and will encourage more such transactions in India.

SEBI Board approves Draft Regulations for Foreign Portfolio Investors to encourage Foreign Investments

In an another attempt to make it easier for FDIs to make investments in Indian markets and providing them a permanent registration, SEBI in its Board Meeting held on 05th October 2013, considered and approved the draft SEBI (Foreign Portfolio Investors) Regulations, 2013 after taking into account the existing SEBI (Foreign Institutional Investors) Regulations, 1995, the framework of Qualified Foreign Investors (QFIs) in India and recommendations of the “Committee on Rationalization of Investment Routes and Monitoring of Foreign Portfolio Investments”.

The new regulations which will take place of the erstwhile SEBI (FII) Regulations, 1995 will have the effect of clubbing FIIs and QFIs under a common class called Foreign Portfolio Investors (FPIs). The main highlights of these draft regulations are as follows:

  1. “Foreign Portfolio Investors” shall be a new investor class which will include all the existing FIIs, sub accounts and qualified foreign investors.
  2. The FPIs shall be registered by Designated Depository Participants (DDPs) on behalf of SEBI after ensuring compliance with KYC requirements. The DDP will conduct the necessary Due Diligence and obtain declarations and undertakings before registering FPIs. The registration so granted shall be permanent unless suspended or cancelled by SEBI.
  3. The FPIs can be registered under any of the following three categories:
  4. Category

    Entities falling under the Category

    Category I

    Government, Government related foreign investors

    Category II

    Appropriately regulated broad based funds, appropriately regulated entities, broad based funds whose investment manager is appropriately regulated, university funds, university related endowments, pension funds

    Category III

    All other FPIs not covered under Category I or Category II

  5. Existing FIIs, Sub accounts and QFIs:
    1. All existing FIIs and sub accounts shall be allowed to continue buying, selling or otherwise dealing in securities under the FPI regime
    2. All existing QFIs shall be allowed to continue buying, selling or otherwise dealing in securities for a period of one year from the notification of these regulations during which they will have to obtain FPI registration.
  6. Investments allowed:
    1. The FPIs shall be allowed to invest in all such securities as are allowed to be invested in by Foreign Institutional Investors (FIIs)
    2. Category I and II FPIs are allowed to issue or otherwise deal in offshore derivative instruments (ODIs) directly or indirectly. However, FPI should be satisfied that such ODIs are issued only to persons regulated by an appropriate foreign regulatory authority
  7. The Designated Depository Participant:
    1. The following entities can be the DDPs
      1. Authorized Dealer Category-1 bank authorized by Reserve Bank of India
      2. Depository Participant
      3. Custodian of Securities registered with SEBI
    2. The application for DDP shall be forwarded for approval to SEBI by the depository along with its recommendation
    3. SEBI registered Custodian of Securities shall be a deemed DPP subject to payment of prescribed fees.
    4. SEBI approved Qualified Depository Participant not meeting the DDP eligibility criteria may operate as DDP for a period of one year.
These draft regulations have come in the wake of a scenario where the country is seeing a foreign investment leaving the country. Though the sentiments of the foreign investors largely depend on the economic conditions of the country, the regulations will definitely make the procedures for the foreign investors simpler.
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