(First published on Linkedin)
In an important amendment to the FEMA (Non Debt Instruments) Rules, 2019, which deal with foreign investment in Indian entities, it is now permitted to issue shares by an Indian company against swap of equity capital of an overseas company.
Earlier:
1. An Indian company could issue its own equity shares to a non-resident/ foreign entity against acquisition of shares of an “Indian company”; or
2. An Indian company could sell its equity capital in an overseas entity to an overseas company against shares being issued by such overseas acquirer to the Indian company.
ODI-FDI Share Swap not permitted earlier:
However, in a non-cash transaction involving share swap, issuance of shares by an Indian company to a non-resident/ foreign entity against acquisition of shares of an overseas company owned by such foreign seller was not permitted.
Effective Share Swap:
While an effective swap could be effectuated through acquisition of an overseas company from a foreign entity by the Indian company for cash consideration, and thereafter issuance of shares by the Indian company to the overseas seller against cash consideration, complications in terms of conceptualising the construct of binding documents and foreign exchange loss arose.
With this amendment, a direct swap is now permissible, and logically so, the said complications could now be addressed.