Question:
Now that the “contingency” of whether BJP/NDA would form a government is “deferred” to 2029, from a FEMA perspective, is deferred consideration permissible for acquisition of an Indian company? How does it differ from contingent consideration?
Background:
In cross-border share acquisitions or mergers and acquisitions, structuring payment terms is crucial. Deferred and contingent considerations help manage risks and align incentives. The Foreign Exchange Management Act (FEMA) Non-Debt Instrument (NDI) Rules govern these transactions involving foreign investment in India.
Conundrum:
Deferred and contingent considerations offer flexibility but also raise regulatory concerns under FEMA NDI Rules. Understanding their permissibility is essential for compliance.
Dissection:
Deferred Consideration:
Deferred consideration is when a consideration is fixed, but the payment is deferred – essentially, it’s a question of “when” and not “if”. This is permissible if the consideration is payable within 18 months from the date of the share purchase agreement, with the overall deferral capped at 25% of the total consideration. Interestingly, the said deferral and maximum cap apply to both situations – in the case of a non-resident acquiring shares from a resident or vice versa.
Contingent Consideration:
Contingent consideration is when the total consideration is not fixed but is contingent upon the achievement of certain pre-agreed parameters – essentially, it is both a question of “if” and “when”. Given the uncertainty in payment, especially for inbound transactions (i.e., transfer of shares of an Indian company by a resident to a non-resident), contingent consideration is not permissible under FEMA NDI Rules.
While FEMA clearly distinguishes between the two forms of consideration, what could be the tax implications for such forms of consideration? Maybe that’s SHoCs for some other time!