FOCC downstream investments face regulatory hurdles
- The issues cropping up mostly pertain to whether FOCCs can make deferred payments of consideration and whether they can subscribe to convertible options as a part of the investment
Foreign-owned and controlled companies (FOCCs) face difficulties in making downstream investments in India due to issues arising from foreign exchange rules. There is an ambiguity in the current rules, which is leading to interpretational issues and in some cases, the Reserve Bank of India (RBI) has taken a more conservative stance impacting the deals, two foreign exchange law experts familiar with the development said. The industry has already submitted multiple representations to RBI seeking clarity on many of these rules.
The issues cropping up mostly pertain to whether FOCCs can make deferred payments of consideration and whether they can subscribe to convertible options as a part of the investment. Additionally, FOCCs can only make investments in India through money gathered from their internal accruals or through funding received from their foreign parent. This essentially prevents FOCCs from making leveraged buyouts in India, the people cited above added.
An FOCC is a company incorporated in India that is controlled by a foreign company. All multinational companies that are into production, consumer goods and other services in India open a subsidiary in the country to take care of the local business. An email sent to a spokesperson for RBI remained unanswered.
Legal experts said although FOCCs are companies incorporated in India, they are still subject to restrictions that are applicable for investments made by foreign entities.
“Investments by FOCCs are subject to entry route, sectoral caps, pricing guidelines and other attendant conditions which apply to any foreign investment,” said Moin Ladha, partner, Khaitan & Co.
“However, in certain cases, such as transactions involving deferred consideration, a stricter position has been taken for FOCCs, and there is a strong need to streamline and clarify this and similar positions. While an FOCC is foreign-owned and/or controlled, ultimately, it is an Indian company and shouldn’t be subject to stricter conditions compared to what is applicable to non-residents,” he added.
A key reason behind the conservative approach being adopted by RBI stems from the concerns that foreign companies could potentially misuse the FOCC route. “The general regulatory view is, what cannot be done by foreign investors directly cannot be done through FOCC either. Like if there is a sectoral cap for FDI, a foreign company cannot make the same investment via an FOCC either,” said a person cited above.
If rules for FOCCs are made too simple compared to foreign direct investment, then it creates a regulatory arbitrage, and some foreign companies may look to circumvent the foreign direct investment (FDI) rules by simply floating an FOCC in India, experts said.
Leveraged buyouts are a common route in the deals world as the acquirer often raises debt through loans or bonds to fund the acquisitions.
“As per the current regulations, the funding for FOCC acquisitions is required to be made using internal accruals or as funds from abroad,” said Anil Talreja, a partner at Deloitte India. “With the changing economic scenario and business models evolving, a need was felt to allow in a calibrated manner to use borrowings from the domestic market.”
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First Published:27 Sep 2023, 12:09 AM IST
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