JSA’s expertise in foreign investments
India’s ability to attract foreign investments has remained resilient despite the covid-19 pandemic, the geopolitical turmoil and several other challenges in the past few years. As per recent reports, India recorded its highest ever annual Foreign Direct Investment (FDI) inflow of USD83.57 billion in 2021-2022.
In 2021, about 40 Indian startups raising funds from across the globe achieved Unicorn status and there were several big-ticket cross-border deals in 2021 and 2022, in some of which JSA was a legal advisor. To provide a fillip to foreign investments, the government has introduced various incentive schemes and reforms, especially for projects in sectors such as healthcare, electrical vehicles, IT and IT-enabled services.
FOREIGN INVESTMENT LAWS
In India, both inbound and outbound investments are regulated and governed by the Foreign Exchange Management Act, 1999, the foreign direct investment policy of the government of India amended from time to time, and regulations passed by the Reserve Bank of India (RBI). Foreign investments in India are also subject to reporting and periodic compliance requirements prescribed by the RBI.
FDI and the conditions or regulatory implications pertaining to such investment depend on the sector in which the investee entity undertakes its business. In most of the sectors, investments are allowed into India under the automatic route (i.e., without requiring government permission) while certain other investments require government approval. In a few sectors, FDI is not permitted (e.g. lottery, gambling)
Some key issues and challenges:
- In one of the transactions, a foreign entity wanted to acquire 100% equity of the Indian company, but part of the consideration was to be paid as earnout over the next four years. Under the RBI regulations, deferral of consideration for the purchase of equity shares by a foreign entity beyond 18 months and 25% is subject to RBI approval, which could be time-consuming and not guaranteed. Hence, the transaction is structured in a manner that the Indian sellers to be given another instrument at the India entity level, after making appropriate valuation adjustments.
- Authorised dealer banks (who are appointed to facilitate foreign exchange transactions) have in recent years taken a challenging view of valuation requirements in case of any foreign-owned or controlled entity incorporated in India acquires shares from both residents and non-residents sellers in a share purchase transaction. Due to the interpretation taken by RBI, the shares of the resident sellers had to be bought at a price on or above the fair market value of the shares and the shares of the non-resident sellers had to be bought at the fair market value or below, effectively meaning the price of share could only be the fair market value of the share. The commercial intent of the parties was to acquire all the shares at a price above fair market value. This issue was highlighted to the acquirer and the solution was that the foreign parent of the Indian foreign-owned or controlled entity acquires the shares from the sellers and thus, achieves the intended commercial objective.
- The government of India has recently introduced the requirement of obtaining approval for investments where the beneficial owner of the investing entity is a citizen or resident of a country sharing land borders with India (e.g., China). This requirement means even entities incorporated in other countries but having significant investment in them from persons who are citizen or resident of any country sharing a land border with India may be impacted by these regulations. In a recent transaction, the Chinese investor wanted to make further investment in its existing Indian subsidiary but since that would have required prior government approval. The transaction was structured as such that it does not fall within the ambit of “investment”
Direct investments outside India include investment by way of contribution to the capital or subscription to the memorandum of a foreign entity or by way of purchase of existing shares of a foreign entity either by market purchase or private placement or through stock exchange.
For outbound investments, JSA assists clients in ensuring that the investments are compliant with the relevant regulations, such as the net-worth requirements and other related compliances. JSA also works closely with foreign law firms to ensure the Indian investments in their jurisdiction are compliant with their local laws.
JSA advises on legal issues concerning inbound and outbound investments, strategic alliances and joint venture collaborations. The firm regularly advises on policies, laws and regulations in relation to foreign investments in India. Some of the key areas where JSA specialises and which are of utmost relevance to foreign investors investing in India or looking to set up business in India include:
- M&A, private equity or venture capital investments and other foreign investments. JSA is a market leader in advising and representing clients in foreign investments. The M&A practice collaborates with other practices, including competition laws, compliance, environment, employee and social benefits, so that a holistic approach is adopted to handle the transaction. We also undertake extensive due diligence on target entities and including aspects like ethics, compliance and environmental, social, and governance perspective.
- Licensing, technology transferand other commercial agreements. JSA assists clients with complex commercial transactions pertaining to licensing, technology transfer as well as franchising agreements. The firm has assisted several Fortune 500 companies in entering into such agreement with local players in sectors such as hospitality, consumer goods, alcoholic beverages and automotive or auto components.
- Setting up of greenfield projects and employment. Two critical aspects for setting up factoriesor greenfield projects or operations in India are real estate and employment or human resources. JSA’s real estate practice is capable of providing legal support across the country and provides advice that factors in the various local nuances of land laws in India for setting up greenfield projects. On the employment side, JSA has a team of experienced employment law specialists who work with clients from a wide range of sectors, to tackle local and cross-border, contentious and non-contentious employment law issues.
- Entity formation and compliance. Leveraging JSA’s vast experience of Indian laws and practices, tailormade advise is provided to foreign companies in deciding the most favourable entity structure or entry route to set up business in the country. The firm also has corporate secretarial practice that provides end-to-end support on entity formation as well as routine ongoing compliances. Foreign companies find some of the processes very cumbersome, even for minor issues like obtaining a director identification number or digital signature certificates.
- Taxation laws. JSA’s tax law experts provide support to the M&A team in the structuring of foreign investments in India and on a wide variety of issues including choice of entity and choice of instruments for capitalisation. The firm also assists clients with various other issues such as transfer pricing regulations, analysis of tax treaty benefits and issues pertaining to characterisation of income and permanent establishment. Consequently, the firm’s tax practice assists clients in assessing tax risk and taking decisions based on a clear understanding of the tax impact on the client.
JSA has been advising several large Korean corporations in their India related investments and projects. The firm has a dedicated desk consisting of some identified partners who have been working in the Indo-Korean space for several years. Hence, JSA is well-versed and experienced in working with Korean clients and has a deep appreciation of Korean culture and working style.
JSA works extensively with various Korean companies, directly or on referral basis by Korean law firms, such as Kia, LG, Samsung, Hyundai, etc. Such work includes advising on foreign investment-related strategies and post-investment compliances at the local level. We also have the capability to engage Korean of-counsel in India to provide effective hand-holding to Korean clients investing or operating in India
ABOUT THE FIRM
JSA is a full-service Indian law firm with more than 350 lawyers and seven offices across India. For more than three decades, JSA has provided legal representation, advice and services to leading international and domestic clients. JSA’s team of corporate lawyers are trained in several disciplines across all seven offices. Being a full-service law firm, its various attorneys provide cutting-edge specialist advice on matters pertaining to corporate laws, financing, real estate, capital markets and disputes to assist clients in reaching their desired business goals within the parameters of the applicable legal regime.
The firm has been recognised and ranked year-on-year by a host of domestic and international league tables, publications and ranking agencies.
- Upendra Nath Sharma (Partner)
- Kartik Jain (Partner)
- Debottam Chattopadhyay (Senior Associate)
Sandstone Crest, Opp.
Park Plaza Hotel
Sushant Lok – 1, Sector 43
Gurugram – 122009, India
Tel: +91 1244390600