Reserve Bank of India (RBI) seems to have issued notices to several Foreign Owned or Controlled Companies (FOCC) for structuring share purchases in Indian companies through the deferred (holdback) consideration construct. FOCCs being Indian companies but foreign-owned and controlled need to adhere to downstream investment guidelines (the famous DI guidelines) under the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019, as amended (NDI Regs). The DI guidelines do not expressly permit deferred construct. However, considering that a FOCC is an alter ego of a non-resident entity (NR entity) and NDI Regs permit NR entity to hold back a certain percentage of consideration in share purchase transactions, industry view was to apply the same yardstick to FOCCs.

What is also noteworthy is that typically in transactions involving FOCCs taking the DI route there is no cross-border transaction. While the transactions are required to adhere to pricing and valuation norms, from a practical standpoint the money never leaves the country – it’s more or less a domestic transaction!

Such deferred constructs safeguard investors from valuation swings and ensure agreed milestones are met.

While RBI seems to have asked such FOCCs to compound the offence, this development will certainly impact foreign investment and structuring around share purchases going forward.