challenges in entry for pes in india & investment abroad · challenges in entry for pes in...

Challenges in Entry for PEs in India

& Investment Abroad

- Anup P. Shah

1st February 2013

2 Days‟ Real Estate Summit

Hotel J.W. Marriott

Challenges in Entry for PEs in India

© PRAVIN P. SHAH &

ASSOCIATES, CAs 3

Types of PE

Seed Investors – start-up

Angel Investors – early / start-up stage

VC Funds – second stage

Private Equity – Growth stage / pre-IPO

PIPE – Private Investment in Public Equity

aka Preferential Issue to PEs

© PRAVIN P. SHAH &

ASSOCIATES, CAs 4

Veto Rights

Veto Rights / Affirmative Vote

Fundamental Issues on which PE‟s

consent is a must

Most contentious clause

PEs want Veto on almost all matters

Should be clearly spelt out rather than

leaving it broad and vague

Restrictions on Transfer

© PRAVIN P. SHAH & CO. 5

Restrictive Covenants in Articles

Valid against Co. only if part of Articles, else

remains a Private Contract

-

Whether Valid in a Public Listed / Unlisted Co.?

No pre-emptive rights allowed in Public Cos.

Pre-emptive rights possible in Public Cos.

Position under New Cos. Bill


FDI & Instruments


Relevant Regulations

Consolidated FDI Policy – DIPP, Ministry of Commerce

FEMA Regulations –

Mode of Investments

+ Reporting

AP Dir Circulars –

RBI‟s changes

from time to time

Who Can Invest?

• Any Foreign Co. / LLP / EntityNon-resident

Entity

• Provided not on RBI’s Watch List

• Can invest under FDI with RBI / FIPB approval

Erstwhile OCBs

• Can invest under PIS or FDI Route

• Company must bifurcate the twoFIIs

• Can invest under FVCI Route in a VCF or under FDI route in a Company. Segregate FVCI & FDIFVCIs


Entities for FDI

Company – Private / Public

Firm –RBI

Route for Rep. basis

LLPs –Only on

FIPB Route

Trusts –Must be

SEBI Regd. VCF


FDI / PE Instruments

Equity

Voting NVR

Hybrid

CCD CCPS

Warrants


Instruments


Equity Shares

Consideration must be for Cash

All other cases – FIPB approval

Issue Price of FDI Shares

Listed Cos.

Unlisted Cos.

Must be issued within 180 days of funds


Equity Shares

DCF Valuation

No Guidelines specified

Discretion to Valuer in selection of:

No. of Years‟ Forecast

Discount Rate / WACC

Growth Rate

Method of Calculation of Terminal Value / Perpetuity


CCDs

Quasi-equity Instruments

Subject to ECB restrictions?

Cap on Rate of Interest?

All-in-cost ceilings like ECBs?

Tax Deduction benefits to Investee Co.

Can be redeemed / bought back by Co.?

Time limit for conversion into Equity?

8 years reasonable?


CCDs

CFDIP

Issue Price or Conversion Formula to be specified

upfront at time of issue

Price @ Conversion Date > FMV @ Issue Date

FMV = DCF OR Preferential issue Pricing under ICDR

Earlier Issue Price was required

Flexibility in Earn-out Formula Deals

Beneficial for PE / VCF Deals

Co. gets higher Value if performance good


NVR Shares

Issue of NVR Shares possible?

When Useful?

If Public Company?

Examples


Preference Shares

Part of Sectoral Caps Only if CCPS

If RPS / OCPS – treated as ECBs

Must be converted within a reasonable

timeframe

Plain redemption / buyback possible?

Max. Dividend Rate


Others

Issue of

Warrants?

Partly Paid-up Shares

Flip-flop in Policy

Recent Reports - Proposal

Paid-up portion - a part of Capital

25% paid-up upfront

Balance within 12 months

FDI in LLPs

FDI allowed in LLPs:

Only with FIPB Approval and in sectors where Auto

Route FDI is allowed

Not in sectors where FDI requires FIPB approval

Not in sectors linked with performance conditions:

Real Estate

Downstream Invst. not possible from LLP

FIPB approval reqd. for:

Conversion of Co. with FDI into LLP

Is conversion of a RE Co. allowed? FIPB


FDI in LLPs

FDI allowed in LLPs:

FIIs / FVCIs cannot invest in LLPs

Indian Co. with FDI can make a downstream in LLP

Both Co. & LLP must be in auto-route sectors

Both must not be in performance related sectors

Thus, no downstream in RE/ NBFC


Total FDI

Direct FDI

FDI from Overseas in Indian Co.

Indirect FDI

FDI routed via an Indian Co.


Indirect FDI

FDI via Indian Cos

Owned & Controlled by Resident Indian Citizens =

Domestic Investment not counted as FDI

Owned & Controlled by NRs = Indirect FDI

Ownership

More than 50% of Voting Power

Control

Power to appoint Majority of BoD


Indirect FDI

FDI in

Real

Estate

Indco

Indco‟s

Invst.in

SPV

Indirect FDI in SPV Does SPV

need to be

FDI

compliant?

49% 51% Nil – Indco is O&C by Indians

75% 26% 26% - Indco is O&C by NRs so entire

Downstream is Indirect FDI

51% 75% 75% - Indco is O&C by NRs so entire

Downstream is Indirect FDI

60% 100% 60% - Downstream in SPV is a mirror

image of Indco



FDI in Real Estate

© PRAVIN P. SHAH & CO. 24© PRAVIN P. SHAH & CO. 24

FDI in Real Estate

General Prohibitions

Real Estate Business

Construction of Farm House

Trading in Transferable Development Rights (TDRs)

„Real Estate Business‟:

Meaning

Assignment of Development Agreements?

Leasing?


FDI in Real Estate – Guidelines

100% FDI allowed under Automatic Route subject to

conditions in Construction & Development Projects

Projects Permitted

Housing

Commercial Premises

Resorts

Educational Institutions

Recreational Facilities

City & Regional Level Infrastructure

Townships


Conditions

Minimum Area

Serviced Housing Plots – 10 hectares/25 acres

Built-up area: 50,000 sq. mtrs. or 5,38,200 s.ft.

Combination Project – Any one of above 2

conditions

What is „built-up area‟?

What is included and what is excluded in it?


Conditions

Investment – Minimum Capitalisation

In case of WOS – US $10M

In case of JV – US $ 5M

FDI in a JV in 99:1 between Foreign & Indian

Partner – What should be the min. capital?

RBI‟s Recent Proposal for min. Foreign Stake in JV

Securities Premium included in Min. Cap?

Whether Preference Shares included?


Conditions

Funds to be brought within 6 months of

commencement of business

What is Commencement of Business?

Would it be date when Co. buys land as its SIT

Would it be date of approval by Local Authority?

What if delay in getting Min. Cap.?

6 mts. Time for Min. Capitalisation of $ 10 mn. not

relaxed for a WOS


Conditions

Original Investment locked-in for 3 years

Lock-in from receipt of each Tranche or

Completion of Min. Cap.

~ whichever is later

50% project must be developed in 5 years

from date of obtaining all statutory clearances

RBI‟s view both conditions are cumulative & No EXIT

What is developed ~ Must be LIVABLE / OC obtained

50% completion of Project in 5 years also a condition for

repatriation in addition to 3 years lock-in?


Conditions

Lock-in of Initial Investment

Can Foreign Investor sell to another NR within 3

years?

No outflow /remittance from Co.

Is lock-in on Investor or on Investment?

Can Foreign Investor sell to Domestic Investor

within 3 years?


Conditions

Lock-in of Initial Investment

Can Mauritian Co. / Cypriot Co. which has made

FDI be sold before 3 years?

Transfer of Foreign Investor offshore

FIPB‟s View

NR-NR transfer allowed within 3 years for Foreign

Investor in RE Co. pursuant to Group

Reorganisation of Investor?

FIPB‟s View


Conditions

Investor cannot sell „Undeveloped Plots‟

„Undeveloped Plots‟ means road, water supply, street

lighting, drainage, sewerage, etc. not made available

Developer to provide infrastructure and obtain CC

before disposing serviced housing plots

All Conditions should be mandatorily fulfilled

Min. Capitalisation / Min. Area / Lock-in NA to

Education Sector & Old Age Homes

Earlier Exit ?


FDI in Real Estate – Issues

Whether Agricultural Land can be acquired for

developing serviced housing plots?

If FDI & non-FDI compliant projects, can Co. get

FDI?

FIPB planning to monitor end-use of funds on a

Qtly basis


FDI in Real Estate – Issues

Whether Service Provider to Developer needs to

comply with conditions of P.Note?

Is RE Consultancy, Valuation, Property

Management = RE Business?

Is FDI allowed in this activity?

Logic?


Structuring of PE Investments

Mauritian Co.

Real Estate SPV

Cypriot Co. Singaporean Co.

India


Azadi Bachao Andolan (SC)

Treaty Shopping is Valid

To claim DTAA benefits

PO Box Office & Professional Directors with TRC?

Substantial Presence?

What if DTAA does not contain a LOB Clause?

Singapore better than Mauritius / Cyprus?




Factor Mauritius Cyprus Singapore

Interest under DTAA

Domestic Tax Rate

Credit for DDT

Underlying Tax Credit for

Dividends

Capital Gains Tax

LoB in DTAA

Perception

Ranking

Top 10 FDI Jurisdictions (2000-12)


PIS by FIIs

Can FIIs purchase shares of Listed RE Cos.

Under PIS – DLF/Unitech / Oberoi?

What if Listed Cos. have non-FDI compliant

projects?

Any limit?

Can FIIs buy under IPO?

Conditions for RE FDI applicable?

What about Pre-IPO Placements?

© PRAVIN P. SHAH &

ASSOCIATES, CAs 40

PIPE – PE in a Listed Co.

If PIPE of 25% or more in a Listed Co.

by Preferential Issue

Additional Factors to be Considered :

Special Resolution - s. 81(1A) of Cos. Act

Pricing as per SEBI Preferential Issue G/L

1 year lock-in from allotment

Open Offer under Takeover Regs.

26% of total post-issue shares

Pricing of Offer as per SEBI Takeover Regs.

© PRAVIN P. SHAH &

ASSOCIATES, CAs 41

PIPE of 15%+

Open Offer for min. 26% by PE Triggered on Date of Board Resolution

approving Preferential Issue not EGM Notice

Diageo - UB

If Foreign PE, then prior permission of RBInot reqd.


FDI in Hotels & Hospitals

100% FDI under Auto Route in Hotels & Tourism

Hotels includes:

Restaurants

Beach Resorts

Other Tourist Complexes

Convention centres, seminar units

100% FDI under Auto. Route also allowed in Hospitals

RE Conditions applicable to Hotels & Hospitals? RBI‟s Proposal?

What if Mixed Use Projects?

DIPP Proposal?


FDI in Industrial Parks

100% FDI allowed under the Automatic Route

FDI in Setting up of IPs and also in Established IPs

STPs, IT Parks, Bio-tech parks, etc

RE Conditions applicable?

Conditions for FDI

Minimum 10 Units and No Single Unit > 50% of allocable area

Minimum 66% of the total allocable area for Industrial Activity

Tax Benefits under Industrial Park Scheme, 2008

Difference between IPS 2008 and Circular 1/2011

Which is more liberal


FDI in SEZs

100% FDI allowed under the Automatic Route in

Development of :

SEZs

Free Trade Warehousing Zones

RE Conditions Applicable?

Conditions of SEZ Act should be fulfilled

What about Transfer of Shares of an SEZ Developer?

Recent Stand of BoA

Challenges in Investment Abroad

Liberalised Remittance Scheme

Scheme of RBI

For Resident Individuals

Foreign citizens Resident in India?

Minors?

US $200,000 equivalent / FY

Any permissible Capital or Current A/c Transaction

Opening Bank A/c, Acquiring Real Estate

Only US$ or any Foreign Currency equivalent


Country Negative List

Prohibited Countries?

Mauritius, Pakistan, Bhutan & Nepal

FATF Non co-operative

Iran, North Korea

What about following countries which appear in the List

of “High-risk and Non co-operative” of FATF?

Thailand?

Sri Lanka

Cuba

Indonesia

Turkey


Sources

Out of owned funds?

Borrow and Invest?

Banks can lend for LRS?

Application-cum-Declaration Form

Rental Income / Capital gains earned on assets

held abroad under LRS can be retained abroad and

reinvested


Buying Property Through a Co.

Set-up Co. Abroad & Acquire Property in Co.?

Would RBI permit setting up of a Co. under LRS?

Can Resident buy out shares of an Existing Co. for a

price equal to Property value?

Can Resident buy Initial Capital of an Existing Co. and

Invest balance under a Rights Issue?

Can Co. borrow abroad for buying a Mortgaged

Property?


Practical Situations

R & NRI relative jointly buy a house abroad

Resident sends $200,000 & Balance by NRI Relative

2 Resident Brothers

4 members in each Brother‟s Family

Flat at Chelsea, London - $30,00,000 / £19,00,000

Can remit $15 lakhs of Purchase price by March

2013 and balance $15 lakhs in April 2013

Flat would be jointly owned by 8 co-owners


Practical Situations

Can Resident sell House / Asset in India and

invest in HP abroad?

Can he claim benefit u/ss. 54 / 54F?

Is Benefit available for Houses abroad?

Yes ~ S.54

No ~ S.54F

Recent decision disallowed u/s. 54F distinguishing the

earlier 2 favourable decisions since they were under s.54


Other Considerations

Stamp Duty

Can be as high as 10% in Singapore

Agent‟s Fees

Property Transaction Fees

Foreign Lawyer

Inheritance Tax / Estate Duty


Thank You!!

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