INDIA Law and Practice Contributed by: Anish Mashruwala, Utsav Johri, Megha Upadhyaya and Sahil Unadkat, JSA
1. Market 1.1 Major Lender-Side Players
• Outbound acquisitions, where an Indian acquirer acquires a company incorporated outside India directly or through a special- purpose vehicle incorporated outside India ( “Offshore SPV” ). For an inbound acquisition where the acquisi- tion is through an offshore acquirer, the lend- ing market essentially comprises international banks, capital markets, financial institutions and offshore debt funds. However, such acqui- sition finance cannot be secured by a pledge on shares of the Indian target, charge on assets of the Indian target or guarantees from the Indian target due to Indian exchange control regula- tions. Additionally, Indian banks, Indian financial institutions and domestic funds cannot provide finance to an offshore entity to acquire shares of an Indian company. For an acquisition by a FOCC, finance cannot be provided by Indian banks, Indian financial institutions or domestic funds, as FOCCs are not permitted to leverage in the Indian market for the acquisition of shares. An Indian company can raise foreign currency financing from off- shore lenders in the form of external commercial borrowings (ECB), but these cannot be used for equity investments in India. The primary source of debt funding which a FOCC can utilise is from overseas lenders for the acquisition of an Indian target through the issuance of NCDs, which can be subscribed to by FPIs. FPIs are registered with the Securities and Exchange Board of India (SEBI) under the SEBI (Foreign Portfolio Inves- tors) Regulations, 2019 (the “FPI Regulations” ). For an outbound acquisition, an Indian acquirer can borrow domestically from banks, financial institutions and other lenders if it complies with certain qualitative and quantitative requirements. Additionally, if the acquisition of the offshore tar-
Guidelines issued by the Reserve Bank of India (RBI) restrict an Indian bank’s ability to finance the acquisition of equity shares. Generally, a pro- moter’s contribution towards equity cannot be funded by a bank, and banks cannot finance the acquisition of equity shares other than in excep- tional cases. Therefore, financing for a domes- tic acquisition is generally procured from non- banking financial companies (NBFCs) or by the issuance of non-convertible debentures (NCDs) by the acquirer, which can be subscribed to by foreign portfolio investors (FPIs), mutual funds and alternate investment funds (AIFs). NBFCs are registered with the RBI and so far enjoy a more relaxed regulatory framework than banks. International banks often lend through their offices outside India to borrowers outside India for acquisitions in India, or they lend to Indian borrowers for Indian acquisitions through the FPI route (discussed in 1.2 Corporates and LBOs and 3.1 Senior Loans ). Private credit funds have also started participat- ing in this space through AIFs in India or under the FPI route. 1.2 Corporates and LBOs In the Indian context, cross-border acquisitions are commonly classified into two categories. • Inbound acquisitions, where an offshore acquirer acquires the shares of an Indian target. A slight variation to this structure is the acquisition of an Indian target by a foreign- owned and controlled operating company (FOCC) incorporated in India (which is a sub- sidiary of an offshore entity).
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