INDIA Law and Practice Contributed by: Lalit Kumar, JSA Advocates and Solicitors
holder of convertible securities becomes entitled to apply for shares, based on the valuation report of the registered valuer given not earlier than 60 days from the date when the holder of convertible securities becomes entitled to apply for shares. The decision of the option to be adopted must be taken at the time of issuance of the offer of securities. • The offer of securities is made through a private placement offer letter in a prescribed format which is sent to the proposed allottees of shares. • The proposed allottees apply for the shares by remitting the funds into the company’s bank account. • The shares are then allotted by the company, generally, in a dematerialised form. • The shareholder is recorded in the company’s record of shareholders. • A prescribed online form with details of the allotment made is filed with the Registrar of Companies. • In addition, the investment could also require regulatory approval – eg, if the acquisition is 26% or more in a financial services company, then prior approval of the Reserve Bank of India will be required. 7.2 Restrictions There are some regulatory and other restric - tions that must be borne in mind when a foreign VC investor is considering investments in India. Some of these restrictions are given below. • As mentioned in 2.1 Fund Structure , irre- spective of the sector in which investment is made, if FDI is made by (i) an entity of a country sharing land border with India; or
(ii) where the beneficial owner of an invest - ment into India is situated in or is a citizen of any country sharing land border with India, FDI can only be made under the govern - ment approval route. Therefore, a foreign VC investor must bear this condition in mind. In this regard, it may be noted the restriction is on investments made through a fund which is sponsored and/or beneficially owned by investors who are residents of countries shar - ing land border. The residency status of the manager or the limited partner will not be the relevant criterion. • Investment made should be following the investment criteria specified in the SEBI regu - lations. • Investment made in the form of FDI must comply with the pricing guidelines, which means the investment made cannot be lower than the price determined by a valuer. This is applicable when the foreign investor is mak - ing investment through primary issuance or secondary acquisition. • Compliance with sectoral caps for specific sectors (which means investment limits up to which the investment can be made under the Automatic route) and other restrictions and conditions provided in the FDI Policy and the NDI rules. • For transfer of shares to a person a resident in India, the provisions of tax withholding apply when payment is made to a non- resident investor. Therefore, this would need to be checked at the time of exit by a foreign investor. • Liquidation preference in case of winding up of the investee company will be subject to the insolvency law waterfall mechanism provided. • The instruments that can be used for invest - ment could be equity shares or compulso - rily convertible securities (such as CCPS). All other kinds of instruments are treated
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