Regulatory gaps in cross border M & A Transactions: The FC TRS Conundrum

Alpana Srivastava

Overview of Rule 4 of the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 ("NDI Rules") and the requirement to file Form FC-TRS there under:

Rule 4 of the NDI Rules lays down the general conditions that unless otherwise provided by the Foreign Exchange Management Act, 1999 ("FEMA") or rules or regulation made thereunder, an Indian entity, investment vehicle, venture capital fund, firm, association of persons, or proprietary concern shall not receive any investment or record investment in its book from a person resident outside India. The permission concerning such investment should be subjected to RBI's approval, sought through an application made and with sufficient reasons as it deems fit.

Brief analysis Form FC-TRS:

The application to RBI for approval for the transfer of shares is made through Form FC- TRS under Regulation 4(3) of Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 ("NDI Reporting Reg"). It is also pertinent to note that the onus of reporting the transfer shall be on the resident transferor/transferee or the person resident outside India holding equity instruments on a non-repatriable basis, as the case may be. The Form-FCTRS shall be filed within 60 (sixty) days of the transfer of equity instruments or receipt/remittance of funds whichever is earlier. Further, Para 6.2 of the Foreign Direct Investment Policy ("FDI Policy") states that - when the transfer is on a private arrangement basis, on settlement of the transactions,

 

the transferee/his duly appointed agent should approach the investee company to record the transfer in their books along with the certificate in the Form FC-TRS from the Authorized Dealer Bank ("AD Bank") that the remittances have been received by the transferor/payment has been made by the transferee. On receipt of the certificate from the AD Bank, the company may record the transfer in its books. Here the term 'books' under FDI Policy may be construed to be the register of members and share transfers maintained by the Indian investee company under CA 2013.

Position under the Companies Act, 2013 ("CA 2013"):

Under FEMA, in case of secondary share purchases, the transferee must remit purchase consideration in full (or at least 75% in case of deferred payment structure) to the transferor prior to the transfer of shares. While this being the thumb rule, the expression 'transfer of equity instruments or receipt/remittance of funds, whichever is earlier' used under Regulation 4(3) of NDI Reporting Reg creates needless misunderstanding.

In relation to the "date of transfer" collective reading of FEMA and CA 2013 requirements suggest that, the sequential steps to transfer shall be (i) the receipt/remittance of funds needs to take place, (ii) followed by filing of Form FC-TRS within 60 (sixty) days with AD Bank (iii) only upon receiving an approval copy for such reporting the parties execute form SH-4 (or delivery instruction slip in case of demat shares) as well as comply with the applicable AoA restrictions, (iv) the investee company to take on record/approve the same. At the time of filing Form FC-TRS, the reporting party cannot definitively know the actual date of transfer, as it depends on subsequent approvals and compliance with AoA. Even after AD Bank approval, the transfer could be rejected by the company for violating its AoA, especially in the case of private companies. A similar view was taken by the RBI offices in the past few cases wherein Indian investee companies were directed to take cross-border share transfers on record only after obtaining approval for Form FC-TRS reporting, and any deviation here was held in contravention of Rule 4 of NDI Rules.

However, in contrast, existing Form FC-TRS mandates to disclose 'date of transfer', which seems to clearly contradict with FDI Policy, and the sequential steps discussed hereinabove. On this point, the RBI's FDI reporting manual clarifies to select the date of application itself as date of transfer (where the date of transfer is future date) or to provide the date of transfer as per share transfer agreement. This clarification is vague and allows to select any practically convenient date without appreciating the legalities around determining the date of transfer.

In practice, the AD Banks are relying on this and are approving Form FC-TRS filings basis such different date being provided. Consequentially, such transactions may end up having two different 'dates of transfer' under these two statutes (i.e., one which is provided purely for FEMA reporting purposes and the other being the actual date of transfer determined as per CA 2013 after considering other legalities like AoA restrictions, procedures etc., leading to absurdity. Besides, if one tries to fix this issue by recording the share transfer as per CA 2013 first and then filing Form FC-TRS with that actual transfer date, this may still be viewed as a contravention of Para 6.2 of the MI Policy at a later date.

Conclusion:

The apparent inconsistencies between the CA 2013 and the FEMA in the aforementioned areas underscore the urgent need for regulatory alignment and clarity. Given the significance of determining legal ownership and associated rights and obligations, absolute clarity regarding the date of issue or transfer of securities is crucial. Therefore, it is imperative that the Government or the Reserve Bank of India (RBI) addresses these discrepancies through necessary clarifications or amendments to FEMA.