It is not very often that courts in
India have had the occasion to interpret and rule on the Foreign Direct
Investment (FDI) Policy of the Government of India. Earlier this month, the
Bombay High Court issued its ruling in IDBI
Trusteeship Services Ltd. v. Hubtown Ltd., which relates to the
legalities of a foreign investment structure that involved compulsory
convertible debentures (CCDs) issued by an Indian company to a foreign investor
the proceeds of which were in turn used by the Indian company to invest in
optionally convertible debentures (OCDs) of two other companies operating in
the construction development sector. The specific issues in question relate to
the permissibility of assured returns to the foreign investor and the nature of
downstream investments. Sandip Bhagat, et. al., discuss the facts, issues and
decision in an article
on The Firm.
India have had the occasion to interpret and rule on the Foreign Direct
Investment (FDI) Policy of the Government of India. Earlier this month, the
Bombay High Court issued its ruling in IDBI
Trusteeship Services Ltd. v. Hubtown Ltd., which relates to the
legalities of a foreign investment structure that involved compulsory
convertible debentures (CCDs) issued by an Indian company to a foreign investor
the proceeds of which were in turn used by the Indian company to invest in
optionally convertible debentures (OCDs) of two other companies operating in
the construction development sector. The specific issues in question relate to
the permissibility of assured returns to the foreign investor and the nature of
downstream investments. Sandip Bhagat, et. al., discuss the facts, issues and
decision in an article
on The Firm.
Here, I propose to highlight some
of the key implications of this judgment that may be of wider relevance:
of the key implications of this judgment that may be of wider relevance:
1. The Bombay High
Court has demonstrated its willingness to view the transaction as a whole by
transcending beyond the form and into the substance. In other words, although
the transaction involved two stages of foreign investment into a holding company,
which in turn invested in two operating companies, the court effectively viewed
the transaction as a whole and not in separate parts. The openness to re-characterizing
the transaction may cause some amount of uncertainty in structuring foreign
investments. Moreover, the reliance of the Court in doing so on judgments of
the Supreme Court relating to aspects such as taxation and cases involving
fraud leaves the debate somewhat open.
Court has demonstrated its willingness to view the transaction as a whole by
transcending beyond the form and into the substance. In other words, although
the transaction involved two stages of foreign investment into a holding company,
which in turn invested in two operating companies, the court effectively viewed
the transaction as a whole and not in separate parts. The openness to re-characterizing
the transaction may cause some amount of uncertainty in structuring foreign
investments. Moreover, the reliance of the Court in doing so on judgments of
the Supreme Court relating to aspects such as taxation and cases involving
fraud leaves the debate somewhat open.
2. The
implications of the judgment on downstream investments are categorical in that
foreign owned/controlled investment companies in India must follow all aspects
of foreign investment regulations (including types of investment instruments
such as equity shares or CCDs). This enhances the compliance requirements of
downstream investments.
implications of the judgment on downstream investments are categorical in that
foreign owned/controlled investment companies in India must follow all aspects
of foreign investment regulations (including types of investment instruments
such as equity shares or CCDs). This enhances the compliance requirements of
downstream investments.
3. In essence, the
Court declined to validate the transaction due to the presence of an assured
return. This will have to be considered in the context of pronouncements by the
Reserve Bank of India (RBI) of its intention to liberalize greater flexibility in
the pricing of instruments, including an assured return, in the context of
optionality clauses, as discussed here.
Court declined to validate the transaction due to the presence of an assured
return. This will have to be considered in the context of pronouncements by the
Reserve Bank of India (RBI) of its intention to liberalize greater flexibility in
the pricing of instruments, including an assured return, in the context of
optionality clauses, as discussed here.
In any event, this does not appear
to be the final word as the Court was only determining whether there are
triable issues in a summary suit that require further adjudication. The hearing
in the suit is to follow.
to be the final word as the Court was only determining whether there are
triable issues in a summary suit that require further adjudication. The hearing
in the suit is to follow.