1. SCOPE Overview of Cross-Border M & A transactions Process involved Deal structuring issues Due Diligence issues Legal aspects FEMA Provisions Transaction Documents Emerging Trends Key Challenges

2. Cross Border Transaction Cross Border Transaction services means services related to transaction which involve two or more countries. In India there are two Acts which primarily seems to show concern when a person (Indian Resident or foreign Resident) undertakes cross border transactions that is: Foreign Exchange Management Act, 1999 and Income Tax Act, 1961

3. Definitions Capital: Equity share, fully, compulsorily or mandatory convertible preference shares, debentures, Capital account transaction: Transaction which alters assets or liabilities. Control: Right to appoint majority of directors, or control of management or policy decisions FDI: Investment by Non-Resident which alters capital

4. Joint Venture: Indian Company in which a foreign company makes investment OCB: Overseas Corporate Bodies QFI: Qualified Foreign Investors VCF: Venture Capital Funds

5. Who Can Invest In India Non Resident subjct to FDI policy expect in prohibited sector. NRI resident in Nepal and Bhutan OCB: Overseas Corporate Bodies FII: Registered

6. Where to Invest Companies Partnership Firm VCF Trust : Prohibited LLP No other entities

7. Prohibited Sectors Lottery Gambling and betting Chit Funds Nidhi Companies Trading in TDR Real Estate Other prohibited

8. Permitted Agriculture including floriculture, horticulture, seed development, agro services- 100% Tea: 100% Mining: 100% Petroleum and Natural Gas: 100% Defense: 49% Aviation : 100% Courier: 100%

9. Sectors Construction: 100% Automatic Telecom: 100% Automatic Trading : 100% Automatic Single Brand retail: 100% Automatic upto 49% Multi Brand Retail: 51% Government Railways: 100% Automatic Banking 74% Automatic NBFC: 100% Automatic Pharma: 100% Automatic

10. OBJECTIVES Greater Economies of Scale Access to Markets Access to Raw Material Diversification of Business

11. IMPARATIVES Cultural Issues Legal & regulatory framework Identifying and delivering synergies Tax regimes & treaties Business Dynamics Business Environment Accounting treatment

12. TAX AND FINANCE ISSUES Exit considerations Cash repatriation Debt Structuring Income flows and their taxability Entry Strategy Financing options 1 2 3 4 5 6

13. CATEGORIES Corporate Partnering Public to Private Supporting Management Buy Outs Leveraged Buy Outs Strategic Investments Earn Out Acquisitions Distress Sale

14. APPLICABLE LAWS  India  Companies Act – Section 372A,  FEMA Regulations  Tax  Target jurisdiction  Company Law & Competition law  Exchange Control Regulations  Takeover Regulations  Tax

15. PROCESS Assemble Team Limited Due Diligence Purchaser obtains financing commitment MoU / LoI Detailed due diligence Definitive Purchase Agreement Purchaser ’ s firm financing Seller and Purchaser comply with covenants CLOSING

16. STRUCTURE ISSUE Tax Financing Corporate Veil Regulatory constraints (host & target countries) Exchange Control Regulations

17. FIRST STEP  Appointment of Advisor  Investment Banker  Attorneys (Local and Offshore)  Public Relations Agents  Identify Due Diligence Areas  To achieve commercial objectives  Acquisition  Strategic Investment  Preliminary Documentation  Review of Information Memorandum  Entering into mandate letter with Advisors  Executive Non-Disclosure Agreement  Exclusivity Arrangements

18. LOI or MOU Pros – Binding v/s. Non-binding – Reduces basic understanding to writing – It may look different in written form – From buyers perspective Exclusivity may cut-off seller ’ s negotiations with third party Provides basis for expense reimbursement Cons – Leaks – Duty to disclose Contents

19. Due Diligence Physical Data Room Virtual Data Room DD list needs to be carefully tailored to meet the needs of specific transaction and jurisdiction Specific inputs needed from local lawyers and tax advisors

20. Due Diligence Effective Due Diligence Process should address the following- – Strategy Assumptions – Identify operational, legal, financial and other significant issues – Assessment of Risks – Effect of assessment on Valuation (e.g. Fair Price for the Target Company)

21. Illustrative Due Diligence issues (1) Onerous obligations/covenants Payment of ongoing fee/royalty Restriction on activities Rights of first refusal/put/call option LDs/ penal provisions/any liability which flows through

22. Exclusivity provisions Confidentiality Assignability / change of control/ consent of the counter party for transactions Regulatory Approvals

23. Impact of DD Impact on M&A Agreements – Representations, warranties, indemnities, covenants – Conditions precedent, conditions subsequent Holdback / escrow (mechanism for retention) of purchase price, bank guarantee, milestones for payment Functions as an internal audit for post acquisition strategy In cross-border deals - Impact of applicable law to Transaction (Competition Law issues, Dominant Undertaking, Takeover Regulations, Insider Trading, etc.)

24. Results of Due Diligence  What can the purchaser do?  Require the seller to remedy the problem  Obtain an indemnity/other contractual protection  Restructure deal to exclude asset or liability  Reduce purchase price  Insurance in respect of risk – “price” – the risk  Pull out  Limitations of liability  Cap on liability  Threshold – “basket”  De-minimis  Others  What should limitations apply to?  Creditworthiness of person giving warranties – consider guarantee  Allocation of Risks  Representations and Warranties  Who gives?  All shareholders Institutional shareholders  Involvement of management  Extent

25. Cross Border Deals - Agreements Shareholders’ Agreement Technology Collaboration Agreement Product Supply Agreement Stock Purchase/ Subscription Agreement Exclusivity Arrangement Information Memorandum Brand Licensing Agreement Code of Ethics Labour Union Settlement Loan/ Security Agreement Employment Agreement Feeder Stocks Supply Agreement

26. Regulatory Approval Competition Authority Stock Exchange Board of Target Company Lenders Foreign Investment Authority Sector Regulators

27. Companies Act, 1956 Section 372A – Inter corporate loans & investment beyond 60% of paid up capital and free reserves or 100% of reserves to be approved by shareholders Complications in International bidding due to disclosure requirements

28. FEMA Overseas Direct Investment ( ‘ ODI ’ ) Permissible in: overseas Joint Venture ( ‘ JV ’ ); or overseas Wholly Owned Subsidiary ( ‘ WoS ’ ) ODI not permitted in real estate business or banking business Conditions for investment under the automatic route Total permissible financial commitment ≤ 200% of the net worth Bona fide business activities

29. Eligibility norms for Investor: not on RBI ’ s exporters ’ caution list / list of defaulters not under investigation by investigation / enforcement agency or regulatory body Filings in respect of ODI (in Form APR) to be up-to-date All transactions with the JV/WoS to be routed through 1 AD branch Form ODA (with details of ODI under automatic route) to be submitted to the AD Total Permissible Financial Commitment (post August 12, 2005) ECBs – different views

30. Cash remittance by market purchase Capitalization of: export proceeds, and fees, royalties, commissions or other entitlements due from foreign entity for supply of technical know-how, consultancy, managerial or other services 50% of the value of guarantees issued to or on behalf of the JV / WoS Direct and indirect investment in agricultural operations

31. Financing an Acquisition Funding Methods Drawal of foreign exchange from AD Swap of ADRs/GDRs Utilization of proceeds of ECBs / FCCBs Balances in EEFC account Utilization of foreign currency funds raised through ADR / GDR issues 200% net worth ceiling not applicable in case of funding by: Balances in EEFC account Utilization of foreign currency funds raised through ADR / GDR issues

32. Post Investment Changes Parent Co Step Down Sub (3) Step Down Sub (2) JV / WoS Step Down Sub (1) Step Down Subsidiary Post investment changes / additional investment in existing JV / WoS  Post investment changes / additional investment in existing JV / WoS  JV/WoS may diversify its activities  Set-up step down subsidiaries  Alter shareholding pattern in the overseas entity  Reportings to be made to the RBI in Form APR

33. Share Purchase Agreement Key issues – Reps and Warranties based on due diligence reports – Conditions Precedent & Subsequent – Closing mechanism – Indemnity from seller – Statutory approvals – CPs to closing – Hold back, brand usage and non-compete – Competition law issues

34. Governing Law and Dispute Resolution Choice of Law - Domestic/Neutral Mediation  Informal  Institutional Mechanism: Courts v. Arbitration  Domestic/Neutral  Costs  Interim relief  Appeal rights  Enforcement

35. QUESTIONS Thanks Rajvendra Sarswat Advocate Rajasthan High Court +91-98290-98210 sarswat.r@gmail.com