| Acquisition/Investment in Indian Companies by | | | | as per the prescribed guidelines; and the price per |
| Foreign & Domestic Investors - Six Steps | | | | share arrived at has been certified by a chartered |
| Mantra | | | | accountant. The share consideration in respect of the |
| Joint ventures, strategic alliances and acquisitions are | | | | shares purchased by Investor will need to be |
| the flavor of the day that enable fast growth | | | | remitted to India through the banks authorized to |
| focused companies to have rapid inorganic growth | | | | deal in foreign exchange. |
| and expansion in new sectors. However, prior to | | | | In case of transfer of shares to the Investor the |
| engaging in a joint venture relationship or acquisition | | | | transaction would be subject to levy of stamp duty |
| of an operating Indian company ("Investee | | | | ranging from 0.25% to 0.75% of the value of the |
| company"), either by way of private placement, or | | | | shares transferred and payable in accordance with |
| secondary market, or subscription of substantial | | | | the applicable rates prescribed by the respective |
| equity share capital, it is advisable for the Investor to | | | | State where is the Investee company is registered. |
| carefully and stringently undertake the following six | | | | The transferor usually bears the stamp duty for the |
| step mantra to avoid future surprises and heartburns: | | | | transfer of shares in the absence of a contract to |
| (i) Due Diligence/Operations Audit: Extensive legal and | | | | the contrary. Alternatively, Investor can consider to |
| financial due diligence of the Investee company is | | | | subscribe to the equity share capital of the Investee |
| advisable to assess Investee company's track record | | | | Company by way of preferential allotment and avoid |
| in compliance with Indian laws, statutory obligations | | | | the stamp duty payable on transfer of shares. |
| and regulations applicable to it. The due diligence | | | | Capital gains arising from transfer of shares (in the |
| exercise (which usually takes between three (3) to | | | | event of an acquisition instead of an issue of fresh |
| four (4) weeks depending on availability of | | | | equity) would attract tax in the hands of the seller, |
| documents) not only enables the Investor to assess | | | | i.e., the existing shareholder of the Investee |
| potential liabilities, evaluate unknown and potential, | | | | Company. |
| disclosed or undisclosed liabilities but also enables the | | | | (iv) Contract Documentation Preparation: Upon |
| Investor to assess the feasibility and viability of the | | | | successful resolution of preliminary issues and an |
| proposed acquisition and rationalize enterprise | | | | affirmative decision to proceed with the acquisition, |
| valuation. If required, Investor can demand creation | | | | parties would need to identify and prepare |
| of an escrow account for safe deposit of a part of | | | | commercial documentation to record their |
| the acquisition cost, parked for an agreed period to | | | | understanding of the transaction and the manner in |
| mitigate against any future liabilities of the Investee | | | | which such transactions would be closed. |
| company. | | | | (v) Closing: A reasonable time frame is agreed within |
| (ii) Resolution of Preliminary Issues: Preliminary issues, | | | | which the share acquisition would be consummated. If |
| if any, arising pursuant to the conduct of the Due | | | | Closing is delayed, parties may consider to put |
| Diligence exercise would need to be resolved and a | | | | documents/consideration money in an escrow |
| decision taken whether or not to proceed with the | | | | pending resolution and satisfaction of the closing |
| acquisition. For example, whether a change of control | | | | conditions. |
| would affect the ability of the Investee company to | | | | (vi) Post Acquisition Compliances: This would usually |
| carry on its business operations under the current | | | | include corporate compliances such registration of the |
| regulatory framework and the approvals and licenses | | | | share transfer in the statutory books of Investee |
| required. Unresolved issues that are not fatal to the | | | | Company and intimation of change of control that |
| acquisition may be identified and negotiated. | | | | may be required pursuant to any regulatory |
| (iii) Regulatory/Pricing/Tax Issues: Identification of | | | | approvals and licenses already obtained. For instance, |
| regulatory and tax issues that may impact the | | | | Investee Company will need to inform Registrar of |
| transaction is critical. In case the Investor is a | | | | Companies and the RBI about the change in the |
| non-resident, foreign direct investment ("FDI") | | | | equity structure of the company. |
| guidelines will also need to be assessed. | | | | The risk of acquiring an existing operating company |
| FDI either by way of acquisition/transfer of issued | | | | with its past baggage of liabilities versus setting up a |
| equity capital or fresh subscription to the equity | | | | new company is a critical question that most |
| capital of Investee company in most sectors is | | | | Investors face. Needless to say, the cumbersome |
| presently unregulated and most sectors barring a | | | | process of setting up a new company, obtaining |
| few do not require the FDI approval from the | | | | necessary authorizations from regulatory authorities |
| Foreign Investment Promotion Board. However, the | | | | for establishing an Indian company and growing a |
| price at which the transfer takes place will need to | | | | new business is always challenging. It is for this |
| conform to the pricing guidelines prescribed by the | | | | reason that mergers and acquisitions are not only |
| Reserve Bank of India ("RBI"), i.e., the fair valuation | | | | common but the preferred way for expansion and |
| of shares have been done by a chartered accountant | | | | growth in the today's fast growing economies. |