Share Swaps are Permitted, But Do Individual Shareholders Benefit?

In August 2024, India's regulations on foreign exchange for inbound investments were relaxed, allowing shareholders of an Indian company to transact with individuals or entities residing outside India and swap their holdings in the Indian company for shares of: (A) another Indian company; (B) a foreign company; or (C) a mix of both. This change is welcomed as previously only inward swaps into India were allowed. This shift in policy is expected to facilitate a more fluid and dynamic investment environment, reducing barriers to cross-border share transactions and fostering deal-making in India.

It is important to note that in cases (B) and (C), where an Indian entity or individual receives shares of a foreign corporation, India's foreign exchange policies on outbound investments come into play. Under these rules, share swaps involving an Indian entity (such as a company, LLP, partnership, body corporate) acquiring shares of a foreign company are allowed, with some exceptions. However, there is no equivalent permission for Indian individuals. Indian individuals can only partake in share swaps through processes like mergers, demergers, amalgamations, or liquidations.

In the context of structuring M&A deals (i.e., structured as a secondary transfer) for Indian companies where the acquirer is foreign company some of the implications are as follows:

• If the target Indian company is owned by a holding company or multiple companies, the acquisition can be structured as either a full share swap (where Indian shareholders receive shares of a foreign company in exchange for their shares in the Indian company) or a combination of a share swap and cash deal.

• The same principle applies when sellers exchange shares of the target company for shares of another Indian company, but the counterparty is a foreign entity.

• For individual sellers of the Indian company, if the acquirer's proposed shares are from a foreign company, such a share swap is not allowed under the foreign exchange regulations and would need prior government approval.

• However, if the sellers are individuals and the acquirer offers shares of another Indian company, this transaction is permitted (with some exceptions).

• It is important to note that if there is a mix of individual and non-individual shareholders, undertaking the deal via a share swap poses several challenges.

  
  

In conclusion, while the liberalization of India's foreign exchange regulations in August 2024 has certainly opened up more avenues for share swaps involving Indian companies, it remains crucial for individual shareholders to navigate these transactions with caution. The benefits of such deals can be substantial, but they come with a complex web of regulatory requirements and potential pitfalls. For individual shareholders, particularly, understanding the nuances of these regulations and seeking appropriate legal and financial advice is essential to maximizing the benefits and minimizing the risks associated with share swaps. Ultimately, the evolving landscape of M&A in India offers exciting opportunities, but it demands informed and strategic decision-making to fully leverage its potential.