Redomiciling to India shouldn’t leave any shareholder at a disadvantage

India redomiciling structures, typically involve a tribunal driven merger.

By Bharat Anand and Ishaan Chopra 

Valuation multiples offered by the Indian public markets to new-age enterprises has led to an increasing number of India-focused yet foreign incorporate technology players to redomicile back to India for tapping into the deepening public markets.

Such India redomiciling structures, colloquially referred to as ‘reverse flips’, typically involve a tribunal driven merger of the offshore holding company with its Indian operating subsidiary. The shareholders of the offshore holding company receive the securities of the Indian operating subsidiary as the merger consideration, and the economic (including the percentage shareholding at the offshore holding company) and governance rights available to shareholders of the offshore holding company are replicated at the Indian operating subsidiary post the merger.

This replication is usually achieved through a shareholders’ agreement at the Indian subsidiary, which often involves an ‘Indianisation’ of financing agreements executed in the US or Singapore.

Key Regulatory and Commercial Considerations

The inversion structures are at a nascent stage in India, and companies as well as investors should be mindful of certain key regulatory considerations. From a foreign exchange regulation perspective, the issue of shares by the Indian operating subsidiary to non-resident shareholders is subject to pricing guidelines, sectoral restrictions and other attendant conditions under the Indian exchange control regulation. Reverse flip structures in the market have typically relied upon a deemed approval by the Reserve Bank of India (RBI) for inbound mergers available under the RBI’s cross border merger regime, subject to compliance with certain conditions, which include the ‘overseas borrowing’ of the foreign holding company being made compliant with cost ceilings under the external commercial borrowing norms in India.

From a process standpoint, shareholders need to ensure that their rights (i.e., entitlement to merger consideration and conduct of company during the pendency of the scheme) are sufficiently safeguarded under the merger scheme filed with the tribunal. Any material amendments to the scheme should ideally be based on involvement of the shareholders.  The scheme approval typically takes up to one year. However, the recently notified fast-track regime for inbound mergers should hopefully accelerate the pace.

Given that the end game for such structures is an initial public offering (IPO), it is critical for the investors to ensure that the shareholders’ agreement at the Indian subsidiary captures the key protective rights such as participation in price discovery for the IPO, appointment of merchant bankers, protections against ‘promoter classification’ and the ability to offer their securities in the offer for sale component. Investors may also want to prefer exploring a resetting the conversion ratio of their convertible securities to ‘make good’ for a sub-par IPO valuation. However, this is challenging due to evolving views of the Securities and Exchange Board of India (SEBI) on such resets, apart from exchange control constraints.

Drawing from the US Inversion Experience

The fall through of the proposed merger between pharmaceutical giants, Pfizer and Allergan in 2016 serves as a compelling case study on the impact that changes in law can have on a reverse flip structure. In this arrangement, Pfizer, a company domiciled in the US, had proposed a merger with Allergan, an Ireland incorporated entity. The merger involved redomiciling Pfizer to Ireland in order to enable Pfizer to benefit from Ireland's more favourable corporate tax regime. However, the merger was abruptly terminated due the introduction of new tax regulations in the US Treasury Department. These regulations made the deal commercially unviable and triggered the ‘Adverse Tax Law Change’ clause under the merger agreement.

Deal makers, and mergers and acquisitions (M&A) lawyers would be well advised to be alert as to the impact that changes in law, tax rates or tax policy can have on such deal structures and, to the extent permissible, create mitigation measures for such challenges.

(Bharat Anand is Senior Partner and Ishaan Chopra is Associate at Khaitan & Co.)

Views expressed are personal, and do not represent the stand of this publication.