The capital market regulator Securities Exchange Board of India (SEBI) has notified new rules revamping the delisting framework in the country via SEBI (Delisting of Equity Shares) (Amendment) Regulations, 2024 notified on 25.09.2024. The new rules have paved the way for fixed price delisting for companies with frequently traded shares as an alternative to the regular reverse book-built price delisting. The floor price for any delisting offer can be determined by taking into account the ‘adjusted book value’ of the listed entity. For a fixed-price delisting, the acquirer will have to offer a minimum 15% premium to the floor price to the public shareholders. These new rules are aimed at promoting ease of doing business and enhancing the efficiency of the delisting mechanism.
Earlier the reverse book building process (RBB) was followed under which a firm planning to delist its shares from the stock exchange would make a public announcement and set a minimum floor price for the delisting offer. After this, shareholders of the company would place offers to sell securities back to the promoters or large shareholders. This process was introduced in 2003 through the SEBI (Delisting of Securities) Guidelines 2003.
SEBI in its new rules has provided an alternative to this RRB process. Fixed-price delisting is the alternative for for delisting of companies whose shares are frequently traded. Moreover, SEBI has mandated minimum a premium of 15% on the offer price for the fixed-price delisting.
Earlier, the floor price was calculated as per Regulation 8 of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. It was linked to the traded price of the stock over a specified period. Under the new rules, the floor price (minimum price) in the case of Frequently Traded Shares, will be calculated as the highest value among the following:
For infrequently traded shares, the floor price will be determined as the highest value among the following criteria:
As per the new rules, the reference date for computing the floor price is the date of the public announcement for the delisting offer, or the next trading day, if the public announcement is made after market hours or on a non-trading day. For instance, if the initial public announcement is made at 1:00 p.m. on August 4, 2023 (Friday), then August 4, 2023, will be the reference date. However, if the initial public announcement is made at 4:30 p.m. on August 4, 2023 (Friday), then August 5, 2023 (Saturday) will be the reference date.
Earlier, the Delisting Regulations allowed acquirers to make a counter-offer within two working days. However, the new rules lower the thresholds for counter-offers. The acquirer can now make a counter-offer if their post-offer shareholding, along with persons acting in concert (PACs), exceeds 75%, and at least 50% of public shareholders have tendered their shares in the delisting offer. Additionally, the counter-offer price must be the higher of two values: the volume-weighted average price (VWAP) of the shares tendered during the RBB process or any indicative price that exceeds the floor price. The counter-offer mechanism does not apply to fixed-price delisting offers that do not involve a bidding or price discovery process. This amendment aims to address past inefficiencies and facilitate smoother delisting processes.
The new rules contain provisions for Investment Holding Companies (IHCs). IHCs will have an additional route for delisting, apart from the Reverse Book Building (RBB) and fixed-price methods. This route involves pursuing delisting through a scheme of arrangement sanctioned by the National Company Law Tribunal (NCLT). SEBI has emphasized regulatory approvals and adherence to the Companies Act to maintain transparency and safeguard shareholder rights.
SEBI's new delisting framework represents a significant overhaul of the regulatory landscape, balancing innovation with investor protection. By introducing fixed-price delisting alongside the traditional Reverse Book Building (RBB) method, SEBI has expanded options for companies, ensuring greater flexibility in the delisting process. Key provisions, such as the redefined floor price calculation, mandatory premium for fixed-price offers, and a streamlined counter-offer mechanism, address historical inefficiencies and aim to promote transparency and fairness. Furthermore, fixed-price delisting reduces speculative volatility and provides upfront pricing certainty for shareholders and acquirers, facilitating smoother decision-making and fund arrangements.
The Securities and Exchange Board of India ("SEBI") has instituted significant modifications to the SEBI (Foreign Venture Capital Investors) Regulations, 2000, through the SEBI (Foreign Venture Capital Investors) (Amendment) Regulations, 2024 ("Amendment"). These amendments, accompanied by detailed Operational Guidelines for FVCIs ("Operational Guidelines"), mark a fundamental shift in the regulatory landscape, with implementation scheduled for January 1, 2025. According to the circular issued on September 26, 2024, these changes are intended to facilitate smooth transition and promote the development of, and regulate, the securities market while protecting investors' interests.
Existing FVCIs are required to engage a Designated Depository Participant (DDP) by March 31, 2025, to facilitate the continued registration process and meet enhanced due diligence requirements. FVCIs failing to engage a DDP will be mandated to liquidate their investments according to a set timeline: listed securities by March 31, 2026, and other investments by March 31, 2027. The proceeds from the sale must comply with KYC and AML/CFT requirements.
For existing FVCIs registered on or before December 31, 2019:
For FVCIs registered post-December 31, 2019:
If the FVCI fails to pay the renewal fee by the due date, SEBI mandates that the FVCI liquidate its existing investments within the specified timeline: listed securities within one year and other investments within two years from the registration block's end date
As far as DDP Assessment Parameters are concerned, the Operational Guidelines prescribe a detailed assessment for determining the eligibility of FVCIs. DDPs are required to verify the applicant's country of origin, ensuring that they are from a jurisdiction compliant with SEBI’s criteria, including being a member of IOSCO or FATF. Additionally, DDPs must ensure the applicant is 'fit and proper' as per SEBI's eligibility standards
The DDP must monitor FVCI compliance regularly, including tracking material changes in ownership or structure, and report any sanctions or regulatory actions taken against the FVCI
Primary Eligibility Requirements include:
SEBI emphasizes the need for FVCIs to maintain fit and proper status, adhere to comprehensive KYC processes, and implement regular monitoring of compliance with AML/CFT guidelines. FVCIs must notify SEBI and the DDP about any material changes in structure or control within the prescribed timelines. They must also ensure proper documentation of beneficial owners, as outlined in the Prevention of Money-laundering Rules, 2005
DDPs are tasked with processing FVCI applications, performing due diligence, and collecting fees. DDPs are also responsible for reporting to SEBI monthly, covering applications received and disposed of, compliance status, and any material changes that may affect the FVCI's registration status. The DDP must notify SEBI of any instances where an FVCI's jurisdiction becomes non-compliant with FATF or IOSCO standards and halt any new investments from such FVCIs until they regain compliance
Significant Regulatory Modifications include Elimination of the minimum commitment requirement (previously USD 1 million), the amendments specifically include eligibility for IFSC-based entities, marking a critical inclusion in the regulations, and enhanced KYC integration with the KRA (KYC Registration Agency) portal. SEBI has streamlined custodian requirements, mandating a single custodian even if an FVCI holds accounts in multiple depositories (NSDL and CDSL)
SEBI expects these amendments to improve operational efficiency by streamlining the registration process, enhancing due diligence, and enabling better monitoring of FVCIs. This also aligns Indian regulations with international best practices. The enhanced eligibility criteria and due diligence processes are likely to foster greater investor confidence, facilitating increased participation in the IFSC.
The latest FVCI Regulations represent a significant evolution in India's venture capital regulatory framework. The delegation of key regulatory functions to DDPs, coupled with enhanced compliance requirements and clearer operational guidelines, indicates SEBI's commitment to creating a more robust and efficient regulatory environment. The success of this regulatory transformation will depend on effective coordination between FVCIs, DDPs, and SEBI, with particular emphasis on meeting the prescribed timelines and compliance requirements. With the explicit inclusion of IFSC-based entities and a streamlined regulatory process, SEBI aims to foster greater participation in India's venture capital ecosystem while maintaining rigorous oversight mechanisms
Exit strategy forms an integral part of the investment process, enabling investors to realize returns from their investments. In India, various exit strategies are available for private equity investments, each with specific legal implications that both investors and companies must consider. These strategies primarily include: (a) Exit through Initial Public Offerings (IPOs), (b) Secondary Sales, (c) Mergers and Acquisitions (M&A), (d) Exit through Share Buybacks, and (e) Exit through Put Option.
An IPO represents the first instance in which a private company offers its shares to the public, serving as a significant avenue for raising capital. Large private companies with robust track record frequently employ IPO as a strategic exit route. This exit strategy can generate substantial returns for investors but necessitates meticulous adherence to regulatory requirements and legal formalities. In India, the Securities and Exchange Board of India (SEBI) regulates IPOs under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018. Companies must ensure strict compliance with such disclosure norms and regulations, which mandate comprehensive disclosure obligations, the submission of a draft red herring prospectus (DRHP), and a thorough scrutiny process by SEBI. Existing shareholders, including private equity investors, are typically subject to a lock-in period, usually ranging from six months to a year, during which they restricted from divesting their shares. Accurate and comprehensive disclosure in the prospectus is crucial to mitigate potential legal repercussions. The prospectus must clearly provide detailed information about the company's financials, business operations, and the potential risk factors.
Secondary sale of sales shares by existing shareholders of a company to other investors is considered a feasible option to get exit from the company. Secondary sales offer a mechanism for providing liquidity to investors without the need for a public listing. Secondary sales must adhere to the regulatory framework established by the SEBI and, in the case of unlisted companies, comply with the provisions of the Companies Act, 2013. Proper filings with the Registrar of Companies (RoC) are mandatory, and for transactions involving foreign investors, compliance with the Foreign Exchange Management Act (FEMA) is essential. The Shareholders' Agreement (SHA) should explicitly outline the terms and conditions governing secondary sales, including pricing mechanisms, transfer restrictions, and provisions such as the Right of First Refusal (ROFR). Additionally, both the buyer and seller must consider the tax implications associated with secondary sales, which may include withholding taxes and capital gains taxes, ensuring full compliance with the relevant tax laws.
Mergers and Acquisitions (M&A) transactions involve the sale of a company or its assets to another entity, serving as a strategic exit route that can potentially deliver significant returns. M&A transactions often require approval from regulatory bodies such as SEBI (for listed companies), the Competition Commission of India (CCI), and, in some cases, the Foreign Investment Promotion Board (FIPB) if foreign investors are involved. Extensive due diligence is imperative to identify and address any legal or regulatory obstacles that could impede the successful completion of the transaction. This process involves a comprehensive review of the target company's legal, financial, and operational status, ensuring that potential issues are uncovered and mitigated before proceeding with the M&A deal. The process may involve reviewing contracts, authenticity of intellectual property rights, and adherence to labor law compliances, etc. The exit structure i.e., whether it should be an asset purchase or share purchase should be designed meticulously taking into account tax implications and potential liabilities.
Share buybacks refer to the process of a company buying back its shares from the shareholders. It is a way of providing liquidity and is beneficial when a company has surplus cash reserves. In India, share buybacks are regulated by the Companies Act, of 2013. Companies must strictly adhere to the formalities and conditions outlined in the Act when considering share buybacks. This includes obtaining Board approval and ensuring compliance with statutory buyback limits. Additionally, the required documentation must be properly filed with the RoC. For listed companies, compliance with SEBI regulations is also mandatory. Failure to meet these obligations can result in legal and regulatory repercussions. It is pertinent to note that the buyback option may affect the valuation of the company and the economic interests of the remaining shareholders. Obtaining legal advice is essential to ensure the fair and equitable treatment of all shareholders. Legal counsel can help navigate the complexities of corporate governance, ensuring that all actions comply with applicable laws and that the rights of each shareholder are adequately protected. Put options grant investors the right to sell their shares in the company to either the company itself or to other shareholders at a predetermined price. This contractual right provides investors with an exit mechanism, offering a predefined exit value and a degree of financial security.
Put options are regulated by both the SEBI and the FEMA. Historically, put options guaranteeing assured returns were often deemed invalid; however, recent regulatory amendments now permit such options, provided they comply with specific conditions. The terms of the put option, including triggering events and pricing mechanisms, should be explicitly detailed in the Shareholders' Agreement (SHA). Enforcement of put options may necessitate litigation if disputes arise. Additionally, exercising put options can have tax implications, including capital gains tax and other relevant taxes.
In Cruz City Mauritius Holdings v. Unitech Ltd (2017) (3) ARBLR 20 (Delhi) the honorable Delhi High Court held that so long as the put option that offered an assured rate of return was exercisable only in the event of a breach of the contractual assurances, it was not violative of FEMA. Similarly, in the case of NTT Docomo Inc. v Tata Sons Ltd (2017) SCC OnLine Del 8078 a provision was put in place where the unique feature was that the put option had to be exercised in case, Tata Teleservices Limited was unable to achieve certain performance benchmarks. This clause was held to be enforceable because there was no fixed price at which the option holder could exit the SHA making the option more akin to a ‘downside protection’ option as against FEMA’s downright ‘assured return’. Thus, now the general impression has been created in their favor to enforce put option contracts although there are no guarantees of assured returns.
However, various challenges can arise with these exit strategies. Key issues include market uncertainties that may impact both the feasibility and timing of the exit. These uncertainties can affect the overall success of the exit strategy and introduce risks that must be carefully managed.
In the first quarter of 2024, there has been a notable surge in private equity (PE) exits and investments in India. PE exits increased significantly, with 50 exits valued at $3.6 billion, compared to just 11 exits worth $121 million in Q1 2023. This represents a remarkable 354.5% increase in the number of exits and an almost five-fold rise in exit values. Open market exits, in particular, saw substantial value growth.
Given these developments, it is crucial for investors to identify and plan their exit strategies well in advance of finalizing an investment deal. This proactive approach ensures a smoother transition when the time to exit arises. Unlike in the past, exits are no longer solely associated with poor company performance; instead, they have become a standard and positive component of the investment lifecycle, serving as indicators of success.
When it comes to the dynamic landscape of finance, venture capital (VC) and private equity (PE) have emerged as potent tools driving innovation and growth across various industries.
Navigating the complex terrain of these investment strategies requires not only financial acumen but also a keen understanding of the legal intricacies that can significantly impact the success of ventures.
A clear knowledge of the essential legal considerations for savvy investors aiming to make informed and strategic choices can be really helpful as well as keep the investors safe from the risks of investment.
Let’s explore the different facets of these two types of funds—VC and PE—and find out some legal must-knows for smart investing and reducing risks:
Before diving into the legal landscape, it’s crucial to understand the diverse nature of VC and PE funds.
Venture capital funds typically invest in early-stage startups with high growth potential. On the other hand, private equity funds target more mature companies, aiming to drive operational improvements and increase profitability.
Within these broad categories, there are various specialised funds, such as seed-stage funds, growth equity funds, and buyout funds, each catering to specific investment objectives.
The investment process in VC and PE involves rigorous due diligence, negotiations, and strategic decision-making. Legal considerations begin at the outset with the drafting and negotiation of term sheets, outlining key terms and conditions.
The due diligence phase involves a comprehensive legal examination of the target company, assessing issues such as regulatory compliance, intellectual property rights, and contractual obligations.
Negotiating definitive agreements, including shareholder agreements and purchase agreements, is a critical legal step in finalising the investment.
While VC and PE investments offer lucrative returns, they are not without risks. Legal due diligence is essential to identify potential legal pitfalls that could impact the success of an investment.
Regulatory compliance, contractual obligations, and intellectual property-related concerns are among the key legal risks.
On the flip side, successful navigation of these risks can lead to substantial rewards, including capital appreciation, significant equity stakes, and active involvement in the strategic direction of the invested companies.
To ensure smart investing in VC and PE, investors must be well-versed in the legal considerations that underpin these transactions. Here are some crucial legal must-knows:
In the fast-paced world of investments, smart investing goes beyond financial calculations. It requires a comprehensive understanding of the legal landscape that surrounds these investments.
From regulatory compliance to meticulous due diligence and well-crafted contractual agreements, legal considerations are integral to mitigating risks and unlocking the full potential of VC and PE investments.
For investors aiming to navigate this intricate terrain, partnering with a reputable law firm with expertise in private equity and venture capital is not just a wise choice; it’s a strategic and legal risk-mitigating imperative.
With a solid legal foundation, investors can embark on their journey towards smart and successful investments in the ever-evolving world of finance.
A lot has been said about what is largely perceived to be a pro-growth Union Budget 2021 (Budget) and a lot more about the unprecedented viral precursor accompanying this fiscal outlook for the financial year 2021-22.
What has however remained unchanged from the pre-COVID era to the near term-after is the government’s continued push, albeit modest, for startups. The Government got to business by offering extended year-bound tax reliefs, unshackling the monetary limitations and reducing the compliance framework for small businesses.
In relation to tax reliefs, the Budget has sought to appease startups by extending the capital gains tax exemption for investments in an eligible startup company and extending the 100% tax rebate on profits, the “tax holiday”, in an eligible startup – both by an additional financial year. These tax exemptions should help attract investments and create tangible benefits for eligible startups.
In the regulatory sphere, beginning with the definitional change of the micro, small and medium enterprises (MSME) effective from July 2020, the redefinition spree has now been extended to small companies under Companies Act, 2013 (2013 Act), by increasing the eligibility limits of Rs 50 lakhs (paid up capital) and Rs 2 crores (turnover) to Rs 2 crores (paid up capital) and Rs 20 crores (turnover).
The result is the slashing of the compliance burden to almost half and lesser paperwork, in comparison with a private company, benefitting new startups seeking a more formalized legal structure. Regulatory flexibility has also been extended to the underperforming “one person companies'' under the 2013 Act, by removing conversion and turnover restrictions, reducing the residency limit for Indian citizens from 182 to 120 days and allowing Non-Resident Indian (NRI) participation.
The amendments to the 2013 Act were followed by the decriminalization of the Limited Liability Partnership (LLP) Act, 2008 and putting forth policy intent to introduce “Small LLP’s” and to permit LLPs to raise capital through the issue of non-convertible debentures. Given that one of the eligibility conditions for start-up recognition under the Startup India Action Plan is the incorporation as a private limited company, registered partnership firm or a limited liability partnership, these regulatory changes should result in more start-ups seeking to formalize their setup as well as promote domestic individual entrepreneurship.
The extension of incorporation rights for “one person companies” should incentivise offshore NRI led start-ups to set up shop in India.
Social impact driven financial inclusion is another theme of this Budget, which along with the complementary Startup India Seed Fund Scheme (SISFS) with a target corpus of rs 945 crores envisaging a staggered disbursement over a period of four years, beginning from April 1st 2021, to support an estimated 3,600 startups.
With the SISFS, the Government is seeking to prioritize startup culture in public welfare sectors such as healthcare, agriculture, social impact, waste management, water management, food processing and financial inclusion, amongst others.
Under the SISFS guidelines, only startups complying with conditions such as recognition by Department for Promotion of Industry and Internal Trade (DPIIT), incorporated not more than 2 years from date of application, having a market fit business idea with viable commercialization and scaling and early-stage inclination to the use of technology, are eligible.
These eligibility requirements may limit the number of actual beneficiaries of the scheme, leaving out the informal and yet to be tech-savvy startups, especially in the public welfare sectors. While the real-world impact of SISFS and its performance assessment are yet to be seen, the selection criteria set out in the guidelines seem to incorporate unbridled discretionary authority and bureaucratic involvement in the review and disbursement process.
Despite all the above-mentioned measures, the Budget has not been all sunshine and subsidies for startups.
The Budget has overlooked resolving some of the critical issues currently faced by startups, such as the difference in treatment between DPIIT recognized and non-recognized startups, loss of benefits such as the ‘Angel Tax’ exemption to non-recognized startups, delinking of ESOP exemption from requiring Inter-Ministerial Board approval exemption from surcharge on gains from sale of unlisted securities and exemption from GST under reverse-charge for start-ups, amongst others.
The government needs to address these issues and arrive at workable solutions which are practical and beneficial to the start-up ecosystem.
While this Budget may seem modest vis-à-vis startups, it is nonetheless a push in the right direction and we may see more Unicorns taking root and flourishing in the given growth-conducive environment.
Further, with the government pivoting interest to other areas of importance, it is plausible to see more Zebras gradually rising and contributing to a lasting socio-economic impact. Despite a global pandemic, 2020 alone saw 11 start-ups turning into Unicorns evincing the fact that the Indian start-up ecosystem has come a long way.
With the Budget incentives coupled with well-meaning policy initiatives, we can hope to see a further boost in numbers of the much-coveted Indian Unicorns and the existing Unicorns maturing to Decacorns.
Author Bio: Manu Varghese is a partner and head - general corporate and commercial practice at White and Brief, Advocates and Solicitors. The views and opinions expressed in this article are those of the author alone.
Manu Varghese is a partner and head - general corporate and commercial practice at White and Brief, Advocates and Solicitors. The views and opinions expressed in this article are those of the author alone.