Taking note of various share purchase agreements concerning FDI investments transaction taking in India, under which, generally, there is a time lag between payment of purchase consideration and the receipt of the shares; Reserve Bank of India (RBI) has come out with a circular (A. P. (DIR Series) Circular No. 58) dated 2 May, 2011 (May 2 Circular) to provide operational flexibility and ease the procedure for such transactions.
Under the May 2 Circular:
· AD Category – I banks are permitted to open and maintain, without prior approval of the RBI, non-interest bearing Escrow accounts in Indian Rupees in India on behalf of residents and/or non-residents, towards payment of share purchase consideration and / or provide Escrow facilities for keeping securities to facilitate FDI transactions.
· SEBI authorised Depository Participants are permitted to open and maintain, without prior approval of the Reserve Bank, Escrow accounts for securities subject to the terms and conditions as prescribed.
Salient features of May 2 Circular
· The Escrow account in INR would be maintained only with an AD Category – I bank in India.
· The Escrow account may be opened jointly and severally.
· Escrow account can be opened by the residents and the non-residents.
· Securities kept / linked with such Escrow accounts may be linked with demat account maintained with SEBI authorised Depository Participants.
· Escrow account needs to be non-interest bearing escrow.
· Permitted credits
o Receipt of foreign inward remittance as consideration towards issue or transfer of shares through normal banking channels; or
o Receipt of rupee consideration through the normal banking channels from India by the resident acquirers of shares who proposes to acquire them from non-resident holders by way of transfer.
· Permitted debits
o Remittance of consideration for issue of shares or transfer of shares directly into the bank accounts of the beneficiary (issuer in India or transferor of shares in India or abroad); or
o Remittance of consideration for refund to the initial remitter of funds in case of failure / non-materialization of the FDI transaction for which the Escrow account was opened.
· The Escrow account shall remain operational for a maximum period of six months only. For more than six months, RBI approval is required
· Fund and non-fund based facilities shall not be permitted against the balances in such cash escrow accounts.
· Balance in the Escrow account, if any, may be repatriated at the then prevailing exchange rate, after all the formalities in respect of the said acquisition are completed.
Takeaways for Transactional Lawyers
· Prior to May 2 Circular, there was an uncertainty as to whether an RBI approval was required for opening of escrow accounts pertaining to FDI transactions; therefore, as a market practice escrows to facilitate such transactions were often maintained outside India to facilitate the commercials of the transaction (commercials includes the structuring of transactions, closing of transactions etc.). But the May 2 Circular, has now made it possible to set up and maintain such escrow accounts for FDI-related transactions in India without any delay.
· Certainly, May 2 Circular is a welcome step towards removing the confusion which was prevalent in the bankers-lawyers community. Often, AD-Banks would insist the banker-lawyer duo to seek approval from RBI to open securities escrow with them based on their faulty interpretation of word ‘deposit’ under the FEMA Deposit Regulations. This hassle of taken RBI approval for opening Escrow account in INR and securities escrow is no-more required; this would some-what ease the burden on Transactional lawyers as well as the AD-Banks.
· As per the May 2 Circular, the terms of the Escrow account shall be laid down strictly in the Escrow agreement, Share purchase agreement, conditions of issue of shares etc.
· For the purposes of FDI reporting (such as FC-TRS filings), date of transfer of funds into the bank account of the issuer or transferor of shares, shall be the relevant date of remittance.
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