THE IMPACT OF INDIA’S 18/25 CAP ON INDEMNITIES IN CROSS-BORDER M&A TRANSACTIONS

von Wolf M. Nietzer

Article on India’s foreign exchange regulations (via American Bar Association, International Business Law Committee, to which NIETZER . Rechtsanwälte is a member to; Article by Majmudar & Partners, India). In 2016, the Reserve Bank of India amended India’s foreign exchange regulations and imposed a requirement to obtain prior RBI approval if an Indian seller’s indemnity obligations to a foreign acquirer (and vice versa) exceeded the newly prescribed limits.

It is commonplace in global M&A deals for buyers and sellers to strongly negotiate the seller’s indemnity obligations, and many a times, unsatisfactory seller indemnities result in deals not going through. Effective May 20, 2016, the Reserve Bank of India (the “RBI”) amended India’s foreign exchange regulations (the “FEMA Regulations”), and imposed a requirement to obtain prior RBI approval if an Indian seller’s indemnity obligations to a foreign acquirer (and vice versa) exceeded the newly prescribed limits.

Pursuant to this amendment, only twenty-five percent (25%) of the total consideration can be paid by a buyer to the seller on a deferred basis up to a period of eighteen (18) months from the date of the transfer agreement. If more than twenty-five percent (25%) of the total consideration is sought to be deferred or any amount of consideration is sought to be deferred beyond a period of eighteen (18) months from the date of the transfer agreement, then prior RBI approval is required. Subject to the foregoing restrictions, the deferred consideration can be housed in an escrow arrangement between the buyer and the seller. Further, only if the full purchase consideration has been paid by the buyer to the seller, the seller may give an indemnity in an amount not exceeding twenty-five percent (25%) of the total consideration for a period not exceeding eighteen (18) months from the date of payment of the full consideration ...

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