The government has decided to allow Indian companies to freely enter into share-swap deals with foreign firms to facilitate cross-border mergers and acquisitions, provided such deals are consistent with the country’s policy on foreign direct investment (FDI).
Currently, share swaps between Indian and foreign firms are not unambiguously recognised in the FDI policy. When such proposals come up, the Reserve Bank of India (RBI) and the Foreign Investment Promotion Board (FIPB) often consult each other. They either give discretionary approvals or put the proposals on hold.
According to official sources, under the new norms being prepared, shares offered in cashless exchanges could even be of another company within the group which is not party to the deal.
The pricing norms for such transactions are being framed by market regulator Securities and Exchange Board of India (Sebi) as the proposal has received in-principle approval from the Department of Industrial Policy and Promotion (DIPP) and the Department of Economic Affairs (DEA) in the finance ministry.
The RBI’s jurisdiction over cashless exchanges like share swap emanates from the provisions of the Foreign Exchange Management Act. While the central bank was liberal in approving such deals, of late, it has started directing such applications to the FIPB. However, the board has not approved many such proposals due to the absence of clear-cut policy guidelines.
Last year, Bharti Airtel and South Africa’s MTN were trying to seal a $23-billion deal through a share-swap arrangement, which would have entailed Bharti picking up 49% in MTN and the latter in turn buying 36% in Bharti. The deal did not happen because South Africa insisted on dual listing, something which the India does not allow as of now.
The DEA has supported the proposal to allow share-swap deals to bring in FDI, subject to its meeting Sebi’s valuation guidelines and honouring tax liabilities involved in such transactions. The market regulator will, in turn, compute a fair swap ratio of the quantity of shares to be exchanged between the two companies, taking into account share prices in both the markets. However, companies involved in share-swap deals require a mandatory listing in their respective countries.