Private Equity is a form of alternative investment where a wealthy investor invests money/capital into a private company/ public company that is not listed on any stock exchange. Private equity investors generally work towards funding new technology, making new acquisitions, expanding working capital, and bolstering the balance sheets of companies. Private Equity firms also work in the same manner as Venture Capitalists invest in the long term in start-ups to help them grow and then reap benefits after the companies go public or merge with other firms.

There exist several laws, policies, and regulations formulated by the Government/ Regulatory authority and the Legislature which come into play wherein a private equity fund chooses to make an investment or during a private equity transaction. The liability of adhering to these laws falls both upon the Company in which the investment is made and the Private Equity Fund which makes the investment. The important laws governing Private Equity transactions are discussed below.

The regulatory framework governing private equity funds and Transactions in India:

The following are the general legislative provisions that have relevance in the private equity context:

1. The Companies Act 2013

2. The Income Tax Act 1961

3. Consolidated FDI Policy

4. The SEBI Act 1992

5. The Foreign Exchange Management Act, 1999 (FEMA)

6. The Indian Contract Act 1872

7. Depending on the quantum and the types of transactions or the industry sector of the target or other factors, private equity transactions are also regulated by other regulatory authorities such as the following:

a) The Competition Act 2000

b) The Insurance Regulatory and Development Authority Act 1999

c) The pension fund regulatory and development authority act 2013

 1. The Companies Act 2013:

All private equity transactions are governed by the applicable provisions of the Companies Act and the rules, regulations, directions and other circulars issued thereunder by the MCA. They are therefore regulated by the Registrar of Companies (RoC) under the authority of the MCA having territorial jurisdiction over, and at the place of incorporation of, the Indian target entity. As per the Companies act, private companies are not allowed to offer securities to public for raising any capital. They can get capital through the means of private placement process that allows issuing the securities only to selected number of private persons. The Private Placement Process is prescribed by Section 42 of the Act.

a) Section 42 and Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014:

The provisions of Section 42 of the Companies Act, 2013, as amended by Companies (Amendment) Act, 2017 read with the Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 deal with the issue of securities by way of Private Placement. The Private Placement means any offer of securities or invitation to subscribe securities to a select group of persons (herein referred to as “identified persons”), by way of issue of securities, then only the proposed issue shall be considered as Private Placement.

 Certain condition precedents for Private Placement:

i.  Number of Persons to whom the offer shall be made:

The offer or invitation cannot be made to more than two hundred persons excluding Qualified Institution Buyer’s (QIB) and employees offered securities under Employee Stock Option Plan (ESOP) in a financial year.

ii. Private placements offer cum application (PAS-4):

A private placement offer cum application form shall be in the form of an application in Form PAS#4, which should be serial numbered and addressed to the person to whom the offer is made and sent to him, either in written or in electronic mode, within 30 days of recording their name.

iii. Maintaining of Record (PAS-5)

The Company shall maintain a complete record of such offers in Form PAS-5. [Rule 14(4)]

iv. Minimum Investment size:

The value of such offer/invitation per person shall be with an investment size of not less than twenty thousand rupees of face value of the securities.

v. Identified Person:

Private placements offer/invitation shall only be made to such persons whose names are recorded by the company prior to invitation to subscribe the securities.

vi. Separate Bank Account:

Money payable towards subscription of securities be paid through cheque/DD or other banking channels and the application money received shall be kept in a separate bank account in a scheduled bank and shall not be utilized for any purpose.

vii. Allotment of shares within permissible time:

Allotment of securities to be made within 60 days from the date of receipt of application money and if the company fails to do the same the application money needs to be repaid within 15 days with an interest of 12% p.a.

b) Section 62 and Companies (Share Capital and Debentures) Rules, 2014: 

Further issue of Share Capital: Section 61(1)(a) confers certain pre-emptive rights on the existing shareholders. However, Section 62(1)(b) and (c) allow issuance of further shares to employees and other persons subject to certain conditions prescribed in the Section and the Rules mentioned above. Allotment can be made on preferential basis and any other manner subject to certain conditions such as:

Approvals through Special Resolution: 

The issue shall be authorized by a special resolution and in the articles of association of the company. Further, certain disclosures shall be made in explanatory statement to the notice of the meeting.

Valuation of Shares:

The price of such shares, except for listed companies, shall be determined by the valuation report of a registered valuer. Where convertible securities are offered with the option to convert them into equity shares, the price of the resultant shares has to be determined beforehand on the basis of valuation report. Further, in case of allotment of shares or other securities for consideration other than cash, the valuation of such consideration shall also be done by a registered valuer.

Allotment of Shares: 

  • Securities allotted shall be made fully paid up at the time of their allotment and the allotment shall be complete within 12 months of passing the special resolution. In case the process of allotment is not completed, another special resolution has to be passed.
  • The issue of shares on a preferential basis should also comply with the conditions enumerated in Section 42 of the Act i.e. Private Placement.
  • All applicable provisions prescribed in the Companies (Share Capital and Debentures) Rules, 2014 need to be complied with.

c) Issue of debentures:

 For the issue of debentures, the provisions of Section 42 and Section 62 (if these are issued through preferential allotment) need to be complied with. Further, section 71 of the companies act 2013 also needs to be complied with in terms of debenture redemption reserve and appointment of a debenture trustee, etc.

d) Issue of Preference Shares: 

A preference share is a class of securities that generally provides for a priority claim over common stock on dividends and the distribution of a company’s assets in the event of a liquidation of the business. Many private equity investors show interest to take preference shares also. Section 55 of the Act governs the rules related to issue preference shares. Issuance of preference shares would need to be authorized by a special resolution and also that for issuance of preference shares a company would be required to have not defaulted in repayment of dividend on or redemption of any preference share, the same is discouraged.

e) Amendment of Articles of Association:

Articles of Association of a Company need to be amended to ensure that conditions of the transactions and investments made in the company are incorporated in them.

Synopsis of Companies (Prospectus and Allotment of Securities) Amendment Rules, 2022

According to the Companies (Prospectus and Allotment of Securities) Amendment Rules, 2022, The body corporate need to obtain government approval under the FEMA (Non-debt Instruments) Rules, 2019 to offer any securities to a body corporate incorporated in or a national of a country which shares a land border with India.

In case companies have offered securities to such entities, they must give a declaration that approval has been given for the transaction and should attach the approval letter along with the private placement offer cum application letter.

Private Equity in India An overview of Regulatory Framework

Importance of Companies (Prospectus and Allotment of Securities) Amendment Rules, 2022

In 2020, the government had placed all FDI from border countries under the approval route to curb opportunistic takeovers during the pandemic. These new Amendment Rules, 2022 were largely aimed at preventing Chinese investors from taking control of Indian companies.

Amendment in Private Placement Rules – Insertion of the new proviso in Rule 14 (1)

Companies (Prospectus and Allotment of Securities) Amendment Rules, 2022 has inserted a new proviso Rule 14, in sub-rule (1)

“Provided also that no offer or invitation of any securities under this rule shall be made to a body corporate incorporated in, or a national of, a country which shares a land border with India, unless such body corporate or the national, as the case may be, have obtained Government approval under the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 and attached the same with the private placement offer cum application letter”

From reading the above provisions, it is evident that for allotment of Shares or Securities under Private Placement Rules, to a body corporate incorporated in, or a national of a country which shares a land border with India (i.e. China, Bhutan, Nepal, Pakistan, Bangladesh, and Myanmar), such body corporate or the national must obtain prior Government approval under the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 and attach the same with Form PAS-4 (the private placement offer cum application letter).

Amendment in Form PAS-4 – The Private Placement Offer cum Application Letter

The Companies (Prospectus and Allotment of Securities) Amendment Rules, 2022 has inserted below Checkbox(s) in Form PAS-4:

  •  The applicant is not required to obtain Government approval under the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 prior to subscription of shares:
  •  The applicant is required to obtain Government approval under the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 prior to subscription of shares, and the same has been obtained and is enclosed herewith

The procedural aspect of Private equity transactions under the Companies Act:

1. Convene the meeting of the Board of Directors of the Company, to approve the followings.

    • Issue of securities by way of Private Placement Basis.
    • Finalization and Identification of persons (Identified person).
    • Number of securities to be issued and Increase of authorized capital if required
    • Approval of the Valuation Report and decided on the price of the security.
    • Draft offer letter in Form PAS-4
    • Approve the notice of calling for an Extraordinary General Meeting of the shareholders of the Company to take members’ approval.
    • Opening of a separate Bank Account for keeping the application money received.
    • Any other matter depends upon the nature of the transaction

2. File Form MGT-14 within 30 days of passing the Board Resolution for issue of securities as per Section 117 & 179(3)(c).

Note: A private Company is not required to file Form MGT#14, except in case of offer or invitation of nonconvertible debentures and the amount of the proposed issue does not exceed the limits as specified under the Section 180 of the Companies Act, 2013.

3. Convene Extraordinary General Meeting and pass Special Resolution to approve Private Placement and approve the Offer Letter to be sent to the Identified Persons.

4. File Form MGT-14 with ROC within 30 days of passing the Special Resolution approving the Private Placement.

5. Send Offer cum Application Letters in Form PAS-4 to Identified Persons within 30 days of recording the names of the identified persons. Such Offer cum Application Letters can be sent in electronic mode (emails) or by post.

6. Preparation of Form PAS-5 (complete record of the private placement offer)

7. Receiving application money in a Separate Bank Account with Scheduled Bank within the offer period as mentioned in the Offer cum Application Letter.

8. Post Closure of Offer Period call a Board Meeting and pass Resolution for allotment of securities and issue securities certificate.

9. File the return of allotment in Form PAS-3 within 15 days from the date of the allotment made i.e. After passing the Board Resolution for allotment of securities.

10. Ensure the securities are allotted within 60 days of the receipt of Application money by the Company.

11. The Company shall pay stamp duty as per the respective Stamp Act of the State where the registered office of the company is situated, within 30 days of issue of securities certificates,

12. The Company can utilize the money raised through Private Placement only after the Return of Allotment in Form PAS-3 is filed with the Registrar of Companies.

13. Registrar of Members should be updated in case of issue of share or Registrar of Debenture holders or Securities holders, in case of any other security.

2. The Income Tax Act 1961:

The Income Tax Act, 1961 governs all direct taxation-related aspects of private equity transactions, including applicable taxes on income generated, capital gains tax, tax benefits, exemptions from tax liability and methods to determine the valuation of shares and other securities etc. Let us discuss the important provision of Income tax Act which can impact the PE transaction.

i. Section 281 of the Income Tax act 1961

As per Section 281 of the Income Tax Act (“Act”), in the event an assessee creates a charge or parts with the possession (by way of sale, mortgage, gift, exchange or any other mode of transfer whatsoever) of, any of his assets in favour of any other person, during the pendency of any proceeding under the Act or after the completion thereof, but before the service of notice under Rule 2 of the Second Schedule of the Act, such charge or transfer shall be void as against any claim in respect of any tax or any other sum payable by the assessee as a result of the completion of the said proceeding or otherwise. As per the explanation to the section, ‘asset’ includes shares and securities as well.

On the same way, Section 281 is applicable to shareholder (promoters), if promoters have any outstanding income tax litigation. In the present case Prompters are transferring their assets (shares) and if any promoter have any open income tax litigation having tax liability amount more than Rs.5,000/- , then section 281 will be triggered.

As per the provision of section 281 of Income Tax Act 1961, respective promoters having outstanding Income Tax liability litigation have to take permission/NOC from concern Assessing Officer.

The application for NOC under section 281 of IT Act should be filed to the concern AO before 30 days of proposed transaction (Proposed board meeting)

ii. Section 56(2)(viib) of Income Tax Act 1961.

Under Income Tax Act, 1961 there is no restriction on a company to issue equity shares to its potential private equity investors subject to section 281 of the income tax act 1961. However, in case of a company in which public is not substantially interested, the difference in fair market value of the share and the issue price of the share is treated as income either in the hands of the issuer of shares or recipient of shares, as the case may be.

As per section 56(2)(viib) of the Act, any consideration received by a company from a resident for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares is treated as income under the head “other sources”. In other words, any consideration received in excess of the fair market value of the shares is treated as “income from other sources” in the hands of the recipient of consideration.

iii. Section 195 of Income Tax Act 1961.

When a PE makes a direct investment in an Indian company, generally withholding tax provisions are applicable if there is a secondary purchase (i.e. transfer of shares from existing shareholders) made by the PE.

As per Section 195 of the Indian Income Tax Act (IT Act), a payer (including both resident and non-resident payers) at the time of making a payment to a non-resident is obligated to deduct tax at the appropriate rate if such income (i.e. capital gains) is subject to tax in India.

iv. Section 112(1)(c) of the IT Act, the tax rate on long-term capital gains on the sale of shares of a closely held company to a non-resident seller is 10% plus applicable surcharge (without indexation benefits). Shares held for over 24 months qualify as a long-term asset. The tax rate on short-term capital gains is 30% plus surcharge.

V) Generally, no withholding obligations arise on the acquirer (i.e. non-resident) if the shares are acquired from a resident. Recently, Section 206C(1H) was amended in connection with the sale of goods wherein a seller needs to undertake tax collection at source (TCS) while collecting proceeds on sale of goods. The question is being raised in a few transactions at the time of closing is whether TCS provisions are applicable to the sale of shares (considering some judgments/precedents that ‘shares’ are ‘goods’). In our view, it is a stretched argument and TCS provisions ought not to be applicable.

vii) Section 90(2) of the IT Act, As per section 90 0f the IT Act, a non-resident has the option to be governed by either provisions of the domestic tax law (the IT Act) or the respective DTAA, whichever is more beneficial to the non-resident. Also, for withholding tax obligations, Section 2(37A)(iii) of the IT Act defines ‘rate in force’ as rate per Finance Act or respective DTAA, whichever is applicable.

Thus, if the DTAA provisions are more favourable than the IT Act, then the withholding tax obligations are covered as per the DTAA. It should be noted that with introduction of base erosion and profit shifting (BEPS), India has already re-negotiated DTAAs with countries where capital gains were exempt, for example Mauritius, Singapore and Cyprus. Having said that, a DTAA with a country such as the Netherlands still provides exemption from capital gains tax in certain situations.

Instead of a secondary transfer/purchase, if a fresh issue (i.e. a primary issue) is made to a non-resident, then the funds would be received by the issuing Indian company. There is no withholding tax obligation on the non-resident acquirer/purchaser under Section 195 of the IT Act. In this case, one needs to examine the provisions of Section 56(2)(x) (i.e.

If the PE is already an existing investor with more than 26% holding control, then transfer pricing provisions are applicable. Also, a fresh issue of shares to a non-resident has to be undertaken at fair value as per exchange control regulations of the Reserve Bank of India (exchange control authority in India).

viii)  Section 96:   Under the provision of Section 96 of the IT Act,

An impermissible avoidance arrangement means an arrangement, the main purpose of which is to obtain a tax benefit, and it—

(a) creates rights, or obligations, which are not ordinarily created between persons dealing at arm’s length;

(b) results, directly or indirectly, in the misuse, or abuse, of the provisions of this Act;

(c) lacks commercial substance or is deemed to lack commercial substance under section 97, in whole or in part; or

(d) is entered into, or carried out, by means, or in a manner, which are not ordinarily employed for bona fide purposes.

(2) An arrangement shall be presumed, unless it is proved to the contrary by the assessee, to have been entered into, or carried out, for the main purpose of obtaining a tax benefit, if the main purpose of a step in, or a part of, the arrangement is to obtain a tax benefit, notwithstanding the fact that the main purpose of the whole arrangement is not to obtain a tax benefit.

 It is extremely important to have commercial substance in any transaction or arrangement from the BEPS and GAAR perspective.

Applicability of Goods and Services Tax (GST) Act, 2017:

In Private equity transaction generally, a business is acquired through the transfer or sale of shares, there will be no GST implications, given that the definition of ‘goods’ and ‘service’ excludes stocks, shares and similar from its ambit.

3. Consolidated FDI Policy:

With a view to attracting Foreign Direct Investment (FDI), Government of India has put in place a liberal policy under which FDI up to 100% is permitted under the automatic route in most sectors/activities. Significant changes have been made in the FDI policy regime in recent times to ensure that India remains an increasingly attractive investment destination.

The Department for Promotion of Industry and Internal Trade (DPIIT) under the Ministry of Commerce and Industry, is the nodal department for the formulation of the Government’s policy on Foreign Direct Investment (FDI). It is also responsible for the maintenance and management of data on inward FDI into India, based on the remittance reported by the Reserve Bank of India.

The FDI Policy framework is embodied in the Consolidated FDI Policy Circular, as amended from time to time.

The objective of the FDI Policy is to attract and promote foreign direct investment to supplement domestic capital, technology, and skills, for accelerated economic growth.

FDI is subject to compliance with all relevant sectoral laws, regulations, rules, security conditions, and state/local laws/regulations.

The sectoral caps for FDI are detailed in Chapter 5 of the Consolidated FDI Policy Circular. In sectors/activities not listed in Chapter 5, FDI is permitted up to100%.

Entry Routes for Investment

FDI is permitted either through the Automatic Route or the Government Route.

Automatic Route

No prior approval is required for FDI under the automatic route, only information to the Reserve Bank of India (RBI) within 30 days of inward remittances or issue of shares to non-residents is required. RBI has prescribed a new form, Form FC-GPR (instead of earlier FC-RBI) for reporting shares issued to foreign investors by an Indian company.

For list of sectors/activities under Automatic route, please refer Chapter 5 of the Consolidated FDI Policy Circular.

Government Route

Foreign investment proposals not covered under the ‘Automatic Route’ are considered for Governmental Approval by the respective competent authority / Administrative Ministry/Department. Please refer section 4.1 of the Consolidated FDI Policy Circular for a list of Competent Authorities.

DPIIT oversees the applications filed on the Foreign Investment Facilitation Portal and forwards them to the concerned administrative ministry (competent authority)

DPIIT is the administrative ministry for FDI proposals by Non-Resident Indians (NRl)/ Export Oriented Units (EOU’s) requiring approval of the Government.

Approval letters in standard format are uploaded on the portal for the benefit of investors. An SOP is being followed to process FDI applications.

FDI proposals involving total foreign equity inflow of more than Rs 50 billion, are referred to Cabinet Committee on Economic Affairs (CCEA).

For a list of sectors/activities under Automatic route, please refer Chapter 5 of the Consolidated FDI Policy Circular.

Prohibited Sectors

Sectors prohibited for FDI are listed in section 5.1 of the Consolidated FDI Policy Circular, as amended from time to time.

4. The SEBI Act 1992

The principal regulatory body that regulates alternative investment funds (AIFs) in India is SEBI, with which AIFs are required to register before they can accept commitments from investors and commence operations as AIFs. SEBI is the securities market regulator of India and is established under the SEBI Act 1992.

SEBI (Alternative Investment Funds) Regulations, 2012:

The investment in various organizations is now routed from the “Alternate Investment Funds” which are established for the purpose of making investments. These funds need to be complaint with the SEBI (Alternative Investment Funds) Regulations, 2012. The Regulations provide a legal framework for the pool investment funds in India such as real estate, private equity, hedge funds etc. The regulations mandate registration of all Alternative Investment Funds and restrict any person or entity from acting as an AIF unless registration from SEBI has been procured. The Regulation bifurcates the registration in Category I/II/II and enumerates the eligibility criteria for the same. Category II includes private equity funds within their ambit. Private Equity Fund means an AIF which invests primarily in equity or equity linked instruments or partnership interests of investee companies according to the stated objective of the fund. It also imposes certain restrictions in terms of number of investors and number of investments.

The regulation restricts any scheme from having more than 1000 investors and further accepting a deposit of less than 1 Crore. The investment transactions shall be in line with the restrictions and conditions imposed by the regulations.

5. The Foreign Exchange Management Act (FEMA)1999:

a. The Foreign Exchange Management Act, 1999 (FEMA) enables the Reserve Bank of India (RBI), India’s central bank, to monitor and regulate all foreign investments into target companies in India, acting in this regard under or pursuant to powers granted to it under the Reserve Bank of India Act, 1934 and related banking laws and regulations.

b. Under FEMA Rules, the price of the Capital Instruments of an Indian Company shall not be less than Fair Market Value (FMV) calculated based on any internationally accepted pricing methodology for valuation on an arm’s length basis duly certified by a CA or a SEBI registered Merchant Banker or a practicing Cost Accountant.

c. The FEMA regulations specify the conditions applicable to any issuances or transfers of securities of an Indian company to or by a person resident outside India, including pricing guidelines, remittances of sale proceeds and mandatory reporting requirements to assess and verify the fulfilment of applicable conditions. For instance, the RBI has introduced:

  • an ‘entity master form’, which is a record of the details of companies taking or having taken foreign direct investment; and
  • a ‘single master form’, which is to be updated by such companies each time there is an issuance or transfer of its shares to a foreign investor under a Form FC-GPR (in cases of issuances) or Form FC-TRS (in cases of transfers), respectively.

d. Non-compliance of NDI (Non-Debt Instruments) Rules 2019 read with FDI Policy, and extant FEMA regulation attracts penalty provisions under FEMA and requires non-compliances to be compounded [Compounding application needs to be following the instruction given in RBI Master Direction- Compounding of contraventions under FEMA, 1999.]

6.The Indian Contract Act 1872:

During the Private Equity transaction, the following agreements generally executed between company (Company/ promoters/shareholders) and investors. Parties should be cautious while drafting boilerplate provisions (E.g. Restrictions on transfer of shares by the promoters, Exit options) in their contracts. So, provisions of Indian Contracts Act 1872 should be kept on mind while finalising the agreements.

a. Share Purchase Agreements/buyout agreements

b. Shareholders Agreement

c. Subscription Agreement

d. Shareholder Agreement Term Sheet

e. Side letter /Agreement

f. Indemnity Agreement

g. Non-Disclosure agreements

h. Third-party consents, such as consent from lenders

i. Other legal agreements depending upon the nature and quantum of transactions

7. Depending on the quantum and the types of transactions or the industry sector of the target or other factors, private equity transactions are also regulated by other regulatory authorities such as the following:

d) The Competition Act 2000

e) The Insurance Regulatory and Development Authority Act 1999

f) The pension fund regulatory and development authority act 2013

(a) The Competition Act 2000: 

It is important to examine whether the Proposed Private Equity Transaction will trigger the formation of a ‘combination’ under the Competition Act read with rules and regulations made thereunder.

The term ‘combination’ refers to those transactions which require CCI’s (Competition Commission of India) approval. Combinations in India are regulated by the “Competition Act, 2002”. “Competition Commission of India (Procedure in regard to the transactions of business relating to combinations) Regulations, 2011 (Combination Regulations)” provides for the procedure and mechanism for the implementation of provisions under the act.

Section 5 of the Competition Act defines combinations. As per the definition, any acquisition of one or more enterprises or merger or amalgamation of enterprises that is crossing the jurisdictional thresholds prescribed by the CCI shall be considered as a combination. Section 6(2) of the act states that any transaction which is qualified as a combination under Section 5 is required to file a notice of the transaction and can consummate the transaction only after getting clearance from CCI.

To check whether a particular transaction qualifies as a combination under section 5, it should meet any of the criteria mentioned in the following tests:

1. Parties test: The acquirer and target enterprise, along with its units, subsidiaries and divisions on a consolidated basis or the merged enterprise, post-merger has either:

 (a) assets of more than INR 2000 crore in India or turnover of more than INR 6000 crore in India; or (b) world-wide assets of more than of USD 1 billion, which includes a minimum of INR 1000 crore in India or worldwide turnover of more than USD 3 billion, which includes a minimum of INR 3000 crore in India; or

2. Group test: The group to which the target entity or the merged entity will belong post-transaction has either:

(a) assets of more than INR 8000 crore in India or turnover of more than INR 24000 crore in India; or (b) worldwide assets of more than USD 4 billion, which includes a minimum of INR 1000 crore in India or worldwide turnover of more than USD 12 billion, which includes a minimum of INR 3000 crore in India.

If any of the above conditions are met, then the transaction is considered a combination and triggers the obligation to notify to CCI subject to the following two exemptions:

1. Target Exemption: If the target entity has assets in India of not more than 350 crores or turnover in India of not more than 1000 crores. Then the transaction can get exemption from notifying CCI. However, this exemption can be claimed only until 26 march 2022.

2. Schedule 1 Exemption: Schedule 1 to the Combination Regulations specify certain combinations which are not considered by CCI as combinations causing an appreciable adverse effect on competition and therefore exempt from notification to the CCI.

(b) The Insurance Regulatory and Development Authority Act 1999

According to the Insurance Regulatory and Development Authority of India (Investment by Private Equity Fund or Alternate Investment Fund in Indian Insurance Companies) Guidelines, 2017,

1. A Private Equity Fund may invest directly in an Indian insurance company in the capacity of an investor subject to compliance with the following conditions:

i. Investment shall be as per the fund’s strategy reflected in its placement memorandum to its investors.

ii. The Fund shall not hold shares in the insurance company exceeding ten percent of the paid-up equity share capital of insurance company;

iii. All Indian investors including the investment by the Private Equity Fund /s jointly shall not hold more than twenty-five percent of paid up equity share capital of the insurance company;

iv. The minimum shareholding by promoters / promoter group shall at all times be maintained at 50 percent of the paid up equity capital of the insurer. However, where the present holding of the promoters is below 50 percent, such holding shall be the minimum holding.

v. The investment shall be subject to compliance of Fit and Proper criteria. A self-certification for “Fit & Proper” shall be filed along with the application for transfer of the shares. The determination as to Fit and Proper status shall be made on the basis of the criteria laid down in Annexure A read with part C of Insurance Regulatory and Development Authority of India (Investment by Private Equity Fund or Alternate Investment Fund in Indian Insurance Companies) Guidelines, 2017.

vi. A specific undertaking shall be given by the Private Equity Fund/s to not to create any encumbrance on or leverage the investment.

vii. In case the investment is onetime, then the Private Equity Fund shall make an upfront disclosure to this effect.

2. A Private Equity Fund may also invest in an Indian insurance company through a Special Purpose Vehicle either in capacity of promoter or investor. Where a Private Equity Fund (through an SPV) invests in an insurance company in capacity of Indian investor then the Private Equity Fund shall comply with the stipulations stated in para 1 above.

3. A Private Equity Fund shall not be allowed to invest directly in an Indian insurance company in capacity of promoter. However, a Private Equity Fund can invest through a Special Purpose Vehicle in an Indian insurance company subject to the following:

i. A Private Equity Fund through an SPV shall not be a promoter for more than one life insurer, one general insurer, one health insurer and one reinsurer;

ii. Scheme to be filed with SEBI in accordance with the provisions of the relevant SEBI regulations, as applicable.

iii. Investment shall be as per the fund’s strategy reflected in its placement memorandum to its investors and shall be made entirely out of own funds and not from borrowed funds.

iv. The investment memorandum or the charter documents of the investor or the investment vehicle, as the case may be, must permit the investment to be made in the least upto the proposed limits including in respect of the future capital requirements of the insurance company.

v. The investment shall be subject to compliance of Fit and Proper criteria. A declaration for “Fit & Proper” shall be filed with the Authority in the format given in Annexure-A. The determination as to Fit and Proper status shall be made on the basis of the criteria laid down in Annexure A read with Part-C below;

vi. A specific undertaking to be given to not create any encumbrance on or leverage the investment made through borrowings;

vii.  The investments made shall be subject to a lock in period of five years. The lock in period shall be applicable on SPV and also on the shareholders of the SPV.

Provided that the above said lock in period shall not be applicable on the shareholder / s of SPV holding less than 10 percent capital of SPV;

viii. Any induction of new shareholder/s in SPV by issue of fresh shares beyond 25 percent shall require the prior approval of the Authority.

ix. The minimum shareholding by promoters / promoter group shall at all times be maintained at 50 percent of the paid up equity capital of the insurer. However, where the present holding of the promoters is below 50 percent, such holding shall be the minimum holding.

x. The Indian insurance company shall comply with Guidelines on “Indian owned and Controlled” issued by the Authority;

xi. The Indian insurance company shall comply with the Indian Insurance Companies (Foreign Investment) Rules, 2015;

xii. Chairman of the Board of the Indian Insurance Company shall be an independent director, failing which the CEO / Managing Director / WTD should be a professional and should not be a nominee of a promoter.

xiii. At least one third of the directors on the Board of the insurance company must be independent directors;

xiv. An undertaking to subscribe to the rights issue of the insurance company to be provided to ensure that the Indian insurance company is not cash strapped.

xv. An undertaking of the post lock in period divestment plan preferably through an IPO in accordance with the relevant regulation applicable for such divestment shall be submitted.

4. Private Equity Funds shall, in addition, to the above shall comply with the provisions of IRDAI (Transfer of Equity Shares of Insurer) Regulations, 2015 including the filing of the application for transfer of the equity shares.

 (c) The pension fund regulatory and development authority Act 2013 (PFRDA):

Certain restrictions on foreign companies or individuals or associations of persons:

Section 24 – The aggregate holding of equity shares by a foreign company either by itself or through its subsidiary companies or its nominees or by an individual or by an association of persons whether registered or not under any law of a country outside India taken in aggregate in the pension fund shall not exceed twenty-six per cent. of the paid-up capital of such fund or such percentage as may be approved for an Indian insurance company under the provisions of the Insurance Act, 1938, whichever is higher.

Explanation- For the purposes of this section, the expression “foreign company” shall have the meaning assigned to it in clause (23A) of section 2 of the Income-tax Act, 1961 (43 of 1961)

Apart from the above regulations, other relevant regulations may be applicable to the private equity transaction which depends on the quantum and the types of transactions or the industry sector of the target or other factors, same should be reviewed before proceeding forward to a transaction.  

Disclaimer: Nothing contained in this article is to be construed as a legal opinion or view of the author whatsoever and the content is to be used strictly for informational, and educational purposes. It is based upon relevant law and/or facts available at that point in time and prepared with due accuracy & reliability. Readers are requested to check and refer to relevant provisions of the statute, circulars, clarifications, etc. before acting based on the above write-up. While due care has been taken in preparing this article, certain mistakes and omissions may creep in. In no event, the author shall be liable for any direct, indirect, special, or incidental damage resulting from or arising out of or in connection with the use of this information.

Special thanks to my wife Chandni Mohapatra who encouraged me to have this piece of information in the proper shape.

Author Bio

Qualification: CA in Job / Business
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Location: Gurgaon, Haryana, India
Member Since: 25 May 2017 | Total Posts: 1
A seasoned Finance (Finance, taxation, treasury, and statutory compliance) professional with 15 years of industry experience. Led Complete IPO Cycle from getting the organization ready( kickoff meeting to listing of the company) . Significant experience in dealing with PE investors, Leading due di View Full Profile

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