The road to the Flipkart-Snapdeal acquisition doesn’t seem like a smooth one. While due diligence is underway, Economic Times reports that the acquisition will have to comply with Reserve Bank of India’s rules on foreign exchange.
Given the fact that Flipkart’s holding company is based in Singapore, the deal may have to be specially structured to protect the interest of Snapdeal’s Indian shareholders.
Flipkart will have to ensure that the acquisition does not violate rules under the Foreign Exchange Management Act (Fema).
Flipkart, which is currently undertaking legal and commercial due diligence of SoftBank-backed Snapdeal, operates its ecommerce platform in India through its wholly-owned subsidiary Flipkart Internet.
As per the proposed all-stock deal, estimated at $700 million-$1 billion, shareholders of Snapdeal would receive stocks of Flipkart. But for Flipkart Singapore to issue shares to Snapdeal’s Indian shareholders, it would need a specific permission from RBI.
Senior lawyers and finance professionals told ET that if RBI’s permission is not obtained, the transaction, in the strict legal sense, could be construed as reverse round-tripping and breach of Fema rules.
RBI typically questions cross-border transactions that result in residents owning shares of an overseas company that has stake in another Indian company. It views such flow of funds or securities as round-tripping, though several such transactions are aimed at serving genuine business interests.
However, ET reports that Snapdeal’s local shareholders, which includes Ratan Tata and PremjiInvest are likely to either prefer a direct stake in Flipkart Singapore or certain ‘economic interest’ in Flipkart’s overseas holding company, which when listed would give them an exit opportunity.
This would require Flipkart Singapore to issue its shares to the non-resident as well as resident shareholders of Snapdeal (stock swap).
“Such a stock swap will need RBI approval for Flipkart Singapore to acquire shares of an Indian company for consideration other than cash, and for the resident Indians to own shares of a foreign company (Flipkart Singapore), which may be governed by the ODI (overseas direct investment) guidelines,” said Prem Rajani, managing partner at law firm Rajani Associates told ET.
“However, if the proposed transaction would involve Flipkart Singapore to issue its (Singaporean) company shares to non-resident shareholders of Snapdeal and Flipkart India issues its (Indian) shares to resident shareholders of Snapdeal, then RBI permission may not be required for issue of Flipkart’s Indian company shares to the resident shareholders. If, at a later date (whether at the time of IPO of Flipkart Singapore or otherwise), Flipkart Singapore desires to provide an exit to the erstwhile resident Indian shareholders of Snapdeal (who would by then be Flipkart India shareholders), then such a purchase of shares will have to comply with RBI pricing guidelines,” Rajani adds.
Flipkart’s other domestic units include Flipkart Payment Gateway Services Pvt. Ltd, Flipkart India Pvt. Ltd, Flipkart Digital Media Pvt. Ltd and Flipkart Online Services Pvt. Ltd. Snapdeal’s overseas investors, including Japan’s SoftBank Group, China’s Alibaba Group and Foxconn Technology Solutions, among others, will be offered stakes in Flipkart’s Singapore-based holding company.
The Fema rule is an issue that Flipkart and Snapdeal will have to deal with to consummate the proposed deal.