Debt Funding in India PDF

M U M B AI SILICON VALLEY BANGA LORE SINGA P ORE MUMBA I BK C NE W DE L HI MUNICH
Debt Funding
in India
Onshore and
Offshore Debt Funding
(With Special Focus on NBFCs)
June 2014
Copyright 2014 Nishith Desai Associates www.nishithdesai.com

Debt Funding in India
Onshore and Offshore Debt Funding
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Contents
1. OFFSHORE DEBT FUNDING THE FDI AND THE FPI ROUTE 01
I. The FDI Route 01

II. The FPI Route 01
III.
FVCI Route 04
2. TAXATION OF SECURITIES AND STRUCTURING THROUGH

INTERMEDIATE JURISDICTIONS 06
I. Taxation of Securities 06
II.
Intermediate Jurisdiction 07
3. ONSHORE DEBT FUNDING THE NBFC ROUTE 10
I. Advantages of the NBFC Route 11

II.
Challenges Involved in the NBFC Route 11
ANNEXURE I 18
Foreign Investors Permitted to put: Some Cheer, Some Confusion
ANNEXURE II 22
Foreign Portfolio Investors Regulations Notified

Significant Departure from the Existing Foreign Institutional Investors Regime

1. Offshore Debt Funding The FDI and the

FPI Route
Foreign debt could be infused in one of the following (Foreign Portfolio Investment) Regulations 2014
ways (other than external commercial borrowing): (FPI Regulations).1 FPI is the portfolio investment
regime. The Foreign Institutional Investor regime
i FDI Route: Through fully and compulsorily and the Qualified Foreign Investor regime have
convertible debentures; and now been subsumed into the FPI regime. As regards
ii FPI Route: Through purchase of listed non- exiting FIIs or sub-accounts, they can continue to
convertible debentures (NCDs) of an Indian buy, sell or otherwise deal in securities, subject to
company by an FPI on the floor of the stock payment of conversion fees of USD 10002 to SEBI,
exchange. before the expiry of its registration as an FII or
sub-account. In case of QFIs, they may continue
iii FVCI Route: Through purchase of NCDs and / or to buy, sell or otherwise deal in securities subject
optionally convertible debentures (OCDs) of an to the provisions of these regulations, for a period
Indian venture capital undertaking or a venture of one year from the date of commencement of
capital fund. FPI Regulations, or until it obtains a certificate
of registration as an FPI, whichever is earlier.
Accordingly, the existing FIIs and QFIs will be rolled
I. The FDI Route over into FPI or be phased out in timely manner.
Under the new regime SEBI has given the power to
Under the FDI regime, investment can only designated depository participant (DDP) who on
be made into equity, fully and compulsorily their behalf will register the FPI.
convertible preference shares (CCPS) and fully
and compulsorily convertible debentures (CCDs). Under the amended TISPRO Regulations, the RBI has
Instruments which are not fully and convertible permitted Registered Foreign Portfolio Investors
instruments are considered to be external (RFPI) to invest on the same footing as FIIs.
commercial borrowing (ECB) and therefore, are
governed by ECB regime. Also, any such instrument A new Schedule 2A has been inserted after Schedule
having a put option in favour of a non-resident shall 2 of the Foreign Exchange Management (Transfer
not be FDI compliant unless in consonance with the or Issue of Security by a Person Resident Outside
conditions laid down by RBI, wherein the valuation India) Regulations, 2000 (TISPRO Regulations) to
norms for such optionality clauses are prescribed provide for the purchase / sale of shares / convertible
which prohibit any assured returns to the non- debentures of an Indian company by an RFPI under
resident. the Foreign Portfolio Investment Scheme (FPI
Scheme). The newly introduced Schedule 2A largely
Please refer to Annexure I for detailed analysis on put mirrors Schedule 2 of TISPRO which provides for
options. investments in shares / convertible debentures by
FIIs under the portfolio investment scheme (PIS).
Investment though subscription of CCDs subjected
to the restrictions applicable to FDI, as it is
essentially an equity route in as much as there is B. Listed NCDs
definite commitment to convert into common
Under Schedule V of the amended TISPRO
equity shares.
Regulations, read with the provisions of the FPI
Regulations, FPIs are permitted to invest in, inter
II. The FPI Route alia, listed or to be listed NCDs issued by an Indian
company. FPIs are permitted to hold securities only
in the dematerialized form.
A. Listed Compulsorily Convertible
Debentures Currently, there is an overall limit of USD 51 Billion
on investment by FPIs in corporate debt, of which
On January 7, 2014, SEBI introduced the SEBI 90% is available on tap basis. Further, FPIs can also
1. Please refer to Annexure II for a detailed analysis on the FPI Regulations.

2. Specified in Part A of the Second Schedule of the FPI Regulations
Nishith Desai Associates 2014 1

Offshore Debt Funding The FDI and the FPI Route
invest up to USD 30 Billion in government securities. for listing of debentures); and

iii. Registrar and transfer agent (R&T Agent), and
Listing of non-convertible debentures on the
the depositories for dematerialization of the non-
wholesale debt market of the Bombay Stock
convertible debentures.
Exchange is a fairly simple and straightforward
process which involves the following intermediaries: The entire process of listing, including the
appointment of the intermediaries can be
i. Debenture trustee, for protecting the interests of completed in about three weeks. The typical cost of
the debenture holders and enforcing the security, intermediaries and listing for an issue size of INR
if any; One Billion is approximately INR One Million
ii. Rating agency for rating the non-convertible
Herein below is a structure chart detailing the steps
debentures (there is no minimum rating required
involved in the NCD route:
FPI
Buy
Offershore
India Stock Step 3: Trading

Exchange of NCDs on the
(WDM) floor of stock
exchange
Step 2 Listing of NCDs
NCDs
Issuing
Warehousing Entity
Company
Cash
Step 1: Issuance of NCDs
Under this route, any private or public company can

list its privately placed NCDs on the wholesale debt
Recently, the RBI and SEBI permitted direct market segment of any recognized stock exchange.
subscription of to be listed NCDs by the FII (now An FPI entity can then purchase these NCDs on the
FPIs), thus doing away with the requirement of floor of the stock exchange from the warehousing
warehousing entity. These to be listed NCDs have to entity. For an exit, these debentures may be sold on
listed on a recognized stock exchange within 15 days the floor of the stock exchange3, but most commonly
of issuance, else, the FPI shall be required to dispose- these NCDs are redeemed by the issuing company.
off the NCDs to an Indian entity / person. So long as the NCDs are being offered on private
placement basis, the process of offering and listing
is fairly simple without any onerous eligibility
conditions or compliances.
3. There have been examples where offshore private equity funds have exited from such instruments on the bourses.
2 Nishith Desai Associates 2014

The NCDs are usually redeemed at a premium that the project. Further, not only are there no interest
is usually based on the sale proceeds received by the caps for the NCDs (as in the case of CCDs or CCPS),
company, with at least 1x of the purchase price being the redemption premium on the NCDs can also
assured to the NCD holder. be structured to provide equity upside to the NCD
holders, in addition to the returns assured on the
Whilst creation of security interest4 is not coupon on the NCD.
permissible with CCDs under the FDI route, listed
NCDs can be secured (by way of pledge, mortgage Separately, purchase of NCDs by the FPI from the
of property, hypothecation of receivables etc.) in Indian company on the floor of the stock exchange
favor of the debenture trustee that acts for and in the is excluded from the purview of ECB and hence,
interest of the NCD holders. the criteria viz. eligible borrowers, eligible lenders,
end-use requirements etc. applicable to ECBs, is not
Also, since NCDs are subscribed by an FPI entity applicable in the case of NCDs
under the FPI route and not under the FDI route,
the restrictions applicable to FDI investors in terms The table below gives a brief comparative analysis
of pricing are not applicable to NCD holders. In the for debt investment through FDI (CCDs) and FPI
real estate sector, NCDs are favored by developers (NCDs) route:
who do not want to share their equity interest in
Particulars CCD FDI NCD - FPI

Mere lending rights; however, veto rights can ensure
Equity Ownership Initially debt, but equity on conversion
certain degree of control.
Purchase of NCDs by the FPI from the Indian company on
Assured returns on FDI compliant
ECB Qualification the floor of the stock exchange is expressly permitted and
instruments, may be construed as ECB.
shall not qualify as ECB.
Arm's length interest pay out should be permissible
Interest pay out may be limited to SBI
resulting in better tax efficiency. Higher interest on NCDs
PLR + 300 basis points. Interest can be
Coupon Payment may be disallowed. Interest can be required to accrue only
required to accrue and paid only out of
out of free cash flows. Redemption premium may also be
free cash flows.
treated as business expense.
Pricing DCF Valuation applicable DCF Valuation not applicable
Listed NCDs can be secured (by way of pledge, mortgage
Creation of security interest is not
of property, hypothecation of receivables etc.) in favor of
Security Interest permissible either on immoveable or
the debenture trustee who acts for and in the interest of
movable property
the NCD holders
Sectoral Only permissible for FDI compliant
Sectoral restrictions not applicable.
Conditionalities activities
NCDs are favorable for the borrower to reduce book
profits or tax burden. Additionally, redemption premium
Investor entitled to equity upside upon can be structured to provide equity upside which can
Equity Upside
conversion. be favourable for lender since such premium may be
regarded as capital gains which may not be taxed if the
investment comes from Singapore.
NCD listing (of approximately Rupees One Billion) may cost
Administrative around INR 1 Million including intermediaries cost. In case
No intermediaries required
expenses of FP, additional cost will be incurred for SEBI registration
and bidding for debt allocation limits.
4. Security interest is created in favour of the debenture trustee that acts for and on behalf of the NCD Holders. Security interest cannot be created
directly in favour of non-resident NCD holders

Offshore Debt Funding The FDI and the FPI Route
III. FVCI Route company, from FVCIs to the promoters, under the
Takeover Code.
SEBI introduced the SEBI (Foreign Venture Capital
Investors) Regulations, 2000 (FVCI Regulations) D. QIB Status
to encourage foreign investment into venture
capital undertaking.5 The FVCI Regulations make it FVCIs registered with SEBI have been accorded
mandatory for an offshore fund to register itself with qualified institutional buyer (QIB) status and are
SEBI. Unlike FDI regime where investors can only eligible to subscribe to securities at the IPO through
subscribe to equity / CCDs / CCPS, FVCIs can also the book building route.
invest into Optionally Convertible Preference Shares
(OCPS), OCDs and even NCDs.6 List of sectors in which FVCI can invest is not
specified in any regulations or law. However, RBI
SEBI and the RBI have extended certain benefits to while granting the permission/certificate imposes
FVCIs some of which are as follows: the conditions that an FVCI can only invest in the
following sectors. FVCIs are permitted to invest only
in the infrastructure sector and/ or in Indian venture
A. Free pricing capital undertaking engaged in the following nine
sectors:
The entry and exit pricing applicable to FDI regime
do not apply to FVCIs. To that extent, FVCIs can
i. biotechnology;
subscribe, purchase or sell securities at any price.
ii. IT related to hardware and software development;
iii. nanotechnology;
B. Lock-in
iv. seed research and development;
Under the SEBI (Issue of Capital and Disclosure
v. research and development of new chemical
Requirements) Regulations, 2009 (ICDR
entities in pharmaceuticals sector;
Regulations) the entire pre-issue share capital
(other than certain promoter contributions which vi. dairy industry;
are locked in for a longer period) of a company
vii. poultry industry;
conducting an initial public offering (IPO)
is locked for a period of 1 year from the date viii. production of bio-fuels; and
of allotment in the public issue. However, an ix. hotel-cum-convention centers with seating
exemption from this requirement has been granted capacity of more than three thousand.
to registered FVCIs, provided, the shares have been
held by them for a period of at least 1 year as on the In addition, the FVCI Regulations specify that7:
date of filing the draft prospectus with the SEBI.
This exemption permits the FVCI to exit from its i. at least 66.67 percent of the investible funds of a
investments immediately post-listing. FVCI shall be invested in unlisted equity shares
or equity-linked instruments of venture capital
undertaking; and
C. Exemption under the SEBI ii. not more than 33.33 percent of the investible
(Substantial Acquisition of Shares funds of a FVCI may be invested by way of, inter
and Takeovers) Regulations, 2011 alia, debt or debt instrument of a venture capital
Takeover Code (Takeover Code) undertaking in which the FVCI has already made
an investment by way of equity.
SEBI has also exempted promoters of a listed A comparison between the key features of FPIs and
company from the public offer provisions in FVCIs is provided below:
connection with any transfer of shares of a listed
5. Venture capital undertaking means a domestic company:- (i) whose shares are not listed in a recognised stock exchange in India; (ii) which is
engaged in the business of providing services, production or manufacture of articles or things, but does not include such activities or sectors which
are specified in the negative list by the Board, with approval of Central Government, by notification in the Official Gazette in this behalf.
6. Schedule VI of the TISPRO Regulations and the FVCI Regulations
7. Regulation 11 of the FVCI Regulations. These investment conditions may be achieved by the FVCI at the end of its life cycle.

Particulars FPI FVCI
Registration Registration with DDP is mandatory. Registration with SEBI is mandatory under the
FVCI Regulations.
Permitted investment Listed or to-be-listed NCD of Indian NCD, OCD or OCRPS of Indian venture capital
instruments companies. undertaking and/ or venture capital funds.
Listing of securities Listing is mandatory. A FPI may Listing is not required.
subscribe to to-be-listed non-convertible
debentures of an Indian company.
However, such non-convertible
debentures are required to be listed on
a recognized stock exchange within 15
days from the date of allotment.
Maximum interest payable No limits specified on interest payable. No limits specified on interest payable.
Sectoral restrictions No sectoral restrictions FPIs may Sectoral restrictions are present FVCIs may invest in
invest in debt securities of Indian the infrastructure sector or in Indian venture capital
companies engaged in any sector. undertakings engaged in the nine sectors specified
above.

2. Taxation of Securities and Structuring

through Intermediate Jurisdictions
I. Taxation of Securities residents in respect of the various types of income
in relation to the securities are provided in the table
below8:
The tax rates applicable to residents as well as non-
CATEGORY STATUS WITHHOLDING TAX/ CAPITAL GAINS

INTEREST
Listed Unlisted Listed Unlisted
Short-term Long-term9 Short-term Long term10

Individual Resident 0%11 10% 30% 20% with 30% 20%
indexation,
10% without
indexation13
Non- 30%, 20% for 30% 30% 10% on 30% Marketable

Resident FPIs (5% until capital gains debentures
June 2015)12 in USD; 10% 10% on
on capital capital gains
gains in INR in INR;
for FPI
Non-
marketable
debentures
20% on
capital gains
in USD
Corporate Resident 0%12 10% 30% 20% with 30% 20%

indexation,
10% without
indexation
Non- 40%, 20% for 40% 40%, 30% for 10% on 40% Marketable
Resident FPIs (5% until FPI capital gains debentures
June 2015) 10% on
in USD; 10% capital gains
on capital in INR;
gains in INR
for FPI Non-
marketable
debentures
20% on
capital gains
in USD
8. The rates mentioned above are exclusive of applicable surcharge and cess. Further, the above rates may be subject to applicable tax treaty relief.
9. Listed debentures held for a period of 12 months will be treated as long term capital assets.
10. Unlisted debentures held for a period of 36 months will be treated as long term capital assets.
11. Though the withholding on the interest is 0, but the receiver may still be taxed based on the applicable rates.
12. Provided that the interest is not more than State Bank of Indias PLR plus 500 Basis point
13. For residents, capital gains are generally computed after allowing the benefit of indexation, based on the inflation index prescribed in this regard.

Redemption premium, if treated as interest, will be Of the various Double Taxation Avoidance
subject to withholding tax at the rates applicable for Agreements (DTAAs) which India has entered into
interest in the above table, otherwise they will be across the globe, some of them contain beneficial
subject to taxation at the rates applicable for capital provisions with regard to capital gains tax and tax
gains. withholding on interest payments. Favourable legal
and regulatory environment, coupled with a lower
domestic tax regime in few of these jurisdictions,
including Mauritius, Singapore and Netherlands,
II. Intermediate Jurisdiction have made them, over the years, a popular choice
for an intermediate jurisdiction. The diagram below
Foreign investors may invest in India via an illustrates the use of intermediate jurisdiction for
intermediate jurisdiction to mitigate tax leakage. investment into India:
Offshore Investor
Offshore
Special Purpose
Vehicle
Intermidiate Jurisdiction
India
Portfolio
Company
Since taxation on business income in most the effective tax liability of foreign investor to 0%
jurisdictions is higher, and repatriation of dividends or 10% respectively, with the use of appropriate
from India is not tax effective 14, returns to foreign intermediate jurisdiction. Herein below is a
investors from India are generally structured as comparison of four key jurisdictions Mauritius,
capital gains or interest income, which can reduce Singapore, US and Netherland:
INCOME TAX TREATMENT

STREAM
Mauritius Singapore United States of America Netherlands
Sale of shares Income from the sale Income from the sale As per the India-US tax treaty, Income from sale
of shares of an Indian of shares of an Indian income from the sale of of shares of an
Company by a Mauritius Company by a Singapore shares of an Indian Company Indian Company by a
Company is only taxable Company is only taxable by a US company is taxable Netherlands company is
in Mauritius under the in Singapore under both in India and the US. taxable in the
14. There is DDT of 15% (exclusive of surcharge and cess) payable by the Indian company on the dividend distributed to its shareholders; further, since
DDT is a corporate level tax and not a tax in the hands of the shareholder, credit for DDT is usually not available.

Taxation of Securities and Structuring through Intermediate Jurisdictions
India-Mauritius tax treaty. the India-Singapore Thus, tax residents may have Netherlands. However,
Mauritius taxes capital tax treaty. There is no to pay capital gains tax in in a case where the
gains at the rate of zero capital gains implication India and the US. Dutch company owns
percent. Hence, there will in Singapore if the 10% or more of Indian
be no tax incidence. income is characterized There is an ambiguity under company shares and
as capital gains. US laws on whether tax the transfer is made to
Presently, a limitation on credit will be available for another Indian resident,
benefits (LoB) clause To avail the capital taxes paid in India. the gains may be taxed
is being negotiated in the gains exemption under in India at the rate of 10
India-Mauritius tax treaty the treaty, the entity %. However, such gains
whereby a minimum claiming the tax benefit shall remain taxable
annual expenditure must have incurred an only in Netherlands, if
requirement as under the annual expenditure of such gains are realised
India-Singapore treaty 200,000 Singapore in the course of a
may be prescribed for dollars in Singapore, corporate organisation,
availing the exemption. on operations, in reorganization,
the immediately amalgamation, division
preceding 24 months or similar transaction,
prior to the date the and the buyer or the
gains arise (LoB). seller own at least 10 per
However, Singapore cent of the capital of the
tax authorities may other.
construe capital gains
to be in the nature If India exercises
of business income such taxing right, the
unless (a) the Singapore Netherlands shall allow
Company holds 20 % of a credit for taxes paid in
the ordinary shares in India.
the Indian Co. and (b)
the shares are held for a Participation exemption
continuous period of 24 would be available under
months. Dutch domestic law
by which capital gains
derived from alienation
of shares of a subsidiary
where there is at least
5% holding inter alia
would be fully exempt
from taxation in the
Netherlands.
Buyback Tax shall be payable by the Indian company at the rate of 20% on the total consideration paid by it which is
above the amount received by the company at the time of issuing the shares.
Dividend Dividend Distribution Any dividend distributed Dividend Distribution Tax Dividend Distribution Tax
Tax is payable by the by a company in India shall be payable by the shall be payable by the
Indian Company prior is subject to dividend company in India prior to India Company prior to
to distribution of profits distribution tax at distribution of profits at distribution of profits at
at the rate of 15%*. the rate of 15%. The the rate of 15%. Dividend the rate of 15%.
Dividend Income dividend received by income received by the
received by the Mauritius the Singapore Company American Company shall be Dividend income
Company shall be taxable should be exempt from taxable at the rate of 10-15% received by the
as business income in tax in Singapore. (depending on the case). Netherlands Company
Mauritius at the rate shall be taxable at the
of 15%. However, the However, the India-US tax rate of 10%. However,
Mauritius Company treaty also provides that if a participation exemption
may be eligible to avail US company owns at least would be available under
deemed foreign tax credit 10% of the voting stock of its Dutch domestic law by
of 80% or underlying subsidiary in India, the US which dividends received
tax credits, which may would grant underlying tax from a subsidiary where
reduce the effective tax credit for tax paid in India for there is at least 5%
incidence to 0%-3%. distributions made by the holding inter alia would
Indian company in the form be fully exempt from
of dividends. Thus, tax credit taxation.

would be available in the

US in cases where the
shareholder is a US company
and the holding in the Indian
company is at least 10%.
Interest Interest income earned Interest income earned Interest income earned by a Interest income earned
by a Mauritian company by a Singapore company US company from an Indian by a Dutch company
from an Indian company from an Indian company company shall be subject from an Indian company
would be subject to 40% would be subject to a to a 15% withholding tax in shall be subject to a 10%
withholding tax for Indian 15% withholding tax in India. withholding tax in India
rupee under the India-
borrowing (including India. Further, interest In case of ECB, the Netherlands tax treaty. 15
CCDs). income should be withholding rate will be 5%
characterized as in India. In case of ECB,
Mauritius will tax the business income in withholding rate will be
interest income at the Singapore and be US will tax the interest 5% in India.
rate of 3%. However, subject to tax at the rate income at the rate of 35%.
credit will be received for of 17%. However, due However, credit will be Netherlands will tax the
tax paid in India to tax credit available in received for tax paid in India interest income at the
Singapore, the effective rate of 24%. However,
In case of ECB, the tax rate in Singapore is credit may be received
withholding rate will be likely to be 2%. for tax paid in India
5% in India.
In case of ECB,
withholding rate will be
5% in India.
15. Since the treaty has a most favoured nation clause in its protocol, the withholding rate would be reduced to 5%.

3. Onshore Debt Funding The NBFC Route

In light of the challenges that the FDI and the FPI off by intangible assets) and income from these
route are subjected to, there has been a keen interest financial assets is more than 50 per cent of its gross
in offshore funds to explore the idea of setting income. Both these tests (50% Tests) are required
up their own NBFC to lend or invest in Indian to be satisfied in order for the principal business of a
companies. company to be determined as being financial for the
purpose of RBI regulation.
An NBFC is defined in terms of Section 45I(c) of the
RBI Act, 1934 (RBI Act) as a company engaged
in granting loans/advances or in the acquisition
of shares/securities, etc. or hire purchase finance
or insurance business or chit fund activities or
lending in any manner provided the principal Recommendation of the Working Group on the
business of such a company does not constitute Issues and Concerns in the NBFC Sector chaired
any non-financial activities such as (a) agricultural by Usha Thorat has been issued by RBI in the form
operations, (b) industrial activity, (c) trading in of Draft Guidelines (Draft Guidelines). Draft
goods (other than securities), (d) providing services, Guidelines 16 provide that the twin criteria of assets
(e) purchase, construction or sale of immovable and income for determining the principal business
property. Every NBFC is required to be registered of a company need not be changed. However, the
with the RBI, unless specifically exempted. minimum percentage threshold of assets and income
should be increased to 75 per cent. Accordingly, the
The Act has however remained silent on the financial assets of an NBFC should be 75 per cent
definition of principal business and has thereby or more (as against more than 50 per cent) of total
conferred on the regulator, the discretion to assets and income from these financial assets should
determine what is the principal business of be 75 per cent or more (as against more than 50
a company for the purposes of regulation. percent) of total income.
Accordingly, the test applied by RBI to determine
what is the principal business of a company was
articulated in the Press Release 99/1269 dated April
8, 1999 issued by RBI. As per the said press release, a
company is treated as an NBFC if its financial assets
are more than 50 per cent of its total assets (netted The NBFC could be structured as follows.
Off-shore
Off-Shore Fund
Non-Banking Financial Company India
Indian Company
The Offshore Fund sets up an NBFC as a loan protected downside, and pegged to the equity upside
company, which then lends to Indian companies. of the company by way of redemption premium or
The NBFC may either lend by way of loan or through coupons.
structured instruments such as NCDs which have a
16. The Working Group report was published by the RBI in the form of Draft Guidelines on its website 12th December 2012

I. Advantages of the NBFC Route E. Tax Benefits to the Investee

Company
A. Assured Returns As against dividend payment in case of shares, any

interest paid to the NBFC will reduce the taxable
The funding provided through NBFCs is in the form income of the investee company. However, an NBFC
of domestic loans or NCDs, without being subjected may itself be subjected to tax to the extent of interest
to interest rate caps as in the case of CCDs.17 These income so received, subject of course to deductions
NCDs can be structured to provide the requisite that the NBFC may be eligible for in respect of
distribution waterfall or assured investors rate of interest pay-outs made by the NBFC to its offshore
return (IRR) to the offshore fund. parent.
B. Regulatory Certainty II. Challenges Involved in the

The greatest apprehension for funds has been NBFC Route
the fluid regulatory approach towards foreign
investment, for instance put options. The NBFC
being a domestic lending entity is relatively immune A. Setting up
from such regulatory uncertainty.
The first challenge in opting for the NBFC route is
the setting up of the NBFC. Obtaining a certificate
C. Security Creation of registration from the RBI for an NBFC is a time
consuming process. This process used to take
Creation of security interest in favour of non-
anywhere in the region of 12 14 months earlier,
residents on shares and immoveable property is
which wait period has now significantly reduced,
not permitted without prior regulatory approval.
but it may still take as much as 6 months, or in some
However, since the NBFC is a domestic entity,
cases, even longer.
security interest could be created in favour of
the NBFC. Enforceability of security interests,
however, remains a challenge in the Indian context.
Enforcement of security interests over immovable
property, in the Indian context, is usually a time
consuming and court driven process. Unlike banks, Draft Guidelines provide that NBFCs with asset size
NBFCs are not entitled to their security interests below Rs. 1000 crore and not accessing any public
under the provisions of the Securitization and funds shall be exempted from registration. NBFCs,
Reconstruction of Financial Assets and Enforcement with asset sizes of Rs.1000 crore and above, need to
of Security Interest (SARFAESI) Act.18 be registered and regulated, even if they have no
access to public funds.
D. Repatriation Comfort Draft Guidelines also provide that small non-
deposit taking NBFCs with asset of Rs. 50 crores or
Even though repatriation of returns by the NBFC to
less should be exempt from the requirement of RBI
its offshore shareholders will still be subject to the
registration. Not being deposit taking NBFCs and
restrictions imposed by the FDI Policy (such as the
being small in size, no serious threat perception is
pricing restrictions, limits on interest payments etc.),
perceived to emanate from them.
but since the NBFC will be owned by the foreign
investor itself, the foreign investor is no longer
dependent on the Indian company as would have
been the case if the investment was made directly
into the Indian entity.
17. Exchange control regulations do not prescribe for any cap on coupon in case of CCDs, but only prescribe for a cap on payment of dividends on a
CCPS, which is three hundred basis points over and above the state bank of India prime lending rate, prevailing at the time of issue of the CCPS.
Nevertheless, it is market practice to restrict the coupon that can be paid on CCDs to the same extent as dividends that can be paid on CCPS.
18. SARFAESI Act facilitates enforcement of security interest without intervention of the courts.

Onshore Debt Funding The NBFC Route
Due to the elaborate time period involved in setting mergers or amalgamations with other companies
up the NBFC, one of the common alternatives or NBFCs.
adopted, especially in case of non-deposit taking
The abovementioned RBI approval is sought from
NBFCs was to purchase an existing NBFC. This
the DNBS (Department of Non-Banking Supervision)
was because earlier there was only a requirement
division of the RBI.
of giving 30 thirty days written notice 19 prior to
effecting a change of control of non-deposit NBFC Separately, earlier, any transfer of shares of a
(the term control has the same meaning as defined financial services company from a resident to a
in the SEBI Takeover Code), and a separate approval non-resident required prior approval of the Foreign
was not required; and unless the RBI restricted Exchange Department of the Reserve Bank of India
the transfer of shares or the change of control, the (FED), which took anywhere in the region of 2 4
change of control became effective from the expiry months. In a welcome move, as per a recent RBI
of thirty days from the date of publication of the circular dated November 11, 2013, the requirement
public notice. to procure such an approval was removed if:
However, recently, the RBI vide its circular dated i. any fit and proper/ due diligence requirement
May 26, 2014 20, has prescribed that in order to as regards the non-resident investor as stipulated
ensure that the fit and proper 21 character of the by the respective financial sector regulator shall
management of NBFCs is continuously maintained have to be complied with ; and
for both, deposit accepting and non-deposit
accepting NBFCs, its prior written permission has to ii. The FDI policy and FEMA regulations in terms of
be obtained for any takeover or acquisition of control sectoral caps, conditionalities (such as minimum
of an NBFC, whether by acquisition of shares or capitalization, etc.), reporting requirements,
otherwise. This RBI circular requires prior approval documentation etc., are complied with.
in the following situations also: Since, the requirement of obtaining RBI approval in
case of change in control even for non-deposit taking
i. any merger/amalgamation of an NBFC with NBFC is relatively very new, only time will tell
another entity or any merger/amalgamation of an how forthcoming RBI is in granting such approvals
entity with an NBFC that would give the acquirer and to that extent, how favourable is this option of
/ another entity control of the NBFC; purchasing NBFC.
ii. any merger/amalgamation of an NBFC with
another entity or any merger/amalgamation of
an entity with an NBFC which would result in B. Capitalization
acquisition/transfer of shareholding in excess of
10 percent of the paid up capital of the NBFC; The NBFC would be subject to minimum
capitalization requirement which is pegged to the
iii. for approaching a court or tribunal under Section extent of foreign shareholding in the NBFC as set out
391-394 of the Companies Act, 1956 or Section in the FDI Policy.
230-233 of Companies Act, 2013 seeking order for
Percentage of Holding in the NBFC Minimum Capitalisation

Up to 51% FDI USD 0.5 million, with entire amount to be brought upfront.
More than 51% FDI USD 5 million with entire amount to be brought upfront.
More than 75% FDI USD 50 million, with USD 7.5 million to be brought upfront and the
balance in 24 months.
19. The public notice had be published in one English and one vernacular language newspaper, copies of which were required to be submitted to the
RBI.
20. DNBS (PD) CC.No.376/03.10.001/2013-14
21. Under the Master Circular on Corporate Governance dated July 1, 2013, RBI had emphasized the importance of persons in management who fulfil
the fit and proper criteria. The Master Circular provides as follows:
it is necessary to ensure that the general character of the management or the proposed management of the non-banking financial company shall
not be prejudicial to the interest of its present and future depositors. In view of the interest evinced by various entities in this segment, it would be
desirable that NBFC-D with deposit size of Rs 20 crore and above and NBFC-ND-SI may form a Nomination Committee to ensure fit and proper
status of proposed/existing Directors.

Considering the need for capitalization, it is not CCDs clearly standout against CCPS on at least the
uncommon to see non residents holding less than following counts. Firstly, while any dividend paid
75% stake in the NBFC even though a significant on CCPS is subject to the same dividend entitlement
portion of the contribution comes from non- restriction (300 basis points over and above the
residents. Premium on securities is considered for prevailing State Bank of India Prime Lending Rate at
calculating the minimum capitalization. the time of the issue), dividends can only be declared
out of profits. Hence, no tax deduction in respect of
In addition to the above, every NBFC is required to dividends on CCPS is available. To that extent, the
have net owned funds 22 of INR 20 million (INR 2.5 company must pay 30%24 corporate tax before it can
million provided application for NBFC registration is even declare dividends. Secondly, any dividends can
filed on or before April 20,1999).23 be paid by the company only after the company has
paid 15%25 dividend distribution tax. In addition,
unlike conversion of CCDs into equity, which is
C. The Instrument not regarded as a transfer under the provisions of
the Income-tax Act, 1961, conversion of CCPS into
Before we discuss the choice of an instrument for the equity may be considered as a taxable event and long
NBFC, lets discuss the instruments that are usually term or short term capital gains may be applicable.
opted for investment under the FDI route. Lastly, CCPS will follow CCDs in terms of liquidation
preference.
The only available options under the FDI route
are equity shares, CCPS and CCDs. Typically, However, unlike other companies, a combination
and naturally depending from case to case, a of nominal equity and a large number of CCDs may
combination of equity and CCDs is usually preferred not be possible in case of NBFCs. Though all non-
to capitalize the investee company. Equity usually deposit accepting NBFCs are subjected to NBFC
forms a nominal part of the investment, and a large (Non-Deposit Accepting or Holding) Companies
portion of the investment is made by subscription to Prudential norms (Reserve Bank) Directions (the
CCDs. Prudential Norms), once such NBFC has total
assets in excess of INR 1 billion (USD 20 million
CCDs essentially offer three important benefits.
approximately)26, the NBFC is referred to as a
Firstly, any coupon paid on CCDs is a deductible
systemically important NBFC. Unlike other NBFCs,
expense for the purpose of income tax. Secondly,
a systemically important NBFC is required to
though there is a 40% withholding tax that the non-
comply with Regulation 15 (Auditors Certificate),
resident recipient of the coupon may be subject to,
Regulation 16 (Capital Adequacy Ratio) and
the rate of withholding can be brought to as low as
Regulation 18 (Concentration of Credit / Investment)
10% if the CCDs are subscribed to by an entity that
of the Prudential Norms. The choice of instrument
is resident of a favorable treaty jurisdiction. Thirdly,
is largely dependent on the capital adequacy ratio
coupon can be paid by the company, irrespective
required to be maintained by the NBFC for the
of whether there are profits or not in the company.
following reason.
Lastly, being a loan stock (until it is converted), CCDs
have a liquidation preference over shares. And just Regulation 16 of the Prudential Norms restricts a
for clarity, investment in CCDs is counted towards systemically important NBFC from having a Tier II
the minimum capitalization. Capital larger than its Tier I Capital.
22. Net Owned Funds has been defined in the RBI Act 1934 as (a) the aggregate of paid up equity capital and free reserves as disclosed in the latest
balance sheet of the company, after deducting there from (i) accumulated balance of loss, (ii) deferred revenue expenditure and (iii) other intangible
asset; and (b) further reduced by the amounts representing (1) investment of such company in shares of (i) its subsidiaries; (ii) companies in the same
group; (iii) all other NBFCs and (2) the book value of debentures, bonds, outstanding loans and advances (including hire-purchase and lease finance)
made to and deposits with (i) subsidiaries of such company and (ii) companies in the same group, to the extent such amounts exceed ten percent of
(a) above
23. Although the requirement of net owned funds presently stands at INR 20 million, companies that were already in existence before April 21, 1999
are allowed to maintain net owned funds of INR 2.5 million and above. With effect from April 1999, the RBI has not been registering any new NBFC
with net owned funds below INR 20 million.
24. Exclusive of surcharge and cess.
26. Note that an NBFC becomes a systemically important NBFC from the moment its total assets exceed INR 100 crores. The threshold of INR 1 billion
need not be reckoned from the date of last audited balance sheet as mentioned in the Prudential Norms.

Tier I Capital = Owned funds27 + Perpetual debt FDI can only engage in lending but not in making
instruments (upto15% of Tier I Capital of previous investments.29
accounting year) -Investment in shares of NBFC
and share/ debenture/bond/ loans / deposits with We are given to understand that in a few cases
subsidiary and Group company (in excess of 10% of where the redemption premium of the NCDs was
Owned Fund) linked to the equity upside, RBI qualified such
instruments to be in the nature of investments
Tier II Capital = Non-convertible Preference shares rather than just loan instruments. Once the nature
/ OCPS + Subordinated debt + General Provision and of the instrument changed, then nature of the NBFC
loss reserves (subject to conditions) + Perpetual debt automatically changed from lending to investment,
instruments (which is in excess of what qualifies and FIPB approval was immediately required in
for Tier I above) + Hybrid debt capital instruments respect of foreign investment in an NBFC engaged in
+ revaluation reserves at discounted rate of fifty five investment activity.
percent;
Thus, CCDs being hybrid debt instruments which

fall in Tier II cannot be more than Tier I Capital. This
disability in terms of capitalization is very crucial for
the NBFC and its shareholder as it not only impedes CORE INVESTMENT COMPANIES
the ability of the NBFC to pay out interests to the
foreign parent in case of inadequate profits, but is A core investment company (CIC) is a company
also tax inefficient. There is currently an ambiguity which satisfies the following conditions as on the
on whether NCDs are to be included in Tier II date of the last audited balance sheet (i) it holds
Capital as they do not qualify in any of the heads as not less than 90% of its net assets in the form of
listed above for Tier II Capital. investment in equity shares, preference shares,
bonds, debentures, debt or loans in group companies;
(ii) its investments in the equity shares (including
D. No Ability to make Investments instruments compulsorily convertible into equity
shares within a period not exceeding 10 years from
Having discussed the funding of the NBFC itself, the date of issue) in group companies constitutes not
lets discuss how the NBFC could fund the investee less than 60% of its net assets ; (iii) it does not trade
companies. Under the FDI Policy, an NBFC with in its investments in shares, bonds, debentures, debt
foreign investment can only engage in certain or loans in group companies except through block
permitted activities 28 under the automatic route, sale for the purpose of dilution or disinvestment; and
and engaging in any financial services activity other (iv) it does not carry on any other financial activity
than such activities will require prior approval of referred to in Section 45 I (c) and 45 I (f) of the
the Foreign Investment Promotion Board (FIPB), Reserve Bank of India Act, 1934 except for granting
an instrumentality of the Ministry of Finance of the of loans to group companies, issuing of guarantees
Government of India. on behalf of group companies and investments in
bank deposits, money market instruments etc.
While lending qualifies as one of the permitted
categories (leasing and finance), investment is A CIC is not required to register with the RBI,
not covered in the list above. Therefore, any FDI in unless the CIC accepts public funds AND has total
an NBFC that engages in investments will require financial assets in excess of INR 1 billion.
prior approval of the FIPB. Such an approval though
discretionary is usually granted within 3 months Public funds for the purpose of CIC include funds
time on a case to case basis. Therefore, an NBFC with raised either directly or indirectly through public
27. Owned Fund means Equity Capital + CCPS + Free Reserves +Share Premium + Capital Reserves (Accumulated losses + BV of intangible assets +
Deferred Revenue Expenditure)
28. The activities permitted under the automatic route are: (i) Merchant Banking, (ii) Under Writing, (iii) Portfolio Management Services, (iv)
Investment Advisory Services, (v) Financial Consultancy, (vi) Stock Broking, (vii) Asset Management, (viii) Venture Capital, (ix) Custodian Services,
(x) Factoring, (xi) Credit Rating Agencies, (xii) Leasing & Finance, (xiii) Housing Finance, (xiv) Forex Broking, (xv) Credit Card Business, (xvi) Money
Changing Business, (xvii) Micro Credit, (xviii) Rural Credit and (xix) Micro Finance Institutions
29. The FDI Policy however under paragraph 6.2.17.8.2 (1) provides that: (iv) NBFCs (i) having foreign investment more than 75% and up to 100%, and
(ii) with a minimum capitalisation of USD 50 million, can set up step down subsidiaries for specific NBFC activities, without any restriction on the
number of operating subsidiaries and without bringing in additional capital.
(v) Joint Venture operating NBFCs that have 75% or less than 75% foreign investment can also set up subsidiaries for undertaking other NBFC activities,
subject to the subsidiaries also complying with the applicable minimum capitalisation norms.

deposits, Commercial Papers, debentures, inter- H. Enforcing Security Interests

corporate deposits and bank finance but excludes
funds raised by issue of instruments compulsorily NBFCs, unlike banks, are not entitled to protection
convertible into equity shares within a period not under the SARFAESI Act. This is a major handicap
exceeding 10 years from the date of issue. for NBFCs as they have to undergo through the
elaborate court process to enforce their security
interests, unlike banks which can claim their
security interests under the provisions of SARFAESI
Act without the intervention of the courts.
E. Deployment of Funds Representations were made by industry associations
seeking inclusion of NBFCs within the ambit of
NBFCs can issue debentures only for deployment SARFAESI Act, especially in the current times when
of the funds on its own balance sheet and not to NBFCs are fairly regulated.
facilitate requests of group entities/ parent company/
associates. Core Investment Companies have been We understand that the then RBI Governor D.
carved out from the applicability of this restriction. Subbarao responded to the exclusion of NBFCs on
the ground that their inclusion under the SARFAESI
F. Credit Concentration Norms Act would distort the environment for which
Securitisation Companies (SCs)/ Reconstruction
A systemically important NBFC is not permitted to Companies (RCs) were set up by allowing more
lend or invest in any single company exceeding 15% players to seek enforcement of security rather than
of its owned fund 30, or single group 31 of companies attempting reconstruction of assets.
exceeding 25% of its owned fund. If however the
systemically important NBFC is investing and Subbarao mentioned that SARFAESI Act was enacted
lending, then these thresholds stand revised to 25% to enable banks and financial institutions to realise
and 40% respectively. long-term assets, manage problem of liquidity, asset
liability mis-matches and improve recovery by
Exemption from such concentration norms may exercising powers to take possession of securities,
be sought and has been given in the past where sell them and reduce nonperforming assets by
the NBFC qualified the following two conditions adopting measures for recovery or reconstruction,
firstly, the NBFC did not access public funds32, and through the specialised SCs/RCs, which would be
secondly, the NBFC did not engage in the business registered with the RBI and purchase the NPAs of the
of giving guarantees. Interestingly, public funds banks and FIs. According to him, two methodologies
include debentures, and to that extent, if the NBFC were envisaged - first, the strategy for resolution of
has issued any kind of debentures (including the assets by reconstructing the NPAs and converting
CCDs), then such relaxation may not be available them into performing assets, and second, to enforce
to it. In the absence of such exemption, it may be the security by selling the assets and recovering the
challenging for loan or investment NBFCs to use the loan amounts
leverage available to them for the purpose of making
loans or investments. Subbarao further mentioned that SARFAESI Act
is not merely a facilitator of security enforcement
without the intervention of Court. It is a
G. Only Secure Debentures can be comprehensive approach for restructuring the assets
Issued and make it work and only when it does not work,
the recovery mode was envisaged.
NBFCs can only issue fully secured debentures
whether by way of private placement or public He was apprehensive that since NBFCs have
issue. The security has to be created within a month followed the leasing and hire purchase models
from the date of issuance. If the security cover is generally for extending credit and they enjoy the
inadequate, the proceeds have to be placed in an right of repossession, the only benefit SARFAESI Act
escrow account, till the time such security is created. would extend to the NBFCs will be for enforcement
of security interest without the intervention of the
30. Supra Note 44

31. The term group has not been defined in the Prudential Norms
32. Public funds includes funds raised either directly or indirectly through public deposits, Commercial Papers, debentures, inter-corporate deposits
and bank finance.

court, which may distort the very purpose for which being a transfer of securities from a non-resident
SCs/RCs were created, namely, reconstruction and to a resident cannot be effected at a price higher
the inclusion would simply add a tool for forceful than the price of the shares as determined by the
recovery through the Act. discounted cash flows method. Although, buy back
from the existing shareholders is supposed to be on
a proportionate basis, there have been certain cases
such as Century Enka where the court approved
a scheme for selective buy-back of 30% of its
shareholding from its non-resident shareholders.
Draft Guidelines provide that NBFCs should be given
the benefit under SARFAESI Act, 2002, since there is From a tax perspective, traditionally, the income
an anomaly that unlike banks and public financial from buyback of shares has been considered as
institutions (PFIs), most NBFCs (except those capital gains in the hands of the recipient and
registered as PFIs under Section 4A of the Companies accordingly the investor, if from a favourable treaty
Act) do not enjoy the benefits deriving from the jurisdiction, could avail the treaty benefits. However,
SARFAESI Act even though their clients and/or in a calculated move by the Government to undo
borrowers may be the same. this practice of companies resorting to buying back
of shares instead of making dividend payments the
Budget 2013- 2014 has now levied a tax of 20%35 on
domestic unlisted companies, when such companies
make distributions pursuant to a share repurchase or
I. Exit buy back.
Exit for the foreign investor in an NBFC is the most
The said tax at the rate of 20% is imposed on a
crucial aspect of any structuring and needs to be
domestic company on consideration paid by it which
planned upfront. The exits could either be by way of
is above the amount received by the company at the
liquidation of the NBFC, or buy-back of the shares
time of issuing of shares. Accordingly, gains that
of the foreign investor by the NBFC, or a scheme
may have arisen as a result of secondary sales that
of capital reduction (where the foreign investor is
may have occurred prior to the buy-back will also be
selectively bought-back), or the sale of its shares in
subject to tax now.
the NBFC to another resident or non-resident, or
lastly, by way of listing of the NBFC.33 The proposed provisions would have a significant
adverse impact on offshore realty funds and foreign
Unlike most countries, liquidation in the Indian
investors who have made investments from
context is a time consuming and elaborate process in
countries such as Mauritius, Singapore, United States
India, sometimes taking in excess of 10 years.
of America and Netherlands etc. where buy-back of
shares would not have been taxable in India due to
Buyback of securities is another alternative,
availability of tax treaty benefits. Further, being in
however, CCDs cannot be bought back. CCDs
the nature of additional income tax payable by the
must be converted into the underlying equity
Indian company, foreign investors may not even be
shares to be bought back. Buy-back of securities is
entitled to a foreign tax credit of such tax.
subjected to certain conditionalities as stipulated
under Section 68 of the Companies Act, 2013. A
Additionally, in the context of the domestic investor,
buyback of equity shares can happen only out of
even the benefit of indexation would effectively
free reserves, or proceeds of an earlier issue or out of
be denied to such investor and issues relating to
share premium.34 In addition to the limited sources
proportional disallowance of expenditure under
that can be used for buy-back, there are certain other
Section 14A of the ITA (Expenditure incurred in
restrictions as well that restrict the ability to draw
relation to income not includible in total income)
out the capital from the company. For instance, only
may also arise. This may therefore result in the buy-
up to a maximum of 25% of the total paid up capital
back of shares being even less tax efficient than the
and free reserves of the company can be bought in
distribution of dividends.
one financial year, the debt equity ratio post buy-
back should not be more than 2:1 etc. Buy-back
33. The forms of exit discussed here are in addition to the ability of the foreign investor to draw out interest / dividends from the NBFC up to 300 basis
points over and above the State Bank of India prime lending rate.
34. As a structuring consideration, the CCDs are converted into a nominal number of equity shares at a very heavy premium so that the share premium
can then be used for buy-back of the shares.

As an alternative to buy-back, the investor could Sale of shares of an NBFC or listing of the NBFC
approach the courts for reduction of capital under could be another way of allowing an exit to the
the provisions of section 68 of the Companies Act, foreign investor; however, sale of shares cannot be
2013; however, the applications for such reduction effected at a price higher than the price of the shares
of capital need to be adequately justified to the court. determined by the discounted cash flow method.
From a tax perspective, the distributions by the Listing of NBFCs will be subject to the fulfillment
company to its shareholders, for reduction of capital, of the listing criterion and hinges on the market
would be regarded as a dividend to the extent to conditions at that point in time.
which the company possesses accumulated profits
and will be taxable in the hands of the company at
the rate of 15%.36 Any, distribution over and above
the accumulated profits (after reducing the cost of
shares) would be taxable as capital gains.
36. Exclusive of surcharge and cess

Annexure I
Foreign Investors Permitted To Put: Some Cheer,
Some Confusion
Amendment recognizes shares/debentures with The SEBI notification granted validity to contracts
a built-in option/right as eligible instruments containing clauses related to preemptive rights, right
which may be issued to foreign investors; of first offer, tag-along right, drag-along right, and
call and put options.
Such securities cannot have an assured exit
price, although the Amendment specifies
From an RBI perspective, the issue was more
methodologies to determine the exit price;
from an external commercial borrowings (ECB)
The prescribed price determination measures perspective. RBI had issued a notification on June 8,
may make it more beneficial to invest in 2007 vide Circular 73, setting out that non-residents
compulsorily convertible securities rather than could only subscribe to FDI Instruments, and any
equity shares; instrument that may be redeemable or optionally
redeemable will qualify as ECB. Interpreting that
A minimum lock-in period of one year has been
Circular, the RBI regarded put options in favour
prescribed before the option can be exercised.
of non-residents as redeemable instruments, not
Put Options in favour of a non-resident requiring permitted under the FDI regime. That interpretation
an Indian resident to purchase the shares held by the was even extended to situations where the put
non-resident under the foreign direct investment option was not on the company, but the promoters
(FDI) regime were hitherto considered as of the company.
violative of the FDI Policy by the Reserve Bank of
India (RBI). The RBI has now legitimized option On a separate count, taking a cue from SEBI, the RBI
arrangements through its recent amendment also took a view that a put option provision in an
(Amendment) to the Foreign Exchange investment agreement would qualify as a option
Management (Transfer or Issue of Security by a or an over the counter derivative, which is not
Person Resident outside India) Regulations, 2000 permitted under the FDI route. That view was taken
(TISPRO), notified through its circular37 dated despite the fact that no separate price was paid for
January 09, 2013 (the Circular). TISPRO now the optionality, and the optionality could not be
recognizes that equity shares, fully and mandatorily traded independent of the FDI Instrument.
convertible preference shares and debentures (FDI
Instruments) containing an optionality clause can Having said that, there was no clear written policy
be issued as eligible instruments to foreign investors. that restricted put options, and RBIs approach
However, the Circular specifies that such an option was seen to be on a case-to-case basis, typically in
/ right when exercised should not entitle the non- cases where the promoters (not willing to honor
resident investor to exit at an assured return. the put) approached the RBI themselves. However,
the aggressiveness with which the RBI implements
such an unwritten policy was remarkable. The risk
of having a put was not just limited to it being not
I. Background enforceable, RBI in fact regarded the mere existence
of put in a contract as a violation of the FDI Policy
The validity and enforceability of put options has and initiated proceedings against the parties for
always been a bone of contention from an Indian having provided for such options in their investment
securities law and exchange control perspective. contracts.
In the past, Securities and Exchange Board of India In fact, the Department of Industrial Policy
(SEBI) had taken a stand, in context of public and Promotion (DIPP) had brought in a written
companies, that option arrangements are akin to prohibition on options in the Consolidated FDI
forward contracts, hence restricted. SEBI relaxed its Policy dated October 01, 2011, but deleted that
position through a notification38 in October, 2013. provision within 30 days of it in light of industry
37. RBI Circular No. RBI/2013-2014/436 A.P. (DIR Series) Circular No. 86 (January 09 2013) available at: http://rbidocs.rbi.org.in/rdocs/Notification/PDFs/
APDIR0901201486EN.pdf
38. SEBI Notification No. LAD-NRO/GN/2013-14/26/6667 (October 03, 2013) available at: http://www.sebi.gov.in/cms/sebi_data/
attachdocs/1380791858733.pdf

wide criticism. However, notwithstanding the Indian companies and their founders can no longer
deletion of prohibition of options, RBI continued treat such rights/options as mere paper rights.
with its approach that put options in favour of non-
residents were violative of the FDI policy. Please refer A detailed analysis of the Amendment, its
to our hotline discussing the change in regulatory ambiguities and practical challenges are set out
policy here http://tmp.nishithdesai.com/old/New_ herein below.
Hotline/CorpSec/CORPSEC%20HOTLINE_Oct0311.
htm and here http://tmp.nishithdesai.com/old/New_
Hotline/CorpSec/CORPSEC%20HOTLINE_Nov0111. A. Lock in
htm
While a minimum lock in period of one year has
been specified, it is unclear as to which date it should
apply from. For example, if the date of optionality
II. Amendment agreement and issuance of securities are different,
which would be the relevant date? On a conservative
The Amendment, for the first time, provides for a basis, it may be appropriate to reckon the lock-in
written policy on put options, and in doing that sets conditions from the later of the two dates.
out the following conditions for exercise of options
by a non-resident: There are also issues about whether the lock-in
restricts only the exercise of securities or also the
i. Shares/debentures with an optionality clause secondary transfer of securities, as well as whether
can be issued to foreign investors, provided that a secondary transfer would reset the clock in the
they do not contain an option/right to exit at an hands of the new investor. It appears that the one
assured price; year lock would be required only if the option is
being exercised (and not in case of all secondary
ii. Such instruments shall be subject to a minimum transfers), and would apply afresh in the hands of
lock-in period of one year; each subsequent transferee.
iii. The exit price should be as follows:
In case of listed company, at the market price B. Will DCF Pricing Cap Still Apply, if
determined on the floor of the recognized
the Exit Price for Options is Higher
stock exchanges;
than DCF
In case of unlisted equity shares, at a price not
exceeding that arrived on the basis of Return Under the current regulations, non-residents are
on Equity (RoE) as per latest audited balance not entitled to sell the FDI Instruments to an Indian
sheet. RoE is defined as the Profit after Tax resident at a price exceeding the price computed per
divided by the net worth (defined to include the discounted free cash flows (DCF) methodology.
all free reserves and paid up capital)
However, the DCF cap applicable to FDI Instruments
In case of preference shares or debentures, at a
will not be applicable to sale of FDI Instruments
price determined by a Chartered Accountant
with a put option. This is because the exit pricing
or a SEBI registered Merchant Banker per any
applicable in case of exercise of the option by the
internationally accepted methodology.
non-resident has been introduced by amendment to
Regulation 9 of the TISPRO regulations, whereas the
DCF price cap is applicable to securities transferred
III. Analysis under Regulation 10 B(2) (by virtue of the RBI
circular dated May 4, 2010). Regulation 10B only
In a market where IPOs are almost non-existent, put applies to transfers by non-residents, which are not
options give tremendous comfort to offshore private covered under Regulation 9. Therefore, the DCF cap
equity funds, should a trade sale not materialize will not be applicable when determining the exit
within their exit horizons. Put options become price pursuant to exercise of put option.
even more important for certain asset classes like
real estate or other stabilized yield generating The question remains on whether the option pricing
assets where secondary sales and IPOs are not very norms set out in the Amendment will only apply if
common in the Indian context. The Amendment is a the option is exercised, or even if shares with options
positive development for such players as commercial are transferred to the grantor of the option without
justifications behind inclusion of options into the exercise of an option.
investment agreements have been recognized, and

Foreign Investors Permitted To Put: Some Cheer, Some Confusion
C. Exit Price for Equity Shares convertibles and listed shares
The Amendment provides that the exit price in

respect of equity shares of unlisted company should D. Determination of Price of
not exceed the price arrived at on the basis of Return Convertibles Securities
on Equity (RoE) as per the last audited balance
sheet. The Amendment provides the exit price for
convertibles upon exercise of put option should be
The formula is divorced from the traditional form of a price determined based on international accepted
calculating RoE (where the denominator is average pricing methodology, as determined by a SEBI
shareholder equity and not networth) and brings in registered merchant banker or chartered accountant.
several impractical situations set out below.
This valuation mechanism is likely to provide more
Plain reading of the provision suggests that the exit flexibility to investors at the point of exit, and hence
price would be capped at the RoE. Whilst it is not going forward we may see investors preferring more
clear, it appears that the RoE formula should be of convertible securities as compared to equity
interpreted to mean principal plus the RoE. That is shares for their investments in Indian companies.
to say, if the invested amount was INR 100, and the Having said this, it is unclear why different valuation
company generated profits of INR 20 each year for mechanisms were believed to be required for equity
five years, leading to a hypothetical net worth of 200, shares and compulsorily convertible securities,
the RoE would be equal to the profits of the sixth which are in any case treated on the same footing
year divided by 200. If the profit after tax in the sixth and subject to DCF cap on an as if converted basis
year were INR 20, the RoE would be 20/200 or 10%. under the current regulatory regime
Accordingly, the exit price for the foreign investor
would be capped at INR 110, which clearly may not
be reflective of the FMV of the instrument. E. Status of Existing Option
Arrangements
The formula for determining the exit price seems
to be at complete odds with the pricing suggested The Circular clearly sets out that all existing
for convertibles (any internationally accepted contracts must comply with the conditions set out in
valuation methodology), listed equity shares (ruling the Amendment to qualify as being FDI compliant.
market price), or even shares and convertibles
without optionality attached (discounted cash flow In light of this, a position could be taken that all
valuation), which are likely to be much closer to existing contracts that are not compliant with the
FMV than the RoE methodology. conditions set out in the Amendment become FDI
non-compliant, especially if they provide for options
For instance, if the formula is applied, accumulated with assured returns.
profits only decrease the RoE. The formula also
leaves the exit price contingent on the last audited The terms of such put options contained in existing
balance sheet, which may have unintended and contracts may need to be revisited to bring them
distortionary consequences. For example, if the in compliance with the Amendment. However, if
put option is to be triggered after a fixed period of the existing terms of issuance already provide that
time (being five years, in the above example), and the exit price should be subject to applicable law,
the company incurs a loss in the sixth year, on a then the terms of the security may be considered to
conservative basis, the exit price may be capped at a have been amended by the law and should thus be
price lower than the investment amount. considered valid notwithstanding the Amendment.
If the put option is tied to an event of default,

the valuation mechanism may have unintended F. Impact on Joint Ventures and M&A
consequences as the default may have an impact on Deals
the profitability of the company in the year of exit.
Options are not just contained in private equity
Requiring an exit at RoE is clearly ambiguous. Ideally transactions. Even joint venture transactions and
the RoE can only be the basis to compute the exit sometimes M&A transactions contain put options
price. To that extent, it remains to be seen if the in favour of non-residents. These options are
RBI will permit the exit price on equity shares with usually pegged to fair market value (determined per
optionality attached to be a variable of the RoE that commercial negotiations) or at discount or premium
brings the exit price closer to FMV, just as in case of to the fair market value.

There may be a need to look at such joint venture to invest in common equity. The need to amend
agreements, as the commercially negotiated price existing contracts to bring them in line with the
will now be subjected to the pricing for options as set Amendment may be a challenging task, especially
out in the Amendment for most offshore private equity players that would
be hesitant to revisit investment agreements if
they are close to their exit horizons. What will also
be interesting is to see how the term exercise is
IV. Conclusion interpreted and whether RBI will require exit pricing
as set out for options to be applicable even when the
The Amendment is a welcome development as shares are transferred to the Indian resident granting
it gives predictability and commercial flexibility the option voluntarily, and not in exercise of the
to foreign investors, in relation to contractual option/right.
provisions, which are fairly standard in the
international investment context. However, Aditya Shukla,
pegging the exit price for equity to RoE (and not a Shreya Rao,
multiple of RoE that brings the exit price closer to Ruchir Sinha
FMV) is likely to be a cause of major concern for
investors. While preference shares may be preferred You can direct your queries or comments to the
from an exit pricing perspective, Companies Act authors
2013, which denies the flexibility of voting on
as-if-converted basis may galvanize the investors

Annexure II
Foreign Portfolio Investors Regulations Notified
Significant Departure from the Existing Foreign
Institutional Investors Regime
Foreign Portfolio Investors (FPI) Regulations may impact the industry. Interestingly, SEBI also
notified, repeals FII Regulations. seems to have changed the individual investment
cap that an FPI can hold in Indian companies under
FPIs differentiated into categories based on risk-
the FPI Regulations.
based KYC norms.
Changes made to broad-based criteria and
eligibility to issue and hold ODIs.
I. FPI: An Introduction
Rules concerning taxation of FPIs yet to be
formalized; anticipated to be largely in line with
Under the FPI regime, Securities and Exchange
tax framework for FIIs.
Board of India (SEBI) has harmonized foreign
Designated Depositary Participants (DDPs) institutional investors (FIIs), sub-accounts and
authorized to process applications on behalf of qualified foreign investors (QFIs) regimes into a
SEBI. single investor class foreign portfolio investors
(FPI) and provide a single window clearance
The recently notified Securities and Exchange Board
through designated depository participants
of India (Foreign Portfolio Investors) Regulations,
(DDPs). With each investor registering directly
2014 (FPI Regulations), which repeals the SEBI (FII)
as an FPI (under the respective three categories
Regulations, 1995 (FII Regulations), significantly
discussed later), the sponsored sub accounts
revises the regulation of foreign portfolio
structure seems to be over.
investments into India.
The FPI Regulations put into effect several
FPI Regulations seek to introduce a risk-based
recommendations made by the Committee
approach towards investor Know Your Customer
on Rationalisation of Investment Routes and
(KYC) requirements, ease the entry process and
Monitoring of Foreign Portfolio Investments chaired
reduce timelines for investor participants. However,
by Mr. K.M. Chandrasekhar in 2013.
on the key issues which foreign investors currently
deal with, viz. ambiguity on the broad based criteria,
From the point of view of KYC, the committee
eligibility to issue/subscribe to offshore derivative
recommended (and the FPI Regulations provide)
instruments and clubbing of investment limit, SEBI
for following categorization of FPIs based on their
seems to have revisited the current position which
perceived risk profile:
Eligible Foreign Portfolio Investors
Category I FPI Category II FPI Category III FPI

Government and Government-related i. Appropriately regulated broad based Includes all eligible FPIs who are not
investors such as central funds39; eligible under Category I and II, such
banks, Governmental agencies, as endowments, charitable societies,
sovereign wealth funds or ii. Appropriately regulated persons40; charitable trusts, foundations,
international and multilateral iii. Broad-based funds that are not corporate bodies, trusts, individuals
organizations or agencies appropriately regulated41; and family offices.
39. Includes mutual funds, investment trusts, insurance/reinsurance companies

40. Includes banks, asset management companies, investment managers/advisors, portfolio managers
41. This is subject to the fact that the investment manager of such broad based fund is regulated and undertakes that it will be responsible for the acts,
omissions and other things done by the underlying broad-based funds.

iv. University funds and pension funds;

and
v. University related endowments already
registered with SEBI as FIIs or sub-
accounts
The FPI categorization follow the risk based KYC hold up to 9.99% of the share capital of an Indian
regime as set out in SEBIs circular dated September company.
12, 201342 for foreign investors investing under
portfolio investment scheme. The FPI Regulations provide that in case the same
set of ultimate beneficial owner(s) invests through
multiple FPI entities, such FPI entities shall be
II. Changes in the Broad-Based treated as part of the same investor group43 and the
Criteria investment limits of all such entities shall be clubbed
at the investment limit as applicable to a single FPI.
Under the FII Regulations, a broad-based fund
meant a fund, established or incorporated outside
India which has at least 20 investors with no investor IV. New Rules for Holding ODI44
holding more than 49% of the shares or units of the
fund. It was also provided that if the broad-based Regulation 22 of the FPI Regulations provides
fund had any institutional investor, it was not that Category I FPIs and Category II FPIs (which
necessary for such fund to have 20 investors. Further, are directly regulated by an appropriate foreign
any institutional investor holding more than 49% of regulatory authority45) are permitted to issue,
the shares or units of the fund would have to itself subscribe and otherwise deal in offshore derivative
satisfy the broad based criteria. instruments (ODIs). However, those Category
II FPIs which are not directly regulated (which
The FPI Regulations continue to follow the broad- are classified as Category-II FPI by virtue of their
based criteria with two notable deviations. One, in investment manager being appropriately regulated)
order to satisfy the broad-based criteria, it would be and all Category III FPIs are not permitted to issue,
necessary for a fund to have 20 investors even if there subscribe or deal in ODIs.
is an institutional investor. Two, for the purpose of
computing the number of investors in a fund, both As compared to the FII regime, two differences
direct and underlying investors (i.e. investors of emerge, (1) Broad based unregulated funds are
entities that are set up for the sole purpose of pooling not eligible to subscribe to ODIs, even if they are
funds and making investments) shall be counted managed by appropriately regulated person (which,
under the FII Regulations, were eligible to hold ODIs)
and, (2) Entities that qualify as regulated broad based
III. New Investment Limits sub accounts, may also issue ODIs under the FPI
Regulations (which, under the FII Regulations, could
not do so as broad based sub-accounts).
Regulation 21(7) of the FPI Regulations states that a
single FPI or an investor group shall purchase below These are critical set of changes for FIIs that issue
ten percent of the total issued capital of a company. ODIs. The class of eligible entities issuing ODIs
The position under the FII Regulations was that has been expanded (bringing more potential
such shareholding was not to exceed ten percent of players who have the requisite balance sheet to
the share capital. Effectively, a single FPI can now issue such instruments, in the fray). Further, the
42. CIR/MIRSD/ 07 /2013

43. As per the Operational Guidelines for Designated Depository Participants (Operational Guidelines) released by SEBI, for the purpose of
ascertaining investor group, the concerned DDPs shall consider all such entities having direct or indirect common shareholding / beneficial
ownership / beneficial interest of more than 50% as belonging to same investor group.
44. ODIs have been defined as any instrument, by whatever name called, which is issued overseas by a FII against securities held by it that are listed or
proposed to be listed on any recognized stock exchange in India, as its underlying.
45. Reference may be made to Explanation 1 to Regulation 5 of the FPI Regulations where it is provided that an applicant (seeking FPI registration)
shall be considered to be appropriately regulated if it is regulated by the securities market regulator or the banking regulator of the concerned
jurisdiction in the same capacity in which it proposes to make investments in India.

Foreign Portfolio Investors Regulations Notified Significant Departure from the Existing Foreign Institutional Investors Regime
FPI Regulations also remove unregulated funds as which entities would qualify as being regulated by
potential holders of ODIs (as the regulator seems to an appropriate foreign regulatory authority and to
encourage the format of direct participation for such whom ODIs can be issued under the FPI Regulations.
investors). Additionally, there is still no clarity on
Whether offshore derivative instruments (ODIs) can be issued or otherwise dealt with?
Category I FPI Category II FPI Category III FPI

Yes Yes. (However, unregulated broad-based funds which are classified as No.
Category-II by virtue of their investment manager being appropriately
regulated, are not permitted to issue, subscribe or otherwise deal in ODIs)
V. PCC/SPC: Now Welcomed the umbrella FPI regime. With the delegation of
responsibilities to DDPs, the regime roll over will
have to be carefully carried out with minimum
Prior to December, 2013, there was a blanket ban
disruption to the market and taking into account
on protected cell companies (PCCs), segregated
the views of the all participants in the market, most
portfolio companies (SPCs) or equivalent
importantly the foreign investors.
structures which used to ring-fence assets and
liabilities under law) from participating under the
Clarity is still lacking on certain key issues such as
FII route.
the rollover process from the FII regime to the FPI
regime (particularly from a registration standpoint)
Based on the representations made by our firm,
as well as on tax implications, as the FPI Regulations
SEBI recently provided that entities that apply for
in their current form do not contain any language to
registration under the FII Regulations shall not be
suggest that all categories of FPIs would be treated
regarded as having an opaque structure if they are
as FIIs for the purpose of the Income Tax Act, 1961
required by their regulator or under any law to ring
(Tax Act) and no circulars have yet been issued by
fence their assets and liabilities from other funds /
Central Board of Direct taxes (CBDT).
sub-funds in the entity. This applied for structures
such as open-ended investment companies (OEICs)
Thus, while SEBI has notified the FPI Regulations,
in the UK. OEICs are typically set up in the format
repealing the FII Regulations, the FPI regime
of umbrella companies that have several sub-funds.
would become fully operational only once suitable
Recent amendments to the OEIC regulations in the
amendments have been made to the Tax Act and the
UK required that a PCC structure be adopted to ring
Foreign Exchange Management Act, 1999 (FEMA).
fence liabilities between these sub-funds.
Consequently, the FPI Regulations46 provide that
SEBI will continue to process applications under the
The position has evolved further under FPI
old regime till March 31, 2014 since SEBI appears to
Regulations and, as long as (a) the applicant is
be of the view that required amendments to the Tax
regulated in its home jurisdiction, (b) each fund /
Act and the FEMA will take place by such date.
sub-fund in the applicant satisfies the broad-based
criteria, and (c) the applicant undertakes to provide
Adhitya Srinivasan,
information regarding its beneficial owners upon
Richie Sancheti,
SEBIs request, the applicant shall not be regarded as
Kishore Joshi
having an opaque structure.
You can direct your queries or comments to the
authors
VI. Next Steps for the Regime Roll
Over
SEBI has to be lauded for its effort to harmonize the
different foreign portfolio investment routes under
46. Regulation 47(3)(c) of the FPI Regulations.

The following research papers and much more are available on our Knowledge Site: www.nishithdesai.com
Fund Structuring Investment in Dispute

& Operations Education Sector Resolution in
India
March 2014 February 2014 February 2014
Private Equity and International Doing Business in

Debt in Real Estate Commercial India
Arbitration
January 2014
January 2014 May 2014
Wealth & Estate Investment in Corporate Social

Planning Healthcare Sector in Responsibility &
India Social Business
Models in India
December 2013 December 2013 November 2013
NDA Insights
TITLE TYPE DATE
Jet Etihad Jet Gets a Co-Pilot M&A Lab January 2014
Apollos Bumpy Ride in Pursuit of Cooper M&A Lab January 2014
Diageo-USL- King of Good Times; Hands over Crown Jewel to Diageo M&A Lab January 2014
File Foreign Application Prosecution History With Indian Patent Office IP Lab 02 April 2013
Warburg - Future Capital - Deal Dissected M&A Lab 01 January 2013
Public M&A's in India: Takeover Code Dissected M&A Lab August 2013
Copyright Amendment Bill 2012 receives Indian Parliament's assent IP Lab September 2013
Real Financing - Onshore and Offshore Debt Funding Realty in India Realty Check 01 May 2012
Pharma Patent Case Study IP Lab 21 March 2012
Patni plays to iGate's tunes M&A Lab 04 January 2012
Vedanta Acquires Control Over Cairn India M&A Lab 03 January 2012
Corporate Citizenry in the face of Corruption Yes, Governance 15 September 2011
Matters!
Funding Real Estate Projects - Exit Challenges Realty Check 28 April 2011
Real Estate in India - A Practical Insight Realty Check 22 March 2011
Hero to ride without its 'Pillion Rider' M&A Lab 15 March 2011
Piramal - Abbott Deal: The Great Indian Pharma Story M&A Lab 05 August 2010
Bharti connects with Zain after two missed calls with MTN M&A Lab 05 June 2009
The Battle For Fame - Part I M&A Lab 01 April 2010

Research @ NDA
Research is the DNA of NDA. In early 1980s, our firm emerged from an extensive, and then pioneering, research
by Nishith M. Desai on the taxation of cross-border transactions. The research book written by him provided the
foundation for our international tax practice. Since then, we have relied upon research to be the cornerstone of
our practice development. Today, research is fully ingrained in the firms culture.
Research has offered us the way to create thought leadership in various areas of law and public policy. Through
research, we discover new thinking, approaches, skills, reflections on jurisprudence, and ultimately deliver
superior value to our clients.
Over the years, we have produced some outstanding research papers, reports and articles. Almost on a daily
basis, we analyze and offer our perspective on latest legal developments through our Hotlines. These Hotlines
provide immediate awareness and quick reference, and have been eagerly received. We also provide expanded
commentary on issues through detailed articles for publication in newspapers and periodicals for dissemination
to wider audience. Our NDA Insights dissect and analyze a published, distinctive legal transaction using multiple
lenses and offer various perspectives, including some even overlooked by the executors of the transaction.
We regularly write extensive research papers and disseminate them through our website. Although we invest
heavily in terms of associates time and expenses in our research activities, we are happy to provide unlimited
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Our research has also contributed to public policy discourse, helped state and central governments in drafting
statutes, and provided regulators with a much needed comparative base for rule making. Our ThinkTank
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As we continue to grow through our research-based approach, we are now in the second phase of establishing a
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We would love to hear from you about any suggestions you may have on our research reports. Please feel free to
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M U M B AI SILICON VALLEY BANGA LORE SINGA P ORE MUMBA I BK C NE W DE L HI MUNICH

Copyright 2014 Nishith Desai Associates www.nishithdesai.com

Nishith Desai Associates 2014

Nishith Desai Associates 2014

I. The FDI Route 01

2. TAXATION OF SECURITIES AND STRUCTURING THROUGH

3. ONSHORE DEBT FUNDING THE NBFC ROUTE 10

I. Advantages of the NBFC Route 11

Foreign Investors Permitted to put: Some Cheer, Some Confusion

Foreign Portfolio Investors Regulations Notified

Nishith Desai Associates 2014

1. Offshore Debt Funding The FDI and the

1. Please refer to Annexure II for a detailed analysis on the FPI Regulations.

Nishith Desai Associates 2014 1

invest up to USD 30 Billion in government securities. for listing of debentures); and

India Stock Step 3: Trading

Step 2 Listing of NCDs

Step 1: Issuance of NCDs

Under this route, any private or public company can

2 Nishith Desai Associates 2014

Particulars CCD FDI NCD - FPI

Nishith Desai Associates 2014 3

4 Nishith Desai Associates 2014

Particulars FPI FVCI

Nishith Desai Associates 2014 5

2. Taxation of Securities and Structuring

CATEGORY STATUS WITHHOLDING TAX/ CAPITAL GAINS

Listed Unlisted Listed Unlisted

Short-term Long-term9 Short-term Long term10

Non- 30%, 20% for 30% 30% 10% on 30% Marketable

Corporate Resident 0%12 10% 30% 20% with 30% 20%

6 Nishith Desai Associates 2014

INCOME TAX TREATMENT

Nishith Desai Associates 2014 7

8 Nishith Desai Associates 2014

would be available in the

Nishith Desai Associates 2014 9

3. Onshore Debt Funding The NBFC Route

Non-Banking Financial Company India

10 Nishith Desai Associates 2014

I. Advantages of the NBFC Route E. Tax Benefits to the Investee

A. Assured Returns As against dividend payment in case of shares, any

B. Regulatory Certainty II. Challenges Involved in the

Nishith Desai Associates 2014 11

Percentage of Holding in the NBFC Minimum Capitalisation

12 Nishith Desai Associates 2014

Nishith Desai Associates 2014 13

Thus, CCDs being hybrid debt instruments which

14 Nishith Desai Associates 2014

deposits, Commercial Papers, debentures, inter- H. Enforcing Security Interests

30. Supra Note 44

Nishith Desai Associates 2014 15

16 Nishith Desai Associates 2014

36. Exclusive of surcharge and cess

Nishith Desai Associates 2014 17

18 Nishith Desai Associates 2014

Nishith Desai Associates 2014 19

C. Exit Price for Equity Shares convertibles and listed shares

The Amendment provides that the exit price in

If the put option is tied to an event of default,

20 Nishith Desai Associates 2014

Nishith Desai Associates 2014 21

Eligible Foreign Portfolio Investors