Anti-Dilution Rights - How to Work Around the FEMA (TISPRO) Regulations, 2017 for Non-Residents [Part 5 of the five-part series]

regulations

In order to avoid the ‘Pricing Guidelines’ [discussed previously in Part 4 of this story], the additional shares to be allotted to the original investor of the Indian startup company to comply with the Anti-Dilution Rights must be issued under the ‘rights issue’ mechanism under Section 62 (1) (a) of the Companies Act, 2013 instead of ‘preferential allotment’ mechanism under Section 62 (1) (c) of the Companies Act, 2013.

The FEMA (TISPRO) Regulation, 2017, under Regulation 6, clearly lays down the provisions governing the ‘acquisition of shares through a rights issue or a bonus issue’ to a ‘person resident outside India’. Regulation 6 (5), clearly lays down that, “In case of an unlisted Indian company, the rights issue to persons resident outside India shall not be at a price less than the price offered to persons resident in India.” This means that, under ‘rights issue’, the shares can be issued at any price (including price per share lower than the fair market value), provided the Indian company offers the shares under ‘rights issue’ to the other shareholders at the same price.

Generally, all investment agreements, which have Anti-Dilution Rights, have elements of shareholders agreements and are accordingly executed by all shareholders of the investee company (new shareholders of the investee company are inducted into such ‘investment agreement’ therein through addendum). Therefore, contractually, if one can bind the other shareholders of the investee company to reject such shares offered under ‘rights issue’, then the non-resident investor can exercise its ‘rights issue’ and subscribe to such number of shares that is required to comply with the Anti-Dilution provisions.