Flipkart-Snapdeal deal may tangle into FEMA trap

While Snapdeal acquisition by Flipkart appears to be in the last leg, a media report hints that it won’t be smooth owing to Foreign Exchange Management Act (FEMA) regulation. The Bengaluru based company will have to deal with Reserve Bank of India (RBI) rules on foreign exchange and may have to be specially structured to protect the interest of Snapdeal shareholders.

The regulator will make sure that the acquisition does not violate rules under the Foreign Exchange Management Act.

According to the Economic Times report, in the proposed all-stock deal, estimated in range of $700 million to $1 billion, shareholders of Snapdeal would receive Flipkart stock. But issuance of shares by Flipkart Singapore to Indian shareholders of Snapdeal would need a specific permission from RBI. Otherwise, the acquisition, in the strict legal sense, could be construed as reverse round-tripping and breach of Fema rules.

The country’s apex banking body, typically questions cross-border transactions involving residents owning shares of an overseas company that has stake in another Indian company. It treats such flow of funds or securities as round-tripping though several such transactions are facilitated with genuine business interests.

Earlier, RBI has asked explanations from various software, pharma and manufacturing companies whose overseas subsidiaries have raised funds and invested in Indian arms.

Flipkart operates its e-commerce platform in India through its wholly-owned subsidiary Flipkart Internet Pvt Ltd. The firm is registered out of Singapore. Meanwhile, Snapdeal’s local shareholders, which includes Ratan Tata and Premji Invest will look to either prefer a direct stake in Flipkart Singapore with direct interest in its overseas holding company, which would give them an exit opportunity after being listed.

This would essentially need Flipkart Singapore to issue its shares to the non-resident as well as resident shareholders of Snapdeal (stock swap).

Such a stock swap will require 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, ET reported.

The FEMA rule is an issue that both the companies (Flipkart and Snapdeal) will have to deal with to consummate the proposed deal.

"While there is no fund flow, there is indirect consideration if Snapdeal shareholders here are issued Flipkart Singapore stock. Flipkart may plan to give an undertaking to convince RBI to the effect there will be no round tripping. In case of specific money flow overseas RBI possibly could have been convinced of such money to be earmarked for non-Indian investment. However, in the situation stated above it may be difficult to convince RBI since there will be no actual money flow whilst parent shall still derive additional value from its subsidiary post the transaction,” said Tejesh Chitlangi, partner at IC Legal.

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