LIBERALISATION OF DEFERRED PAYMENT UNDER FOREIGN EXCHANGE MANAGEMENT ACT

Deferred payment is an arrangement where the borrower is allowed to start making payments at some specified time in the future. Such kinds of measures are often used in retail settings where a person buys and receives an item with the assurance to begin making payments at a future date.

Prior to amendment

Deferred payments in share purchase transactions between non-resident buyers and resident sellers required prior approval of the Reserve Bank of India (RBI) till recently.

Additionally, authorized dealer banks in India were allowed to open escrow accounts toward payment of share purchase consideration, but the escrow account could be operational for a limited period of only six months. In all other cases of opening/maintaining of escrow accounts for FDI related transactions, prior approval from the RBI was necessary.

Amendment

The amendment provides that in a transaction involving purchase of shares of an Indian company by a non-resident buyer from a resident seller, or vice-versa, the consideration may be paid on a deferred basis subject to the following conditions:

• The deferred component of consideration must not exceed 25% of the total consideration.
• Such deferred payment must be made within a maximum period of 18 months from the date of the share transfer agreement.

Conclusion

This recent amendment by RBI to permit deferment of purchase consideration and relaxing escrow requirements in cross border share purchase transactions is a positive step towards promoting the ease of doing business in India and encouraging investment into India.

Sanchayeeta Das

Associate

The Indian Lawyer & Allied Services