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India’s central bank has proposed changes to foreign exchange management rules that could broaden the circumstances under which an Indian company is considered controlled by foreign shareholders, raising concerns among legal experts about the impact on minority investors and cross-border transactions.
The Reserve Bank of India (RBI) said the proposed changes are aimed at creating a more user-friendly framework for foreign investment. The central bank has invited public feedback on the draft rules until 31 August.
Under the proposed framework, an Indian entity would be considered foreign-controlled if a foreign investor holds 10 per cent or more of its voting rights, has the ability to appoint a majority of its directors, or can influence management and policy decisions.
The proposed 10 per cent numerical threshold has drawn concern from lawyers, who said it could expand the definition of foreign control and trigger additional compliance requirements for companies and investors.
“The RBI has introduced a numerical benchmark that does not presently exist and could expand the circumstances in which a foreign investor is regarded as exercising control and attract higher compliances,” Anuroop Omkar, founding partner at law firm AK & Partners, told Reuters.
Concerns over minority investors
The RBI’s proposals come as India seeks to attract more foreign investment through measures aimed at reducing taxes and compliance costs, even as capital outflows continue to weigh on investment flows.
The proposed definition of control could have a significant impact on minority investors, particularly in cross-border investment structures where investors may hold substantial stakes without exercising effective control over the company.
“The implications of introducing this quantitative threshold, particularly in situations where investors hold limited minority rights that do not amount to effective control, require careful evaluation in the context of cross-border investment structures and established market practices,” Anjali Malhotra, partner, regulatory, at consultancy firm Nangia Global, told Reuters.
If retained in its current form, the proposed framework could also influence how governance rights are structured in mergers and acquisitions, private-equity transactions and joint ventures, lawyers said.
“This could have important implications for how governance rights are structured in mergers and acquisitions, private-equity transactions and joint ventures,” Moin Ladha, partner at law firm Khaitan & Co, told Reuters.
Uncertainty over 10% threshold
The draft rules have also raised questions over whether holding 10 per cent of voting rights alone would be sufficient to classify an investor as exercising foreign control, or whether the threshold would need to be considered alongside management or other governance rights.
“It remains unclear whether a 10% holding alone, or combined with management rights, would be enough to trigger a control designation,” Suresh Swamy, partner at Price Waterhouse & Co LLP, told Reuters.
“Presumably, the intention is not to treat every 10% investor as exercising control, particularly where the rights are merely protective in nature,” he added.
The issue is particularly relevant to private-equity and strategic investments, where investors may negotiate certain protective or veto rights without seeking day-to-day control over the company.
The RBI’s proposed changes are part of a wider effort to streamline India’s foreign exchange regulations and make the rules easier for businesses and investors to navigate. However, lawyers said the final impact would depend on how the central bank interprets the proposed threshold and distinguishes between genuine control and minority investor protections.
With inputs from agencies.
