Much-anticipated Flipkart-Snapdeal merger may hit FEMA roadblock. Here’s why
The much anticipated acquisition of e-commerce platform Snapdeal by its bigger contemporary Flipkart is likely to run into legal trouble, with experts anticipating regulatory hurdles to the proposed transfer of stocks to shareholders of Snapdeal by Flipkart. The point of contention here could be the Reserve Bank of India’s stringent Foreign Exchange Management Act or FEMA and Flipkart, which has its holding company – Flipkart Pvt. Ltd. – based in Singapore, would have to tread carefully in the all-stock deal which could fall under the purview of the Act.
Last month, Japanese telecom and internet giant SoftBank managed to bring on board Snapdeal’s early stage investors Nexus Venture Partners on board for a deal that would see a merger between the Indian e-commerce firm, Softbank’s biggest Indian asset, and e-commerce giant Flipkart. The all-stock deal, which valued Snapdeal at $1 billion, was estimated at around $700 million to $1 billion. Snapdeal’s shareholders are to receive Flipkart stock as part of the deal.
However, an Economic Times report, citing legal and finance professionals, says the issuance of shares by Flipkart’s Singapore-based holding company to the Indian shareholders of Snapdeal may be construed as breach of FEMA rules and would require special permission from the RBI. Snapdeal shareholders, it is learnt are not keen on receiving shares in Flipkart’s Indian arm, considering that it is the holding company based in Singapore that is likely to be listed first. Once listed, the shareholders will get an opportunity to exit. Snapdeal’s Indian investors include Ratan Tata and PremjiInvest, the personal investment arm of Wipro Chairman Azim Premji. These shareholders, the report said, are more likely to either prefer a direct stake in Flipkart Singapore or certain ‘economic interest’ in Flipkart’s overseas holding company.
Such a deal would require Flipkart Singapore to issue shares to both resident as well as non-resident shareholders of Snapdeal. Such issuance of shares is what constitutes a stock swap.
Structuring the deal in a manner that simultaneously protects the interests of Snapdeal’s shareholders while also steering clear of FEMA violation and not being construed as reverse round-tripping is what could prove a tricky affair, especially given the RBI’s record in questioning such stock swaps. Though aimed at serving genuine business interests, the RBI has typically viewed cross-border transactions that result in residents owning shares of an overseas company that has stake in another Indian company as round-tripping.
Over the past year, the RBI has sought explanations from many software, pharma and manufacturing companies whose overseas subsidiaries have raised funds and invested in Indian firms.
“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,” ET quoted Tejesh Chitlangi, partner at IC Legal, as saying.
Flipkart’s domestic units include Flipkart Internet Pvt Ltd which operates its e-commerce platform in India, Flipkart Payment Gateway Services Pvt. Ltd, Flipkart India Pvt. Ltd, Flipkart Digital Media Pvt. Ltd and Flipkart Online Services Pvt. Ltd.
Snapdeal’s overseas investors, including Japan’s SoftBank Group, China’s Alibaba Group and Foxconn Technology Solutions, among others, will be offered stakes in Flipkart’s Singapore-based holding company.