On August 13, the Foreign Investment Risk Review Modernization Act, 2018 (FIRRMA) was signed into law by US president Donald Trump. The legislation expands the scope of review and authority of the Committee on Foreign Investment in the United States (CFIUS).
The new law demonstrates a clear intent to scrutinise investments from China. But while that appears to be the key focus, the text of the Act does not distinguish between jurisdictions from where the investments are made. Accordingly, even Indian investments in the US will be subject to FIRRMA in addition to the pre-existing Indian laws on overseas direct investment.
There has been a steady increase in overseas investments by Indian companies in the US. With the Trump administration moving towards a protectionist regime coupled with relevant overseas direct investment regulations prescribed by the Reserve Bank of India, Indian companies will now have to factor in a CFIUS review into their plans for investments in the country.
It is not as if Indian investments were not subject to a CFIUS review in the past. In fact, there have been instances where companies did not take the CFIUS declarations seriously.
For instance, in 2011, reportedly based on a post-deal review, CFIUS required Polaris Financial Technology Ltd to divest some of the stake from its majority acquisition in IdenTrust Inc owing to concerns relating to cybersecurity and the target’s government contracts.
Moreover, in 2007, given the sensitivity of the telecommunications sector, CFIUS required Reliance Communications to undertake mitigation measures prior to acquisition of Yipes Holdings, Inc, a California-based provider of Ethernet services.
Given this background, it is imperative that all Indian companies proposing to invest in the US take cognisance of the changes to FIRRMA.
Although the legislation has received presidential approval, regulations are in the works which are expected to provide more clarity on some of the topics.
The key provisions of FIRRMA are set out below:
Applicability: Covered transactions expanded to include investments in property acquisitions (including sale, lease or concession) in the US or in proximity to US military locations/sensitive locations.
It will also include certain non-controlling investments in US businesses dealing with “critical infrastructure”, “critical technologies” or sensitive personal data.
Further, to be covered, the investment must afford the foreign person access to “material non-public technical information”; board membership or observer rights or its equivalent body of the businesses; and changes in a foreign investor’s governance right, even in the absence of any investment.
Investment through funds have been exempted subject to certain conditions. However, it is clarified that any transaction structure or series of events which are intended to bypass FIRRMA will be covered under the CFIUS review.
Declarations: For the first time in 30 years, mandatory declarations have been specified for transactions which result in the acquisition of a “substantial interest” in a US business by an investor in which a foreign government holds, directly or indirectly, a “substantial interest” in a US business operating in the sectors mentioned above.
Further clarity on “substantial interest” is awaited – an investment of more than 10% itself may be classified as substantial interest. CFIUS may by regulation prescribe mandatory disclosures for additional categories. Further, a voluntary disclosure regime is also provided for.
Timelines: CFIUS is required to decide if a transaction is a covered transaction within 10 business days of the draft filing. This seems to be a welcome change as earlier the pre-review period was much longer. Mandatory disclosure timelines will be set by regulations but will not be more than 45 days before closing. There lies a possibility of a long timeline as the existing initial review period has been extended from 30 to 45 days and further by an additional period of 15 days only in “extraordinary circumstances”.
Interim actions and mitigation: CFIUS is authorised to suspend a proposed or covered transaction which is under its review or investigation. It is also authorised to refer a pending transaction to the president for further action at any time.
For completed covered transactions which did not receive CFIUS clearance, the committee may enter into agreements or impose any conditions necessary to mitigate risks to the US national security. Similar powers are available in case parties decide to abandon a transaction. CFIUS is also required to supervise and monitor compliance with the mitigation agreements.
Filing Fees: FIRRMA authorises CFIUS to impose filing fees. Such fees may not exceed 1% of transaction value or $300,000 (adjusted for inflation), whichever is less.
Implementation: FIRRMA has made certain provisions effective from 13 August, 2018. Other provisions will be made effective either 18 months after that date or within 30 days of CFIUS publishing its determination to administer the law, whichever is earlier. The potential harmonisation of the investment security review process between India and the US will be an area to observe.
Way forward
Given the expansion of CFIUS’ jurisdiction, companies are more likely to make declarations to the committee. Considering the evident shift in the US regulatory approach, it may be advisable to make declarations when in doubt. Deal timelines and transaction costs will need to take into consideration the time taken for the CFIUS review, filing fees and other costs associated with such reviews.
Rabindra Jhunjhunwala is partner while Pranay Bagdi is principal associate at Khaitan & Co. The views expressed are personal.