The Bombay High Court’s recent decision in the case of IDBI Trusteeship Services Limited v. Hubtown Ltd. could prove to be a game changer as far as laws related to foreign investment are concerned. Through a complex transaction, a foreign investor subscribed to compulsory convertible debentures and 10% of the equity shares of an Indian holding company, which on conversion would entitle it to 99% shareholding. Further, the Indian holding company invested in two of its wholly owned subsidiaries by subscribing to optionally fully convertible debentures which carried a fixed coupon rate of 14.5%. The present summary suit was filed when the subsidiaries defaulted.

Citing the Supreme Court’s decision in the Vodafone case, the Court held that the transaction should be reviewed as a whole, by resorting to the substance over form approach. Having examined the facts, it held that the structure seemed to have been designed to circumvent restrictions imposed under the FDI policy. Based on the fact that the Indian holding company is to receive a fixed return of 14.5% from its subsidiaries and that the foreign investor would hold 99% of Indian holding company post conversion, the court held that the foreign investor would receive an assured return.  This is not permitted under the FDI policy and FEMA Regulations. The view taken by the Bombay High Court has the potential to adversely affect a number of foreign investment transactions. However, this is only a prima facie view expressed by the court and final verdict is no doubt keenly awaited by all stakeholders.