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Flipkart is going to acquire Snapdeal. That much is a done thing. However, the deal may need to be specially structured so as to avoid quite a bit of trouble for Snapdeal’s shareholders and ensure that the deal complies with Reserve Bank of India rules on foreign exchange.

Here is the main issue with the deal: The holding company for Flipkart, that is Flipkart Pvt Ltd, is domiciled in Singapore. This for all intents and purposes makes it a foreign entity and ensures that it will have to keep the Foreign Exchange Management Act under consideration, while brokering a major deal with an Indian firm.

So basically, Snapdeal shareholders will be receiving Flipkart shares once the former is acquired by the latter. However, in order for Flipkart Singapore to issue stock to Indian shareholders in Snapdeal, a specific permission from RBI would be required. Unless that permission is obtained, it would constitute a breach of FEMA rules.

The fact is that RBI is wary of deals that involve Indian nationals owning stock in a foreign firm that owns stakes in another Indian firm. It views such transactions with suspicions even though as we see in Flipkart and Snapdeal’s case, such a transaction in this case is quite necessary.

Of course, there is an option wherein Snapdeal’s Indian shareholders receive shares of Flipkart’s domestic units instead of its Singapore based Holdings company. However, they are keen to avoid that because of the fact that if Flipkart’s listing occurs, the overseas unit will likely list much sooner than the domestic arms.

Speaking with ET, Prem Rajani, managing partner at law firm Rajani Associates said:

if the proposed transaction would involve Flipkart Singapore to issue its (Singaporean) company shares to non-resident shareholders of Snapdeal and Flipkart India issues its (Indian) shares to resident shareholders of Snapdeal, then RBI permission may not be required for issue of Flipkart’s Indian company shares to the resident shareholders. If, at a later date (whether at the time of IPO of Flipkart Singapore or otherwise), Flipkart Singapore desires to provide an exit to the erstwhile resident.

Of course, there is an option wherein Snapdeal’s Indian shareholders receive shares of Flipkart’s domestic units instead of its Singapore based Holdings company. However, they are keen to avoid that because of the fact that if Flipkart’s listing occurs, the overseas unit will likely list much sooner than the domestic arms.

Local shareholders in Snapdeal include the likes of Ratan Tata and Azim Premji. They are much more likely to prefer either direct stakes in the holdings company or, economic interests which would allow them to exit once the company lists. With that said though, the smaller shareholders (who make up around 40 percent of Snapdeal) need to be accommodated as well.

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