As a measure of providing operational flexibility to Indian Corporates investing / having investments abroad, the Reserve Bank of India has further liberalised and rationalised its Overseas Direct Investment Regulations vide A. P. (DIR Series) Circular No. 69 dated 27 May 2011 as outlined below.
1. Performance Guarantee issued by the Indian Party
Hitherto, along with capital investment and granting of loan, 100 per cent of the Guarantees issued by the Indian Party to or on behalf of Overseas Joint Ventures (JV)/Wholly Owned Subsidiary (WOS) formed part of the ‘Financial Commitment’ within the overall ceiling of 400 per cent net worth of the Indian Party as per the last Audited Balance Sheet.
Now onwards, only 50 percent of the Performance Guarantees to or on behalf of the Overseas JV/WOS need to be considered for the purpose of computing ‘Financial Commitment’ of the Indian Party. This change is in the backdrop of utility and usage of Performance Guarantees in project executions abroad and risks associated with such Guarantees vis-à-vis Financial Guarantees.
The time specified for completion of the contract will be considered as the validity period of the related Performance Guarantee and any invocation of such Guarantee breaching the ceiling of 400 percent of the net worth the Indian Party would warrant prior Reserve Bank’s approval before remittance of funds.
2. Restructuring of the Balance Sheet of the Overseas Entity involving ‘write-off’ of capital and receivables
The Reserve Bank has permitted Indian Corporate Promoters who have set-up an Overseas WOS or invested minimum of 51 percent stake in an Overseas JV to write-off capital (equity/preference) or other receivables, such as, loans, royalty, technical know-how fees and management fees in respect of the JV/WOS, even while such JV/WOS continue to function as follows:
– Listed Indian Companies are permitted to write-off capital and other stipulated receivables up to 25 percent of the equity investment in the JV/WOS under the Automatic Route; and
– Unlisted Companies are permitted to write-off capital and other stipulated receivables up to 25 percent of the equity investment in the JV/WOS under the Approval Route.
• The write-off/restructuring needs to be reported to the Reserve Bank through the designated Authorised Dealer bank (AD) within thirty days along with the following documents:
– Certified copy of the Balance Sheet showing the loss in the overseas JV/WOS; and
– Projections for the next five years indicating benefit accruing to the Indian company consequent to such write off / restructuring.
3. Disinvestment by the Indian Parties of their stake in an overseas JV/WOS involving write-off
Hitherto, all cases of divestments involving ‘write-off’ i.e. where repatriation is less than the original amount invested required prior Reserve Bank’s approval. Further, only the following categories of divestments qualified for the Automatic Route i.e. without any prior Reserve Bank’s approval:
– In cases where the JV/WOS is listed in the overseas stock exchange;
– In cases where the Indian promoter company is listed on a stock exchange in India and has a net worth of not less than INR 100 crore; and
– Where the Indian promoter company is an unlisted company and the investment in the overseas venture does not exceed USD 10 million.
The Reserve Bank’s has extended the Automatic Route of divestment to cases of Listed Indian Promoter Companies with net worth of less than INR 100 Crore and investment in overseas JV/WOS not exceeding USD 10 Million subject only to reporting through AD within 30 days from the date of divestment.
The Reserve Bank has clarified that all the cases of divestments falling under the Automatic Route would also include cases where divestments is less than the original amount invested.
4. Issue of Guarantee by an Indian Party to step down subsidiary of JV/WOS under general permission
Hitherto, Indian Parties were permitted to issue corporate guarantees on behalf of their first level step down operating JV/WOS set up by their JV/WOS operating as a Special Purpose Vehicle (SPV) under the Automatic Route within the prescribed ceilings and conditions.
Subject to applicable ceilings and conditions, the Reserve Bank has now permitted the Indian Promoter Entity to extend corporate guarantee on behalf of their first generation step down operating company under the Automatic Route irrespective of whether the direct subsidiary is an operating company or a SPV.
The Reserve Bank has laid down that the issue of corporate guarantee on behalf of the second generation or subsequent level step down operating subsidiaries will be considered under the Approval Route, provided the Indian Party directly or indirectly holds 51 per cent or more stake in such step down overseas subsidiary for which such guarantee is intended to be issued.
Comments – The above liberalisations are welcome initiatives and rationalise several issues surrounding overseas investments. Instead of performance guarantee, all types of guarantees could have been considered for inclusion in financial commitment of the Indian Party as 50 per cent as was the case prevalent prior to Reserve Bank’s Circular A. P. (DIR Series) Circular No. 75 dated 14 June 2007. Further, the provisions relating to cases of divestments eligible under Automatic Route to include cases where the divestment is less than the original amount invested are not very happily worded and likely to warrant more clarification apart from a watch out for the statutory enactment.