In a move towards further liberalizing the policy for overseas direct investment (ODI) and converging existing rules and regulations with International Financial Reporting Standards (IFRS), the RBI has notified changes in relation to the following by way of A.P. (DIR Series) Circular No. 69RBI/2010-11/ 548 dated 27 May 2011 (the “Circular”):
(i) Performance Guarantees issued by the Indian Party.
(ii) Restructuring of the balance sheet of the overseas entity involving write-off of capital and receivables.
(iii) Disinvestment by the Indian Parties of their stake in an overseas JV/WOS involving write-off.
(iv) Issue of guarantee by an Indian Party to step down subsidiary of JV /WOS under general permission.
Performance Guarantees issued by the Indian Party
Prior to the changes brought about by the Circular, ‘financial commitment’ of the Indian party included contribution to the capital of the overseas joint venture/ wholly owned subsidiary (“JV/WOS”), loan granted to the JV/WOS and 100 per cent of guarantees issued to or on behalf of the JV/WOS. According to the changes brought about by the Circular, now only 50 per cent of the amount of the performance guarantees may be reckoned for the purpose of computing financial commitment to its joint venture (JV) or wholly owned subsidiary (WOS) overseas, within the 400 per cent of the net worth of the Indian party as on the date of the last audited balance sheet.
The time specified for the completion of the contract may be considered as the validity period of the related performance guarantees. These guarantees may be reported in the same way as financial guarantees are currently reported.
In cases where invocation of the performance guarantees breach the ceiling for the financial exposure of 400 per cent of the net worth of the Indian Party, the Indian Party shall seek the prior approval of the Reserve Bank before remitting funds from India, on account of such invocation.
Restructuring of the balance sheet of the overseas entity involving write-off of capital and receivables.
Restructuring of the balance sheet of the overseas JV/WOS not involving winding up of the entity or divestment of the stake by the Indian party was not permitted by the Regulations under FEMA. To provide greater operational flexibility to Indian companies, Indian promoters who have set up WOS abroad or have at least 51 per cent stake in an overseas JV, are now allowed write off capital (equity / preference shares) or other receivables (like loans, royalty, technical knowhow fees and management fees) in respect of the JV/WOS subject to the following restrictions and compliances:
(i) Listed Indian companies are permitted to write off capital and other receivables up to 25 per cent of the equity investment in the JV /WOS under the Automatic Route; and
(ii) Unlisted companies are permitted to write off capital and other receivables up to 25 per cent of the equity investment in the JV /WOS under the Approval Route.
(iii) The write-off / restructuring shall be reported to the Reserve Bank through the designated AD bank within 30 days of write-off/ restructuring. The Indian Party shall submit the following documents for scrutiny along with the applications to the designated AD Category –I bank under the Automatic as well as the Approval Routes:
a) A certified copy of the balance sheet showing the loss in the overseas WOS/JV set up by the Indian Party; and
(b) Projections for the next five years indicating benefit accruing to the Indian company consequent to such write off / restructuring.
Disinvestment by the Indian Parties of their stake in an overseas JV/WOS involving write-off.
Initially, all disinvestments involving ‘write off’, i.e., where the amount repatriated on disinvestment is less than the amount of original investment, needed prior approval of the Reserve Bank. Thereafter, in 2006, certain categories of disinvestments were permitted under the Automatic Route, being the following:
(i) Cases where the JV/WOS is listed in the overseas stock exchange;
(ii) Cases where the Indian promoter company is listed on a stock exchange in India and has a net worth of not less than Rs.100 crores; and
(iii) Where the Indian promoter company is an unlisted company and the investment in the overseas venture does not exceed USD 10 million.
As per the changes introduced by way of the Circular, even in cases where the Indian promoter company is listed on a stock exchange but has a networth of less than Rs. 100 crores, disinvestment by the Automatic Route is allowed. However, the Indian Party shall have the responsibility to report the disinvestment through its designated AD Category I bank within 30 days from the date of disinvestment.
It has been further clarified in the said Circular that disinvestment cases falling under the Automatic Route would also include cases where the amount repatriated after disinvestment is less than the original amount invested, provided the corporate falls under the above mentioned categories.
Issue of guarantee by an Indian Party to step down subsidiary of JV /WOS under general permission
There was confusion whether , Indian Parties were permitted to issue corporate guarantees on behalf of their step down subsidiaries .
However, now, irrespective of whether the direct subsidiary is an operating company or a SPV, the Indian promoter entity is now permitted to extend corporate guarantee on behalf of the first generation step down operating company under the Automatic Route, within the prevailing limit for overseas direct investment. Such guarantees will have to be reported to the Reserve Bank in Form ODI, as required earlier.
Further, issue of corporate guarantee on behalf of second generation or subsequent level step down operating subsidiaries shall now be considered under the Approval Route, provided the Indian Party, directly or indirectly, holds 51 per cent or more stake in the overseas subsidiary for which such guarantee is intended to be issued.