RBI/2010-11/548
A.P. (DIR Series) Circular No. 69
May 27, 2011
To
All Category - I Authorised Dealer Banks
Madam / Sir,
Overseas Direct Investment – Liberalisation / Rationalisation
Attention of the Authorised Dealer (AD - Category I) banks is invited to the
Notification No. FEMA 120/RB-2004 dated July 7, 2004 [Foreign Exchange
Management (Transfer or Issue of any Foreign Security) (Amendment) Regulations,
2004] (the Notification), as amended from time to time and
A.P. (DIR Series)
Circular No.29 dated March 27, 2006.
- With a view to providing more operational flexibility to Indian corporates
having investments abroad, it has been decided to further liberalise /
rationalise the following regulations relating to overseas direct investment:
- Performance Guarantees issued by the Indian Party
At present, ‘financial commitment’ of the Indian Party includes contribution to
the capital of the overseas Joint Venture (JV) / Wholly Owned Subsidiary (WOS),
loan granted to the JV / WOS and 100 per cent of guarantees issued to or on
behalf of the JV/WOS. Keeping in mind the utility and usage of the instrument of
performance guarantees in project executions abroad and also considering the
risks associated with such guarantees vis-à-vis financial guarantees, it has
been decided that only 50 per cent of the amount of the performance guarantees
may be reckoned for the purpose of computing financial commitment to its JV/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. Further, the time specified for the
completion of the contract may be considered as the validity period of the
related performance guarantee. The Indian Party may report these guarantees in
the similar way in which financial guarantees are being presently 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
The extant FEMA Regulations do not provide for the 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. In order to provide more
operational flexibility to the Indian corporates, it has been decided that
Indian promoters who have set up WOS abroad or have at least 51 per cent stake
in an overseas JV, may write off capital (equity / preference shares) or other
receivables, such as, loans, royalty, technical knowhow fees and management fees
in respect of the JV /WOS, even while such JV /WOS continue to function as
under:
- 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
- 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.
The write-off / restructuring have to be reported to the Reserve Bank through
the designated AD bank within 30 days of write-off/ restructuring. The write-off
/ restructuring is subject to the condition that the Indian Party should 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 certified copy of the balance sheet showing the loss in the overseas WOS/JV
set up by the Indian Party; and
- 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
- Currently, in terms of Regulation 16 of the
Notification No. FEMA
120/RB-2004 dated July 7, 2004, as amended from time to time, all disinvestments
involving ‘write off’, i.e., where the amount repatriated on disinvestment is
less than the amount of original investment, need prior approval of the Reserve
Bank. In terms of
A.P. (DIR Series) Circular No. 29 dated March 27, 2006 it was
decided to allow the undernoted categories of disinvestment under the Automatic
Route without prior approval of the Reserve Bank, subject to the following
conditions:
- 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 Rs.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.
In partial modification of the above, it has now been decided to include listed
Indian promoter companies with net worth of less than Rs.100 crore and
investment in an overseas JV/WOS not exceeding USD 10 million, for disinvestment
under the Automatic Route with the requirement that the Indian Party shall
report the disinvestment through its designated AD Category I bank within 30
days from the date of disinvestment.
- It is also clarified 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
- Currently Indian Parties are 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, subject
to the condition that the financial commitment of the Indian Party is within the
extant limit for overseas direct investment. As a measure of further liberalisation, it has been decided that irrespective of whether the direct
subsidiary is an operating company or a SPV, the Indian promoter entity may
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 hitherto, through the designated AD concerned.
- Further, it has also been decided that issue of corporate guarantee on
behalf of 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 the overseas subsidiary for
which such guarantee is intended to be issued.
- Necessary amendments to the Foreign Exchange Management (Transfer or Issue of
Any Foreign Security), Regulations, 2004 are being issued separately.
- AD - Category I banks may bring the contents of this circular to the notice
of their constituents and customers concerned.
- The directions contained in this circular have been issued under Sections
10(4) and 11(1) of the Foreign Exchange Management Act (FEMA), 1999 (42 of 1999)
and are without prejudice to permissions/approvals, if any, required under any
other law.
Yours faithfully,
(Meena Hemchandra)
Chief General Manager-in-Charge