India Inc gets more room to invest abroad

RBI substantially relaxes overseas direct investment rules for Indian companies.

Overseas direct investment rules for Indian companies were substantially relaxed by the Reserve Bank of India (RBI) on Friday,cutting by half the financial commitment for companies when they provide guarantees for projects on behalf of their overseas subsidiaries or joint ventures. The RBI has also allowed them more leeway to restructure the balance sheets of these entities.

As more Indian overseas ventures compete to bag projects abroad,their parent companies were finding it more difficult to provide a 100% performance guarantee for each project. The cost of such guarantees were crimping the balance sheets of the Indian companies.

Instead of the 100% performance guarantees issued to or on behalf of the JV or the whollyowned subsidiary (WOS) that was taken into consideration while arriving at the financial commitment,it has now been lowered to 50%. Considering the risks associated with such guarantees vis- à -vis financial guarantees,it has been decided that only 50% of the amount of the performance guarantees may be reckoned for the purpose of computing financial commitment to its JV,WOS overseas,within 400% of the net worth of the Indian party as on the date of the last audited balance sheet, the RBI said in a notification.

The RBI added that the time specified for the completion of the contract may be considered as the validity period of the related performance guarantee. Should the guarantee be invoked,causing a breach on the cap for the financial exposure of 400% of the net worth of the Indian party,it would need to seek approval of the RBI before remitting funds from India.

Commenting on the changes,Rajesh Sennik,partner (strategic initiatives),Accenture said the RBI has basically de-risked the transactions for Indian companies with exposure abroad,allowing them space to build up their financial commitments to overseas projects.

Indian promoters can now write off capital (equity/preference shares) or other receivables,such as,loans,royalty,technical knowhow fees and management fees in respect of the JV or the WOS,even while they function. While listed Indian companies are permitted to write off capital and other receivables up to 25% of the equity investment in the JV or the WOS under the automatic route,unlisted companies are permitted to write off capital and other receivables up to 25% of the equity investment in the JV or WOS under the approval route. The write-off or restructuring is subject to the condition that the Indian party should submit a certified copy of the balance sheet showing the loss in the overseas WOS/JV and projections for the next five years indicating the benefit accruing to the Indian company consequent to such write off or restructuring, the RBI observed. The RBI has also decided to include listed Indian promoter companies with net worth of less than R100 crore and investment in an overseas JV or WOS not exceeding $10 million,for disinvestment under the automatic route.

Currently,Indian parties are permitted to issue corporate guarantees on behalf of their first-level step-down operating JVs or WOS set up by their JVs or WOS operating as a special purpose vehicle (SPV) under the automatic Route,provided the financial commitment of the Indian party is within the extant limit for overseas direct investment. It has been decided that irrespective of whether the direct subsidiary is an operating company or an 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. It has also been decided that issue of a 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% or more stake in the overseas subsidiary for which such guarantee is intended to be issued.