This Circular has liberalised/rationalised the regulations relating to Overseas Direct Investment as under:
(1) Performance Guarantees issued by the Indian Party:
Presently, ‘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% of guarantees issued to or on behalf of the JV/WOS.
This Circular provides that only 50% of the amount of performance guarantee will be reckoned for the purpose of computing financial commitment to its JV/WOS overseas, within the 400% 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.
In cases where invocation of the performance guarantee breaches the ceiling for the financial exposure of 400% of the net worth of the Indian Party, the Indian Party will have to obtain prior approval of RBI before remitting funds from India, on account of such invocation.
(2) Restructuring of the balance sheet of the overseas entity involving write-off of capital and receivables:
Presently, there is no provision for 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.
This Circular provides that Indian promoters who have set up WOS abroad or have at least 51% stake in an overseas JV, can write off capital (equity/preference shares) 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 under:
(i) Listed Indian companies are permitted to write off capital and other receivables up to 25% 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% 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 Indian Party must submit the following documents along with the applications for write-off/restructuring to the 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.
(3) Disinvestment by the Indian Parties of their stake in an overseas JV/WOS involving write-off:
Presently, 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 RBI. However, in the following cases disinvestment is permitted under the automatic route, subject to the following conditions:
(i) In cases where the JV/WOS is listed in the overseas stock exchange;
(ii) 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
(iii) Where the Indian promoter company is an unlisted company and the investment in the overseas venture does not exceed US $ 10 million.
This Circular: (i) Has expanded the list of corporates eligible for disinvestment under the automatic route. As a result, listed Indian promoter companies with net worth of less than Rs.100 crore and investment in an overseas JV/WOS not exceeding US $ 10 million, can now go for disinvestment under the automatic route. They are however, required to report the disinvestment to RBI through their designated bank within 30 days from the date of disinvestment.
(ii) Clarifies that disinvestment, in case of eligible corporates, under the automatic route will also include cases where the amount repatriated after disinvestment 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:
Presently, Indian Parties are permitted to issue corporate guarantees only 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.
This Circular provides that:
(i) Indian Party 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, irrespective of whether the direct subsidiary is an operating company or an SPV.
(ii) Indian Party may issue corporate guarantee on behalf of second generation or subsequent level step-down operating subsidiaries 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.
