RBI/2011-12/473
A.P. (DIR Series) Circular No. 96
March 28, 2012
To
All Category-I Authorised Dealer Banks
Madam / Sir,
Overseas Direct Investments by Indian Party –
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. To grant more
flexibility to the Indian party, it has been decided to further liberalise
various provisions / regulations of the Notification as detailed under.
2. Creation of charge on immovable / movable property and other
financial assets
The existing regulations of the Notification do not envisage creation of
charge on the immovable / movable property and other financial assets (except
shares of JV / WOS) of the Indian Party. It has been decided that proposals from
the Indian party for creation of charge in the form of pledge / mortgage /
hypothecation on the immovable / movable property and other financial assets of
the Indian Party and their group companies may be considered by the Reserve Bank
under the approval route within the overall limit fixed (presently 400%) for
financial commitment subject to submission of a ‘No Objection’ by the Indian
Party and their Group companies from their Indian lenders.
Appropriate reporting mechanism for capturing the financial commitment on
account of creation of charge on such property / assets shall be introduced
shortly.
3. Reckoning bank guarantee issued on behalf of JV / WOS for
computation of Financial Commitment
Presently, the bank guarantee issued on behalf of JV / WOS is not reckoned
for the purpose of computing the financial commitment of the Indian Party to its
JV / WOS overseas.
It has been decided that the bank guarantee issued by a resident bank on
behalf of an overseas JV / WOS of the Indian party, which is backed by a counter
guarantee / collateral by the Indian party, shall be reckoned for computation of
the financial commitment of the Indian Party and reported accordingly.
Appropriate reporting mechanism for capturing the financial commitment on
account of issuance of bank guarantee shall be introduced shortly.
4. Issuance of personal guarantee by the direct / indirect individual
promoters of the Indian Party
It has been decided that issuance of personal guarantee by the promoters of
the Indian Party as presently allowed under the General Permission shall also be
extended to the indirect resident individual promoters of the Indian Party with
same stipulations as in the case of personal guarantee by the direct promoters.
5. Financial Commitment without equity contribution to JV / WOS
Presently, Regulation 6(4) of the Notification ibid prescribes that
an Indian Party may extend a loan or a guarantee to or on behalf of the Joint
Venture / Wholly Owned Subsidiary abroad, within the permissible financial
commitment, provided that the Indian party has made investment by way of
contribution to the equity capital of the Joint Venture.
Keeping in view the business requirement of the Indian party, particularly
the legal requirement of the host country, it has now been decided that the
proposals from the Indian party for undertaking financial commitment without
equity contribution in JV / WOS may be considered by the Reserve Bank under the
approval route. AD banks may forward the proposals from their constituents after
ensuring that the laws of the host country permit incorporation of a company
without equity participation by the Indian party.
6. Submission of Annual Performance Report
Presently, Regulation 15(iii) of the Notification prescribes that Indian
party needs to submit to the Reserve Bank through the designated Authorised
Dealer bank every year an Annual Performance Report in Form ODI Part III in
respect of each Joint Venture or Wholly Owned Subsidiary outside India, set up
or acquired by the Indian party, after the finalization of the audited accounts
of the Joint Venture / Wholly Owned Subsidiary outside India.
Where the law of the host country does not mandatorily require auditing of
the books of accounts of JV / WOS, the Annual Performance Report (APR) may be
submitted by the Indian party based on the un-audited annual accounts of the JV
/ WOS provided:
-
The Statutory Auditors of the Indian party certifies that ‘The un-audited
annual accounts of the JV / WOS reflect the true and fair picture of the
affairs of the JV / WOS’ and
-
That the un-audited annual accounts of the JV / WOS has been adopted and
ratified by the Board of the Indian party.
7. Compulsorily Convertible Preference Shares (CCPS)
The extant provisions of Overseas Direct Investments envisage setting up /
acquiring JV / WOS abroad by subscribing / contributing to the equity capital of
the JV / WOS. Therefore, contribution to the preference share capital (whether
convertible or non-convertible) of the JV / WOS abroad by the Indian party is
treated as loan to them.
Keeping in view the nature of the Compulsorily Convertible Preference Shares
(CCPS), it has been decided that Compulsorily Convertible Preference Shares
shall be treated at par with equity shares and the Indian party is allowed to
undertake financial commitment based on the exposure to JV by way of CCPS.
8. Necessary amendments to the Foreign Exchange Management (Transfer or Issue
of Any Foreign Security), Regulations, 2004 are being issued separately.
9. AD - Category I banks may bring the contents of this circular to the
notice of their constituents and customers concerned.
10. 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,
(Dr. Sujatha Elizabeth Prasad)
Chief General Manager