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BW Businessworld

An Outbound High

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Outbound investments from India have increased significantly over the last few years, largely due to the government's conscious efforts to encourage Indian entrepreneurs to tread the global path. These efforts have further taken shape in the form of more recent regulatory changes made by the Reserve Bank of India (RBI) through the Foreign Exchange Management Act (FEMA). In particular, these changes are focused on providing a further boost to joint ventures and liberalise regulations that relate to outbound investments. These changes have been welcomed by corporates as they provides for far more operational flexibility when it comes to expanding operations in overseas jurisdictions. Some of the significant changes have been discussed in the following paragraphs.

Performance Guarantee
Currently Indian corporates are allowed financial exposure up to 400 per cent of their net worth in an overseas Joint Venture (JV) / Wholly Owned Subsidiary (WOS). Earlier, the issue of a performance guarantee was treated akin to a financial investment wherein the amount of the guarantee was reckoned for calculation by of the ceiling of 400 per cent of their financial commitment, overseas. As per the revised regulations, only 50 per cent of the amount of the performance guarantees will be considered for the purpose of computing a firm's financial exposure.

The change is a significant move as it will endow Indian entrepreneurs with greater flexibility in enabling them to issue such guarantees to their overseas ventures/subsidiaries which are quite routinely required if the overseas venture/subsidiary was to contemplate any serious business other than acting as a marketing limb. Furthermore, having recognised that the invocation of guarantees by the parent (Indian) company should be an exception rather than the norm, the RBI has now provided that in cases where the invocation of the guarantee breaches the financial exposure ceiling of 400 per cent, the Indian corporation shall be required to seek prior approval from the RBI before remitting funds from India.

Writing Off Capital And Other Receivables
The RBI has also provided greater operational flexibility to Indian corporates by allowing them to write off capital and other receivables, provided they have  a stake of at least 51 per cent in an overseas JV/WOS.

The write off is permitted up to 25 per cent of the equity investment under the automatic route for listed entities and under the approval route for unlisted companies. Indian corporates are required to comply with the reporting formalities and are also required to submit the prescribed documents to the RBI for scrutiny.

Guarantees To Step Down Subsidiaries
As per the new regulations, the RBI has now permitted Indian corporates to extend corporate guarantees on behalf of the first generation step down subsidiary operating company, provided the latter is within the overall financial exposure limit irrespective of whether the direct subsidiary is an operating company or a Special Purpose Vehicle (SPV). Earlier, the benefit of providing the guarantee on behalf of the step down subsidiary was available only in case where investments were made through an SPV.

Divestments Involving Write Offs
Divestments involving write offs will now be allowed under the automatic route subject to conditions specified. Similarly divestment under the automatic route is now extended for listed Indian companies having net worth of less than Rs 100 crores provided the investment in JV/WOS is not more than $ 10 million.

The ideology of 'going global' is not preserved for a select few corporates - indeed, it should not be as India Inc is aspirational - there is a genuine hunger to grow and to establish overseas ventures and/or subsidiaries.  The latest RBI regulations are a sign that regulators are more than happy to do their bit in encouraging Indian corporates in their quest to become MNCs.

N.C Hegde is a partner with Deloitte and Falguni Sheth is manager at Deloitte Haskins & Sells