Introduction

Each time in July, RBI comes out with a Master circular on various important topics of FEMA. These master circulars contain all the provisions from various AP(DIR Series) Circulars for that particular topic, including all the changes that may have taken place in the year in such provisions. This article contains the changes that have been incorporated in the Master Circular No. 11/ 2015-16 on Direct Investment by Residents in Joint Venture (JV) / Wholly Owned Subsidiary (WOS) Abroad issued this year on 1st July, 2015 (“New Master Circular”), as compared to Master Circular No. 11/ 2014-15 dated 1st July, 2014 (amended upto 04th July, 2014) (“Old Master Circular”).

Master Circular now applies to Financial Commitment

1. In the New Master Circular, wherever the word “Overseas Investments”, “Overseas direct investments” or “investments” have been used, the words “or Financial Commitment” have been added in a bracket besides  such words. Hence the Indian party will not only be able to make direct investments, but also undertake financial commitments in overseas Joint Venture(“JV”)/ Wholly Owned Subsidiary (“WOS”)
2. Financial commitment has been defined to comprise of:
   • 100% of the amount of equity shares;
   • 100% of the amount of compulsorily and mandatorily convertible preference shares;
   • 100% of the amount of other preference shares;
   • 100% of the amount of loan;
   • 100% of the amount of guarantee (other than performance guarantee) issued by the Indian party;
   • 100% of the amount of bank guarantee issued by a resident bank on behalf of JV or WOS of the Indian party provided the bank guarantee is backed by a counter guarantee / collateral by the Indian party.
   • 50% of the amount of performance guarantee issued by the Indian party provided that  the  outflow  on  account  of  invocation  of  performance guarantee results in the breach of the limit of the financial commitment in force, prior permission of the Reserve Bank is to be obtained before executing remittance beyond the limit prescribed for the financial commitment.

Investment by Alternative Investment Funds in Off-shore Venture Capital Undertakings

As per the Old Master Circular, Domestic Venture Capital Funds could invest in equity and equity linked instruments of off-shore Venture Capital Undertakings, subject to an overall limit of USD 500 million. Now, under the New Master Circular the Alternative Investment Funds (“AIFs”) can also invest in such equity and equity linked instruments of off-shore Venture Capital Undertakings. The Domestic Venture Capital Funds and AIFs desirous of availing of this facility may approach SEBI for necessary permission.

Creation of charge on domestic and foreign assets

1. Earlier as per a note in the Old Master Circular, a specific approval of the Reserve Bank was required for creating charge on immovable / moveable property and other financial assets (except pledge of shares of overseas JV / WOS) of the Indian party / group companies in favour of a non-resident entity, subject to submission of a ‘No Objection’ by the Indian party and their group companies from their Indian lenders. This note has now been deleted from the New Master Circular.
2. Now, an Indian   party   may   create   charge   (by   way   of   mortgage,   pledge, hypothecation or otherwise) on its assets (including the assets of its group company,  sister  concern  or  associate  company  in  India,  promoter  and  /  or director) in favour of an overseas lender as security for availing of the fund based and/or non-fund based facility for its Joint Venture (JV) or Wholly Owned Subsidiary (WOS) or Step Down Subsidiary (SDS) outside India subject to the certain terms and conditions as prescribed under Regulation 18A of the Notification and A.P. (DIR Series) Circular No.54 dated December 29, 2014 {For detailed study of such conditions, please refer our magazine “Changes, Challenges and Controversies in Corporate Law”- Issue no. 18 (2014-15) dated 17th January, 2015 or refer http://nrsadvisors.com/overseas-direct-investment-by-indian-party-rationalization-liberalisation/}.
3. Also, now an Indian   party   may   create   charge   (by   way   of   mortgage,   pledge, hypothecation or otherwise) on the assets of its overseas JV or WOS or SDS in favour of an AD bank in India as security for availing of the fund based and/or non-fund based facility for itself or its JV or WOS or SDS outside India subject to certain terms and conditions as prescribed. under Regulation 18A of the Notification and A.P. (DIR Series) Circular No.54 dated December 29, 2014 {For detailed study of such conditions, please refer our magazine “Changes, Challenges and Controversies in Corporate Law”- Issue no. 18 (2014-15) dated 17th January, 2015 or refer http://nrsadvisors.com/overseas-direct-investment-by-indian-party-rationalization-liberalisation/}.
4. In the various conditions for investment / financial commitment under Automatic route, one of the conditions is that the investment in JV/WOS is within the overall ceiling limit of 400% of the net worth of the Indian party as per the last audited balance sheet. Now any creation of charge shall also be a part of this limit, meaning thereby that all the financial commitments, including all forms   of guarantees and creation of charge should be within the overall ceiling.

Pledge of Shares of JV/ WOS/ Step Down Subsidiary (“SDS”)

1. Under the Old Master Circular, the Indian Party could pledge the shares of only JV and WOS for availing finance. However, under the New Master Circular, shares of SDS can also be pledged by the Indian Party.
2. Now, the Indian Party can pledge shares of JV/WOS/SDS can be to avail fund based or non-fund based facility for itself, (i.e. the Indian party) or for the its JV / WOS abroad in / SDS whose shares have been pledged, or for any other JV / WOS / SDS of the Indian party.
3. Under the Old Master Circular, only the terms of Regulation 18 needed to be fulfilled. Now, terms and conditions prescribed under Regulation 18 of the Notification and A.P. (DIR Series) Circular No.54 dated December 29, 2014 need to be fulfilled for pledging of shares of JV/WOS/SDS {For detailed study of such conditions, please refer our magazine “Changes, Challenges and Controversies in Corporate Law”- Issue no. 18 (2014-15) dated 17th January, 2015 or refer http://nrsadvisors.com/overseas-direct-investment-by-indian-party-rationalization-liberalisation/}.

Overseas Investment by Proprietorship Concern

Keeping in view the changes in the definition / classification of the exporters as per the Foreign Trade Policy of the Ministry of Commerce and Industry, issued from time to time, one of the conditions for ODI by Proprietorship Concern, which, under the Old Master Circular required the Partnership Firm or Proprietorship to be a DGFT recognized Star Export House, now under the New Master Circular requires the Partnership Firm or Proprietorship to be classified as ‘Status Holder’ as per the Foreign Trade Policy.