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Overseas Direct Investment by Indian Party – Rationalization/ Liberalisation

Date posted: Saturday 17 January 2015
Laws:

Introduction

With a view to grant greater flexibility to Indian Companies, RBI vide Notification No. FEMA.322/RB-2014 dated 14th October 2014 amended the FEMA (Transfer or Issue of any Foreign Security) Regulations, 2000 (“Regulations”) and the amendment became effective from the date of publication in the official gazette i.e. 3rd December, 2014. RBI thereafter issued RBI/2014-15/371 A.P. (DIR Series) Circular No.54 dated 29th December, 2014 (“Circular”) to clarify the above amendments. This article will discuss the changes brought about in the Regulations by the notification and by the Circular thereafter.

The following changes have been brought about in the Regulations and through the Circular:

Creation of charge

  •  On: Shares of JV/ WOS/ Step Down Subsidiary (SDS) (irrespective of the level) of an Indian Party,
  • In favour of: Domestic/ Overseas Lender,
  • For securing:  Funded  and  non-funded  facility  for  the  Indian  Party  or  its  group companies/ sister concerns/ associate concerns or any of its JV/WOS/ SDS (irrespective of the level),
  • Route: Automatic,
  • Conditions to be fulfilled:
    • The invocation of charge resulting into the domestic lender acquiring the shares of the overseas JV / WOS / step down subsidiary shall be governed by the extant FEMA provisions / regulations issued by the Reserve Bank from time to time;
    • The facilities (funded or non-funded) extended by the domestic lender to the Indian party or to its group / sister / associate concern or to any of its overseas JV / WOS / SDS shall also be governed by the prudential norms and other guidelines issued by the Department of Banking Regulation (DBR, the erstwhile DBOD), Reserve Bank of India from time to time; and
    • Such additional terms and conditions as may be prescribed by the Reserve Bank from time to time.
  • Changes as compared to the earlier FEMA provisions:
    • Now, even the shares of Step down subsidiary (SDS) can be pledged in favour of domestic/ overseas lender under the automatic route.
    • Security can be created for the said facilities availed by the Indian Party for itself, or its group companies/ sister concerns/ associate concerns or any of its JV/WOS/ SDS (whose shares have been pledged or any other JV/WOS/SDS). In the earlier regulations, the security could be created only for the facilities availed by the Indian Party or for its JV/WOS whose shares had been pledged

Creation of charge

  • On: Domestic assets (movable/immoveable/ finance/ other) of an Indian Party (or its group / sister/ associate concerns including the individual promoter/ director),
  • In favour of: Overseas Lender,
  • For securing: Funded and non-funded facility for its JV/WOS/ SDS (irrespective of the level) outside India,
  • Route: Automatic,
  • Conditions to be fulfilled:
    • A ‘No Objection’ is obtained from the domestic lender (in whose favour charge is already created on the domestic assets);
    • The overseas lender undertakes that, in the event of enforcement of charge, they shall transfer the domestic assets by way of sale to a resident only;
    • In case of invocation of charge, the resultant remittance of the proceeds > the prescribed limit of the financial commitment of the Indian party (prevailed at the time of creation of charge) shall require prior approval of the Reserve Bank;
    • Wherever creation of charge involves pledge of shares of an Indian company, the pledge  shall  also  be  governed  by  the  extant  FEMA  provisions  /  regulations issued  by  the  Reserve  Bank  and  the  consolidated  Foreign  Direct  Investment (FDI) policy issued by the Government of India from time to time; and
    • Such other additional terms and conditions as may be prescribed by the Reserve Bank from time to time.
  • Changes as compared to the earlier FEMA provisions:
    • Security can now be created on the assets of Indian Party, its sister concern, group company, associate company, promoter and/or director for securing the said facilities availed for JV/ WOS or SDS outside India.
    • Requirement of prior approval of RBI has been done away with.
    • Approval  shall  be  required  only  if  remittance  post  invocation  exceeds  the financial commitment limit that prevailed at the time of creation of charge.

Creation of charge

  •  On: Overseas Assets (excluding shares) of the JV/ WOS/SDS (irrespective of the level) of an Indian Party,
  • In favour of: Domestic Lender,
  • For securing:  Funded  and  non-funded  facility  for  the  Indian  Party  or  its  group companies/ sister concerns/ associate concerns or its overseas JV/ WOS/SDS (irrespective of the level),
  • Route: Automatic,
  • Conditions to be fulfilled:
    • A ‘No Objection’ is obtained from the overseas lender or domestic AD bank (in whose favour charge is already created on the overseas assets);
    • The facility extended by the domestic AD bank to the Indian party / JV / WOS / SDS is governed by the prudential norms and other guidelines issued by the Department of Banking Operations and Development, Reserve Bank;
    • The overseas assets, on which charge is being created, are not securitized;
    • The  invocation  of  charge  resulting  into  the  domestic  lender  acquiring  the overseas assets shall require prior approval of the Reserve Bank; and
    • Such additional terms and conditions as may prescribed by the Reserve Bank from time to time.
  • Changes as compared to the earlier FEMA provisions:
    • Now, security can be created on the assets of JV/ WOS/ SDS outside India, in favour of an AD Bank in India for securing the said facilities availed for itself or JV/ WOS or SDS outside India.
    • Requirement of prior approval of RBI has been done away with.
    • Prior approval shall be required only on invocation of charge and acquiring of overseas assets.

Common Conditions to be fulfilled in case of creation of charge under any of the above three heads:

  •  The value of the fund based or non-fund based facility will form part of the financial commitment of the Indian party and the total financial commitment of the Indian party remains within the limit stipulated by the Reserve Bank for overseas direct investments in the JV / WOS from time to time (400% of networth at present);
  • The overseas lender is regulated and supervised as a bank as per the law of the host country;
  • Compliance of Regulation 6 and 7 (if applicable) to be ensured;
    • Regulation 6 specifies what constitutes total financial commitment.
    • Regulation 7 specifies compliances required to be done when the Indian party making investment outside India is engaged in financial services.
  • The period of charge, if not specified upfront, may be co-terminus with the period of end use (like loan or other facility) for which charge has been created;
  • The loan / facility availed by the JV / WOS / SDS from the domestic / overseas lender shall be utilized only for its core business activities overseas and not for investing back in India in any manner whatsoever;
  • A certificate from the Statutory Auditors’ of the Indian party, to the effect that the loan /facility  availed  by  the  JV  /  WOS  /  SDS  has  not  been  utilized  for  direct  or  indirect investments in India, is to be obtained and kept by the designated AD; and
  • The matter relating to the setting up / acquiring the multi-layered structure of overseas entities  by  the  Indian  party,  wherever  applicable,  is  under  the  examination  of  the Reserve Bank and the decision taken in this regard shall be conveyed in due course for necessary compliance at AD / Indian party level.

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