The Legal Sphere: Cross Border Corporate Guarantee by an Indian Comp...

The Legal Sphere: Cross Border Corporate Guarantee by an Indian Comp...: Regulation 5 (b) (i) of the Foreign Exchange Management (Guarantees) Regulations, 2000 ( as amended from time to time ), issued by the ...

Cross Border Corporate Guarantee by an Indian Company

Regulation 5 (b) (i) of the Foreign Exchange Management (Guarantees) Regulations, 2000 (as amended from time to time), issued by the RBI applies to the issue of cross border guarantee to be issued by an Indian Corporate and reads as under (relevant extract):

Guarantees which may be given by persons other than an authorised dealer

5. A person other than an authorised dealer may give a guarantee in the following cases, namely:

(a) [(i)] ^{…………………………………………}

      [(ii)]....................................

[(b) (i) An Indian Party[1] promoting or setting up outside India, a Joint Venture or a Wholly Owned Subsidiary, may give a guarantee to or on behalf of the latter in connection with its business: [Emphasis supplied]

Provided that the terms and conditions stipulated in Foreign Exchange Management (Transfer and Issue of Foreign Security) (Amendment) Regulations, 2004 for promoting or setting up such company or subsidiary are continued to be complied with:

Provided further that the guarantee under this clause may also be given by an authorised dealer in India;

(ii) …………………………:

Explanation: Indian Party' shall have the same meaning as assigned to it in Foreign Exchange Management (Transfer or Issue of any Foreign Security) (Amendment) Regulations, 2004.]

While the foregoing provision grants a general permission to Indian Party including Indian Companies to issue guarantee on behalf of its overseas JV/WOS, the RBI has issued various circulars, notifications in relation to cross-border guarantees and co-acceptances from time to time which regulate and limit the issuance of guarantees by Indian parties.

In terms of Clause 2.3.5 of the RBI Master Circular DBOD. DBR. No. Dir. BC.11/13.03.00/2015-16 dated July 1, 2015 pertaining to Guarantees & Co-Acceptances, an Indian party may have financial commitment towards its overseas JV / WOS to the limit, as prescribed by the Reserve bank from time to time, of the net worth of the Indian party as on the date of the last audited balance sheet. The financial commitment may be in the form of

(a) ……………………………….

(b) corporate guarantee (only 50 percent value in case of performance guarantee) and /or bank guarantee (which is backed by a counter guarantee / collateral by the Indian party) on behalf of the JV / WOS and

(c) ……………………………….

Meaning of ‘Financial Commitment’:

Regulation 2(f) of the Foreign Exchange Management (Transfer or Issue of any Foreign Security) (Amendment) Regulations, 2004 defines ‘Financial Commitment’ as

the amount of direct investment by way of contribution to equity, loan and 100 percent of the amount of guarantees and 50 per cent of performance guarantees issued by an Indian party to or on behalf of its overseas Joint Venture Company or Wholly Owned Subsidiary;

Further, Section B.1 of the RBI Master Circular No. 11/2014-15 on Direct Investment by Residents in Joint Venture (JV) /Wholly Owned Subsidiary (WOS) Abroad dated July 1, 2014 (amended up to May 6, 2015) stipulates that the total financial commitment of the Indian party in all the Joint Ventures / Wholly Owned Subsidiaries shall comprise of the following:

a)    100% of the amount of equity shares;

b)    100% of the amount of compulsorily and mandatorily convertible preference shares;

c)    100% of the amount of other preference shares;

d)    100% of the amount of loan;

e)  100% of the amount of guarantee (other than performance guarantee) issued by the Indian party;

f)  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.

g) 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.

Financial commitment shall also be subject to the following conditions:

(a)  The Indian party / entity may extend loan /guarantee only to an overseas JV / WOS in which it has equity participation.

Indian entities may offer any form of guarantee - corporate or personal (including the personal guarantee by the indirect resident individual promoters of the Indian Party)/ primary or collateral / guarantee by the promoter company / guarantee by group company, sister concern or associate company in India provided that:

     (i)  All the financial commitments, including all forms of guarantees and creation of charge are within the overall ceiling prescribed for the Indian party.

    (ii)  No guarantee should be 'open ended' i.e. the amount and period of the guarantee should be specified upfront. In the case of performance guarantee, time specified for the completion of the contract shall be the validity period of the related performance guarantee.

    (iii) In cases where invocation of the performance guarantees breach the ceiling for the financial, the Indian Party shall seek the prior approval of the Reserve Bank before remitting funds from India, on account of such invocation.

   (iv) As in the case of corporate guarantees, all guarantees (including performance guarantees and Bank Guarantees / SBLC) are required to be reported to the Reserve Bank, in Form ODI-Part II. Guarantees issued by banks in India in favour of WOSs / JVs outside India, and would be subject to prudential norms, issued by the Reserve Bank (DBOD) from time to time.

b)………..

  c)  All transactions relating to a JV / WOS should be routed through one branch of an Authorised Dealer bank to be designated by the Indian party.

d) ………...

e) ………..

f………...

g) ………..

Limitation:

With effect from July 03, 2014, the limit of Overseas Direct Investments (ODI)/ Financial Commitment (FC) to be undertaken by an Indian Party under the automatic route has been restored to the limit prevailing, as per the extant FEMA provisions, prior to August 14, 2013. It has, however, been decided that any financial commitment exceeding USD 1 (one) billion (or its equivalent) in a financial year would require prior approval of the Reserve Bank even when the total FC of the Indian Party is within the eligible limit under the automatic route (i.e., within 400% of the net worth as per the last audited balance sheet).

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[1] Regulation 2(k) under the Foreign Exchange Management (Transfer or Issueof any Foreign Security) (Amendment) Regulations, 2004 defines ‘Indian Party’ as ‘a company incorporated in India or a body created under an Act of Parliament or a partnership firm registered under the Indian Partnership Act, 1932[or a Limited Liability partnership (LLP) as defined under clause (ma) of Regulation 2 of this notification] making investments in a Joint Venture or Wholly owned subsidiary abroad, and includes any other entity in India as may be notified by reserve Bank:

Provided that when more than one such company, body or entity make an investment in the foreign entity, all such companies or bodies or entities shall together constitute the “Indian Party”.’

1  Liberalized Policy for NRI investments- entities owned and controlled by NRI’s will be treated as at par with NRI’s for investment in India

I.  Foreign Exchange Management (Transfer or Issue of Security By A person Resident Outside India) Regulations, 2000, under Clause 3(ii) provides that “A NRI may purchase shares or convertible debentures of an Indian Company on non-repatriation basis other than under Portfolio Investment Scheme subject to the terms and conditions specified in Schedule 4”

II.    Press Note No.7 (2015 series) dated June 3, 2015 has clarified that investments by NRI’s under schedule 4 of the aforesaid FEMA regulation will be deemed to be domestic investment at par with the investments made by residents.

III.  A corresponding press release by the Press information Bureau dated May 21, 2015 has further elaborated as under :

“since the investment made under schedule 4 are on non-repatriable basis, it needs to be clearly provided that such investments, for the purposes of FDI Policy are domestic investments. This will enable investments by NRI’s, OCI cardholders and PIO cardholders under schedule 4 on non-repatriation basis, across sectors without being subjected to any of the conditions associated to foreign investments.

IV.     Furthermore, with a view to further liberalize the Policy on NRI investments, the Government of India vide Press  Note dated November 10, 2015 (http://dipp.nic.in/English/acts_rules/Press_Notes/pn12_2015.pdf), under item no.6 of the Annexure lays down as under:

‘In order to attract larger investments, which are possible through incorporated entities only, the special dispensation of NRI’s has now also been extended to companies, trust and partnership firms, which are incorporated outside India and are owned and controlled by NRI’s. Henceforth, such entities owned and controlled by NRI’s will be treated as at par with NRI’s for investment in India.’

V.       The term control has been defined under clause 2.1.7 of the Policy and reads as under:

‘Control’ shall include the right to appoint the majority of the directors or to control the management or policy decisions including by virtue of the shareholding or management rights or shareholders agreements or voting agreements.

As such, any investment in India through a wholly owned subsidiary in India or by the NRI shareholders directly, would be covered under the liberalized FDI Policy on NRI investment and investment would be treated at par with domestic investments and would not be subject to any of the conditions associated with foreign investments.