Volume 4, Issue 3

16th April, 2012

Business Alert
Circular Liberalizing Overseas Direct Investments by Indian Parties


Under Foreign Exchange Management Act, 1999 an Indian party can invest in an overseas Joint
Venture / Wholly Owned Subsidiary (‘JV/WOS’). Presently, the overseas investment in JV/WOS by an Indian resident is governed by Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004. Reserve Bank of India (‘RBI’) with a view to grant flexibility to Indian parties has liberalized various provisions of the aforementioned regulations by way of circular.  A Summary of the amendments by way of circular is as under:

  1. Creation of charge on Immovable / movable property:

    Hitherto, the regulations provided that specific approval of RBI is required for creating charge on immovable property and pledge of shares of the Indian parent / group companies.
    Now, vide the circular, RBI has provided that proposal from Indian parties for creation of charge on the immovable/movable property and other financial assets of Indian party and their group companies may be considered by RBI under approval route provided that the said creation of charge is within the overall limit fixed for financial commitment (at present it is 400% of net worth of Indian party). Further, ‘No objection certificate’ from the Indian party and their group companies from their Indian lenders would be required to be submitted along with the proposal.

    For reporting about creation of charge, RBI will provide the adequate reporting mechanism shortly.

  2. Guarantee issued on behalf of JV/WOS and Financial commitment:  

    Under the existing provisions, a bank guarantee provided by an Indian party on behalf of JV/WOS is not to be considered for computation of financial commitment.

    However, by way of the circular, a bank guarantee given by a resident bank to an overseas JV/WOS backed by counter guarantee/collateral issued by Indian party will be considered while computing financial commitment.

    For reporting about the guarantee given on behalf of JV/WOS, RBI will provide the adequate reporting mechanism shortly.

  3. Issuance of Personal guarantee by direct and indirect individual promoters of Indian party:

    At present, only issuance of guarantee by direct promoters of an Indian party is allowed. By way of the circular, the general permission is now extended to indirect resident individual promoters of Indian party also with same stipulations as in the case of personal guarantee given by direct promoters. 
  1. Financial commitment without equity contribution in overseas JV/WOS:

    Present regulations provide that an Indian party can extend loan or provide guarantee to or on behalf of the overseas JV/WOS provided that the Indian party has made investment in overseas JV/WOS by way of contribution to its equity capital.

    Considering the business requirements of the Indian parties, particularly legal requirements of the host country, it has now been decided that proposals from an Indian party for undertaking financial commitment without equity contribution in the overseas JV/WOS can be allowed under approval route. Authorized Dealers may forward such proposals to RBI after ensuring that the laws of the host country permit incorporation of company without equity participation.   

  2. Submission of Annual Performance Report (‘APR’) (Part III of Form ODI):

    As per the existing regulations, an Indian company is required to submit APR to the AD every year in respect of each overseas JV and WOS within three months of the closing of audited accounts of the JV/WOS as long as the JV/WOS is in existence.

    However, certain countries do not mandatorily require auditing of the books of JV/WOS. In such a case, RBI has decided that Indian party can submit APR based on un-audited annual accounts of the JV/WOS provided:

    1. Statutory auditor of Indian party certifies that un-audited financial annual accounts of JV/WOS reflects true and fair picture of the affairs of the JV/WOS.
    2. Un-audited annual accounts of the JV/WOS have been adopted and ratified by Board of the Indian party.

  3. Compulsorily Convertible Preference Shares (CCPS):

    As per the present regulations, contribution to preference shares (convertible or non-convertible) of overseas JV/WOS of Indian party is treated as loan by the Indian party to its overseas JV/WOS.

    However, considering the nature of CCPS, it has now been decided that the same will be treated at par with equity shares.

SKP Comments and conclusion:

RBI with a view to encounter the commercial difficulties faced by the Indian parties in connection with overseas investments has liberalized the regulations.

However, the amendment in connection with submission of Form APR will cast an additional responsibility on the statutory auditors of the Indian party where the annual accounts of overseas JV/WOS are not statutorily audited. 

These amendments should boost overseas direct investment by the Indian Parties and expansion of their overseas business which should ultimately help in growth of the Indian economy.


1“Indian party” means a company incorporated in India or a body created under an Act of Parliament is a partnership firm registered under  the Indian Partnership Act, 1932 making investment in a JV/WOS abroad, and includes any other entity in India as may be notified by RBI.

2 As amended from time to time.

3 A.P. (DIR Series) circular No. 96 dated 28th March, 2012.

4 Financial Commitment includes contribution to the capital of the overseas JV/WOS, loan granted to the JV/WOS and 100 percent of the guarantees other than performance guarantee and 50 per cent of the amount of performance guarantees issued to or on behalf of the JV/WOS.

For further queries e-mail - info@skpgroup.com