News and developments
New Overseas Investments Regime in India
In August 2021, the RBI had issued the draft Foreign Exchange Management (Non-debt Instruments - Overseas Investment) Rules, 2021 (the “Draft Rules”). The RBI appears to have taken into consideration the feedback received in relation to the Draft Rules in the New Regime which has overhauled and superseded inter-alia the: (i) the Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004, as amended; and (ii) the Master Direction on Direct Investment by Residents in Joint Venture / Wholly Owned Subsidiary Abroad dated January 1, 2016 (updated until June 24, 2021) (together, the “Old Regime”).
This note discusses the changes introduced by the New Regime and its impact on cross border transactions, particularly in relation to the following:
The above revised framework is a combination of liberalizations and relaxations. The New Regime does not specify any restrictions on the levels of step-down subsidiaries on behalf of which guarantees can be provided. Under the Old Regime, guarantees could be provided by an Indian party without RBI’s approval only to the first level of operating step-down subsidiary. The only requirement under the New Regime is that the Indian entity should have ‘control’ in such subsidiaries through the foreign entity. However, if a guarantee is provided by two or more entities jointly and severally, instead of stating that the amount of the guarantee should be proportionately divided among the guarantors for purposes of determination of the financial commitment, the RBI has stated that 100% of the guaranteed amount will be counted for each guarantor.
VII. PLEDGE AND CHARGE
An Indian entity is now permitted to create security by way of pledge or charge in favor of an overseas lender (and not only an overseas bank) and debenture trustees. This is a key liberalization by the RBI as it assists foreign entities to obtain borrowings from entities other than banks. However, previously, an Indian entity was permitted to create security in respect of shares of any foreign entity in which it had made an investment, even for the borrowings of its group company or associate company in India. Now, the security can be created only in respect of shares of the foreign entity which has obtained the borrowing or its step-down subsidiary.
Certain other considerations in respect of a pledge or charge under the New Regime are as follows:
This insight has been authored by Divyanshu Pandey (Partner), Mohit Gogia (Partner), Lakshmi Pradeep (Partner) and Anoushka Borker (Associate). They can be reached at [email protected], [email protected], [email protected] and [email protected], respectively, for any questions. This insight is intended only as a general discussion of issues and is not intended for any solicitation of work. It should not be regarded as legal advice and no legal or business decision should be based on its content. © 2022 S&R Associates
- scope of overseas investments;
- definition of control;
- pricing guidelines;
- round tripping;
- financial commitment;
- guarantees; and
- pledge and charge.
- “the Indian entity is eligible to make Overseas Direct Investment (ODI);
- the Indian entity has made ODI in the foreign entity;
- the Indian entity has acquired control in such foreign entity at the time of making such financial commitment.”
Category of Guarantor | Type of Guarantee | Limitations |
---|---|---|
Indian investing entity | Corporate or Performance Guarantee | If guarantee provided by two or more Indian entities jointly and severally, 100% of the guarantee amount to be counted towards financial commitment limit of each such Indian entity |
Group company of the Indian investing entity (holding company / subsidiary company / promoter group company | Corporate or Performance Guarantee | To be counted towards the financial commitment limit of the group company.Any fund-based exposure to or from the Indian investing entity to be deducted from the net worth of the group company for determining the financial commitment limit. |
Resident individual promoter of the Indian investing entity | Personal Guarantee | To be counted towards the financial commitment limit of the Indian investing entity |
Indian Bank | Bank Guarantee | Backed by counter-guarantee or collateral by the Indian entity or its group company |
- The value of the pledge or charge or the amount of the facility, whichever is less, is to be counted towards the financial commitment limit. However, if the facility is amortizing, it is unclear if the financial commitment will be calculated on going forward basis. For the Indian entity, the financial commitment will be zero if the charge or pledge is offered for the Indian entity’s borrowing. This is a departure from the earlier position where value of charge was considered as financial commitment. Further, the New Regime does not specify whose calculation of the financial commitment limits will be binding on all relevant stakeholders.
- Negative pledge / negative charge / bid bond guarantee will not be counted towards the financial commitment limit.
- The word ‘control’ is not mentioned in the applicable regulation which permits creation of pledge and charge. It would be helpful to have some clarity from RBI as to whether Indian party should have ‘control’ in the foreign entity or in its step-down subsidiary if a pledge or charge is created for a borrowing by a foreign entity or its step down subsidiary.
- The Old Regime included an end-use restriction in respect of the pledge and charge framework as follows: “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”. No such restriction is included in the New Regime and this appears to be consistent with the RBI’s approach to liberalized round tripping restrictions.
This insight has been authored by Divyanshu Pandey (Partner), Mohit Gogia (Partner), Lakshmi Pradeep (Partner) and Anoushka Borker (Associate). They can be reached at [email protected], [email protected], [email protected] and [email protected], respectively, for any questions. This insight is intended only as a general discussion of issues and is not intended for any solicitation of work. It should not be regarded as legal advice and no legal or business decision should be based on its content. © 2022 S&R Associates