Mumbai: The Reserve Bank of India (RBI) announced a series of measures on Friday aimed at helping companies boost investment in overseas units and giving them greater “operational flexibility” to expand their global footprint.
This includes more flexibility on issuing corporate guarantees to foreign subsidiaries and easier norms for divesting stakes in overseas units. The relaxed norms will help firms having global operations to route more investments to their foreign units.
Indian companies have used their overseas units as vehicles to make big-ticket acquisitions overseas as they use the scale they’ve gained in the South Asian nation to enter markets abroad.
RBI said Indian companies can issue corporate guarantees to direct subsidiaries under the automatic route irrespective of whether the direct subsidiary is an operating company or a special purpose vehicle (SPV). Thus far, Indian firms have been permitted to issue corporate guarantees on behalf of their first-level step-down operating subsidiaries operating as SPVs under the automatic route.
“It has been decided that irrespective of whether the direct subsidiary is an operating company or an SPV, the Indian promoter entity may extend corporate guarantee on behalf of the first-generation step-down operating company under the automatic route, within the prevailing limit for overseas direct investment,” RBI said.
In June, India’s largest telecom firm Bharti Airtel Ltd acquired Kuwait-based Zain group’s Africa assets through its wholly owned subsidiary Bharti Airtel International (Netherlands) BV. Indian conglomerates have also acquired overseas companies through SPVs launched for the purpose. The loans taken were all through the SPV and the liability rested on its books. The Tata group has floated such SPVs and wholly owned subsidiaries to acquire Jaguar Land Rover and Corus.
“Most of the acquisitions that Indian companies make are through an SPV. Also, most of the debt is taken on the books of these SPVs, which are then guaranteed by the Indian corporate. Due to the restrictions earlier, the ability of the SPV to raise debt was limited. With the RBI’s relaxation of norms, the restrictions faced by the Indian corporates to go out and finance acquisitions will not be there,” said Harkamal Ghuman, assistant vice-president (mergers and acquisitions) at SBI Capital Markets Ltd.
Groups such as Reliance, Tata, Essar, Birla and many other smaller companies with overseas ambitions will benefit from such a move.
“We will see more mergers and acquisitions in the mid-corporate space after this move,” Ghuman added.
Partha Mukherjee, head of treasury at Axis Bank Ltd, said the relaxed norms will help bring down the cost of operations for companies running overseas subsidiaries.
“RBI easing investment norms, such as easier norms to issue corporate guarantees, will facilitate more Indian investments abroad. This will also help companies to bring down their costs,” he said.
The central bank said companies can also issue corporate guarantees on behalf of second-generation operating subsidiaries, which will be considered under the approval route, provided the Indian company directly or indirectly holds 51% or more stake in the overseas subsidiary.
“This is a very good flexibility offered by RBI that will help a company to enter overseas joint ventures and mergers easily,” said Prabal Banerjee, chief financial officer of Adani Power Ltd.
RBI also said that instead of reporting entire performance guarantees as “financial commitment” provided to its overseas subsidiary, an Indian firm need report only 50% of such guarantees under this head.
In foreign countries, performance guarantees are the norm and the contractor insists on this before the execution of any project. In case the overseas subsidiary does not fulfil its commitment, the performance guarantee can be invoked and money taken from the guarantee issuer.
In reality, performance guarantees are only invoked in exceptional circumstances such as when the overseas subsidiary fails to bring in additional capital required for a project and delays or fails to complete the project.
One such example is of Zoom Developers Pvt. Ltd that was engaged in construction work in Europe. The performance guarantees were invoked because Indian banks at home did not provide further financial guarantees.
Until now, the guarantee issuer, the Indian parent, had to charge the entire amount of the performance guarantee to its accounts and provide for it.
Under the new norms, the company can report 50% of the guarantee amount within the project’s completion schedule. This allows the guarantee issuer to free up accounts and provide less towards such guarantees.
Also, the company can now issue up to 400% of its net worth as performance guarantee against the earlier limit of 200%.
“In cases where invocation of the performance guarantees breach the ceiling for the financial exposure of 400% of the net worth of the Indian party, the Indian party shall seek the prior approval of the Reserve Bank before remitting funds from India, on account of such invocation,” RBI said.
RBI also relaxed its norms on restructuring the balance sheet of the overseas entity where the write-offs relate to capital and receivables.
The extant guidelines do not allow for a restructuring of the balance sheet of the overseas subsidiary if it doesn’t involve the winding up of the entity or the divestment of the stake by the Indian party.
However, as per the latest guidelines, a listed Indian parent can write off capital or “other receivables, such as, loans, royalty, technical knowhow fees and management fees” without taking prior approval from RBI, provided the disinvestment is up to 25% of the equity. If the parent firm is unlisted, they have to take prior approval from RBI for this.
“Although this gives greater flexibility to the Indian company at home, greater caution has to be exercised by the RBI and the corporate so that the minority shareholders’ interest is protected. Why the write-off is happening and whether that is justified is something that should be properly communicated to the shareholders,” said Banerjee of Adani Power.
However, such write-offs have to be reported to RBI within 30 days of such restructuring. The company will also have to inform RBI about its projections for the next five years “indicating benefit accruing to the Indian company consequent to such write-off/restructuring”.
Partially modifying the existing norm, RBI allowed listed Indian companies to disinvest in overseas joint ventures or wholly-owned subsidiaries under the automatic route without the prior approval of the apex bank. For this, the net worth of these listed firms should not be less than Rs 100 crore and investment in overseas subsidiaries should not exceed $10 million (Rs 45.2 crore).
The company should report the disinvestment within 30 days from the date of the disinvestment. The $10 million limit is a new addition in the present classification.