Dear Editor,
The following comment on the pros and cons of relaxed Indian overseas investment norms may be of interest to your readers.
Over the years, the Reserve Bank of India (RBI) has largely relaxed overseas investment norms applicable to an Indian party. Without a doubt, direct investments in joint ventures or wholly owned subsidiaries (JV/WOS) abroad give Indian parties a myriad of benefits. Access to wider global markets, the promotion of brand image, generation of employment and an increase in the utilization of raw materials available in India and in the host country are among a few of these benefits. The scheme for overseas investment is such that direct investments can be made in JV/WOS abroad through either the automatic route or the approval route. The rules to use these routes have been relaxed and rationalized in recent times in the following manner.
First, the increase in investment limits to 100% in 2013 and the subsequent restoration of the total financial commitment to 400% has enabled Indian entities to invest extensively overseas. Following this, there have been substantial amendments to the regulations applicable in relation to guarantees. Earlier, a promoter company, group company, sister concern or an associate company in India could give a guarantee on behalf of the JV/WOS abroad. After the issue of circular No. 96 in March 2012, the overall financial commitment of the Indian party now also includes bank guarantees given by them in addition to corporate and performance guarantees. Personal guarantees can now be issued by both direct and indirect individual promoters of the Indian party. This allows the JV/WOS abroad to invest further and expand their businesses.
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One major amendment brought about by the circular is the relaxation of norms relating to equity participation. If the laws of the host country allow the incorporation of a company without equity participation, then a guarantee can be given to such JV/WOS established abroad even when there is no equity participation. In addition to these factors, accounting for only 50% of performance guarantees provided by an Indian party on behalf of its JV/WOS abroad will increase the amount of investments that Indian entities can engage in. It would benefit companies such as those in the infrastructure sector which have numerous projects being executed in various parts of the world. These kinds of amendments give companies room to inject more funds into their overseas projects.
The main problem with these new regulations is that while the automatic route has a clear structure, the approval route lacks such a multi-layered structure to ensure that the financial commitment stays within the 400% limit. There is no doubt that these provisions have given further operational flexibility to Indian corporations. However, at times of economic turmoil if such outflows are permitted in a reckless manner it would lead to greater dollar outflows, which would reduce the value of the Indian rupee in comparison to the US dollar. Hence, during times of economic slowdown, the RBI must tread carefully when liberalizing overseas direct investment norms, and consider limiting capital outflows.
Nayomi Goonesekere
BA, LLB (Honours), National Law School of India University
Colombo, Sri Lanka
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