Saturday, October 2, 2010

Can Indian Company can extend Guarantee to a foreign company which is a subsidiary of its 100% owned foreign subsidiary ?

Company A can give Corporate Guarantee to a Bank abroad on behalf of Company C. Company B is a 100% subsidiary of A and B is having a 49% holding in Company C.
. Which Guidelines govern the same and what would be the statutory formalities for the same???

Notification No.FEMA 8/2000-RB dated 3rd May 2000 . The notification provides the following prohibition:

Prohibition :-

Save as otherwise provided in these regulations, or with the general or special permission of the Reserve Bank, no person resident in India shall give a guarantee or surety in respect of, or undertake a transaction, by whatever name called, which has the effect of guaranteeing, a debt, obligation or other liability owed by a person resident in India to, or incurred by, a person resident outside India.

RBI master circular on WOS / JV abroad dated July 1, 2010.. In terms of the circular guarantee can ben given on behalf of a subsidiary / JV in which Company 'A' has equity participation. Going by this, Company A can't give guarantee on behalf of Company 'C'

Hence , Guarantee can be offered by a Indian Company to a foreign company in a structured business transactions only. The prohibition clause says even with the general or special permission from RBI , Guarantee cannot be given unless there is a structured business transaction.


1 comment:

  1. What is Structured buiness transaction, is it understood in general paralance.

    Also considering above and general regulation, if an Indian Parent Company is required to issue a Corporate Guarantee on behalf of its foreign subsidiary to a Foreign Body Corporate against reciept of guaranteed return for services agreed to be rendered by foreign
    the subsidiary to a Foreign Body Corporate. PL confirm if their are any restrictions on issue of same and if same is intended to be executed by an Indian Parent Company abroad are their any other tax implication.

    Thanks, Angna