Thursday, June 16, 2011

Liberalization of Performance Guarantee Issued by Indian Company to Foreign Projects by RBI

  1. With a view to providing more operational flexibility to Indian corporates having investments abroad, it has been decided to further liberalise / rationalise the following regulations relating to overseas direct investment:
  1. Performance Guarantees issued by the Indian Party
At present, ‘financial commitment’ of the Indian Party includes contribution to the capital of the overseas Joint Venture (JV) / Wholly Owned Subsidiary (WOS), loan granted to the JV / WOS and 100 per cent of guarantees issued to or on behalf of the JV/WOS. Keeping in mind the utility and usage of the instrument of performance guarantees in project executions abroad and also considering the risks associated with such guarantees vis-à-vis financial guarantees, it has been decided that only 50 per cent of the amount of the performance guarantees may be reckoned for the purpose of computing financial commitment to its JV/WOS overseas, within the 100 per cent of the net worth of the Indian Party as on the date of the last audited balance sheet. Further, the time specified for the completion of the contract may be considered as the validity period of the related performance guarantee. The Indian Party may report these guarantees in the similar way in which financial guarantees are being presently reported. In cases where invocation of the performance guarantees breach the ceiling for the financial exposure of 100 per cent 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.

Indian Companies has to take into account only 50% of the performance guarantee given by them for execution of projects in abroad in their aggregate 100% ceiling  of the net worth of Indian company .

This is as per RBI Circular -RBI/2010-11/548 -A.P. (DIR Series) Circular No. 69

1 comment:

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