Thursday, November 10, 2011

Guarantee by an Indian company on behalf of Wholly Owned Subsidiaries (WOSs)/Joint Ventures (JVs) abroad.

Guarantee by Indian Company on behalf of Wholly Owned Subsidiaries (WOSs)/Joint Ventures (JVs) abroad.

 i. Presently, only promoter corporates are permitted to offer guarantees on behalf of their Wholly Owned Subsidiaries (WOSs)/Joint Ventures (JVs), under the Automatic Route and issue of personal, collateral and third party guarantees requires prior approval of Reserve Bank and is considered by RBI, on a case by case basis.

 ii. The scope of guarantees covered under the Automatic Route has been enlarged. Indian entities are now permitted to offer any forms of guarantee – corporate or personal/ primary or collateral/ guarantee by the promoter company/ guarantee by group company, sister concern or associate company in India, provided:

 a) All "financial commitments" including all forms of guarantees are within the overall prescribed ceiling for overseas investment of the Indian party i.e. currently within 400 per cent of the net worth of the investing company (Indian party).

 b) No guarantee is 'open ended' i.e. the amount of the guarantee should be specified upfront, and

 c) As in the case of corporate guarantees, all guarantees are required to be reported to RBI in form ODI..
 iii. Guarantees issued by banks in India in favour of WOS/ JVs outside India are outside this ceiling and would be subject to prudential norms issued by RBI from time to time.

Financial commitment means the amount of direct investment outside India by way of contribution to equity, loans and 100% of the amount of guarantee issued by an Indian Party to or on behalf of its overseas JV/WOS ( the amount and period of the guarantee should be specified upfront).

Loan and guarantee can be extended to an overseas entity only if there is already existing equity participation by way of direct investment, within the overall ceiling of 400% of the Indian party's net worth as on the date of the last audited balance sheet. 

 Direct investment through the medium of a SPV is permitted under the Automatic Route, for the sole purpose of investment in JV/WOS overseas. Where the JV/WOS has been established through a SPV, all funding to the operating subsidiary should be routed through the SPV only. However, in the case of guarantees to be given to the first–level step down subsidiary of the SPV, these can be given directly by the Indian Party provided such exposures are within the permissible financial commitment of the Indian Party.

A Indian parent company can extend guarantee through Indian bank outside India under automatic route but it should be within 100% networth limit.

No prior approval is necessary as long as if they adhere above.

You have to report to RBI through for ODI for the guarantees issued.

For any doubt or clarification , you may please contact at or 09848915177.

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