ADVANCING LOAN BY INDIAN PARENT COMPANY TO ITS FOREIGN WOS/ OVERSEAS JV

As per recent RBI master circular , an Indian company can make loan to foreign company 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 100% of the Indian party's net worth as on the date of the last audited balance sheet. 

The loan will fall under the term 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). 

The above ceiling 100% will include contribution to the capital of the overseas JV / WOS, loan granted to the JV / WOS and 100 per cent of  guarantees issued to or on behalf of the JV/WOS. 

The Indian party / entity may extend loan / guarantee only to an overseas  concern in which it has equity participation. 

AD Category – I banks should allow remittance towards loan to the JV / WOS  and / or issue guarantee to / on behalf of the JV / WOS abroad only after  ensuring that the Indian party has an equity stake in the JV / WOS. 

You have to report by way of ODI form through online to RBI . The physical copy has to be given to your authorised dealer and he will file it the same through online.

rvsekar2007@gmail.com

919848915177

FOR INCORPORATING A WHOLLY-OWNED SUBSIDIARY IN GERMANY

For incorporation of a GmbH in Germany, one should  have to adhere the guideline prescribed by the Company Register under whose jurisdiction your GMBH would be formed in Germany. Also, German law would govern incorporation issues.

From the Reserve Bank of India perspective, this is an instance of Overseas Direct Investment (ODI) and you would have to follow guidelines laid down by RBI.

First check whether the overseas investment is under automatic route or approval route. 

If under automatic route,

·         The Indian party (investing co.) is eligible to invest in WOS up to 100% of net worth as per last audited balance sheet without prior approval of RBI.

·         But this ceiling of 100% of Net worth is not applicable if investment is out of funds raised thru ADR/GDR, or balances in Exchange Earners' Foreign Currency account of the Indian party. 

·         Reporting is to be done within 30 days of investment to the AD Category - I bank in Form ODI (part I and II) with prescribed enclosures after which you will be granted a Unique Identification Number (UIN). Forms shall be submitted in physical form and your AD will submit the same through online.

If under approval route:

·         Prior approval of RBI would be required

·         For this purpose, application together with necessary documents should be submitted in Form ODI through their Authorised Dealer Category – I banks.

·         Reserve Bank would, inter alia, take into account the following factors while considering such applications:

a) Prima facie viability of the JV  / WOS outside India;

b) Contribution to external trade and other benefits which will accrue to India through such investment;

c) Financial position and business track record of the Indian party and the foreign entity; and

d) Expertise and experience of the Indian party in the same or related line of activity of the JV / WOS outside India.

From Company Law Point of View

As far as Companies Act, 1956 is concerned ensure compliance with Sec.372A as the investment should be within the limit. 

Kindly note that it can be inferred from reading of sec .372 A, that investment in other body corporate for the purpose of "making "it a wholly owned subsidiary is not exempted form applicability of sec. 372A because the exemption is for investment in wholly owned subsidiary. So needless to say that there must be status of wholly owned subsidiary before the proposal of investment in a company.

Every inter corporate investment/loan/guarantee/security falling within section 372A (even within limit) must be sanctioned by a resolution of the board passed at its meeting. Such decision can not be taken by circular resolution nor can it be delegated by the Board.

If investment is beyond limit, then follow provisions of Sec 372A by taking approval of shareholders in General meeting.

R.V.Seckar

rvsekar2007@gmail.com

919848915177

Can a Indian Company can extend loan or guarantee to its WOS or JV Company in Abroad?

An Indian Company can extend loan  to its JV / WOS and 100 per cent of guarantees issued to or on behalf of the JV/WOS.

The investments are subject to the following conditions:

a) The Indian party / entity may extend loan / guarantee only to an overseas concern in which it has equity participation. Indian entities may offer any form 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 that:

i) All financial commitments including all forms of guarantees are within the overall ceiling prescribed for overseas investment by the Indian party i.e. currently within 400 per cent of the net worth as on the date of the last audited balance sheet of the Indian party;

ii) No guarantee is 'open ended' i.e. the amount and period of the guarantee should be specified upfront; and

iii) As in the case of corporate guarantees, all guarantees are required to be reported to the Reserve Bank, in Form ODI-Part II. Guarantees issued by banks in India in favour of WOSs / JVs outside India, would be outside this ceiling and would be subject to prudential norms, issued by the Reserve Bank (DBOD) from time to time.

The Indian party should not be on the Reserve Bank’s Exporters' caution list / list of defaulters to the banking system circulated by the Reserve Bank / Credit Information Bureau (India) Ltd. (CIBIL) / or any other credit information company as approved by the Reserve Bank or under investigation by any investigation / enforcement agency or regulatory body.

All transactions relating to a JV / WOS should be routed through one branch of an Authorised Dealer bank to be designated by the Indian party.