INDIA BUSINESS WORLD - MARCH 2006
THE MONTH THAT WAS

INDIA INC GETS MORE PLAY IN FOREIGN INVESTMENT

In the run-up to the firming up of another report on capital account convertibility, Indian corporates have been given more leeway on outward investment.Corporates will have more operational flexibility to offer any form of guarantee, whether it is corporate or personal or collateral by the promoter company, on behalf of their whollyowned subsidiaries abroad or joint ventures. Besides, the automatic route for disinvestment in companies set up abroad has also been further liberalised, and proprietary or unregistered partnership exporter firms would be allowed to set up a joint venture or whollyowned subsidiary outside India.

According to the new changes in the existing regulations announced by RBI on Monday, the scope of guarantees that Indian corporates can issue under the automatic route has been expanded. They can now offer any form of guarantees — corporate, personal, primary or collateral guarantee by the promoter company or by a group company, sister concern or associate company in India. This would be subject to the condition that all financial commitments, including all forms of guarantees, are within the overall prescribed ceiling for overseas investment of the Indian entity. The ceiling now is 200% of the net worth of the investing company. So far, only promoter companies were allowed to offer guarantees on behalf of their wholly-owned subsidiaries or joint ventures.

The liberalisation of the automatic route for disinvestment by Indian companies having investments abroad implies that Indian firms can disinvest in their overseas firms without prior approval of RBI in certain categories. These would cover cases where the joint venture or wholly-owned subsidiary is listed on the overseas stock exchange, and where the Indian promoter is listed on a stock exchange in India and has a net worth of not less than Rs 100 crore. Divestment without prior RBI approval can also be done where the Indian promoter is an unlisted company and the investment in the overseas venture does not exceed $10 million.

Star exporters with a proven track record and consistently high export performance would also be in a position to benefit from these easing of norms. Established proprietorship or unregistered partnership exporter firms would be permitted to set up a joint venture or wholly-owned subsidiary outside the country without obtaining prior approval of RBI. This would be subject to certain eligibility criteria such as being a DGFTrecognised star export house with exports exceeding Rs 15 crore annually. .