As part of its efforts to reign in flagging economic growth, the Reserve Bank of India (“RBI”) announced, in a press release issued on August 14, 2013, a few measures to curb overseas investment by Indian companies and individuals. Briefly, these include:
- The reduction of the limit for overseas direct investment (“ODI”) under the Automatic Route for all new ODI transactions from 400% to 100% of the net worth of the Indian party;
- The reduction in the limit for remittances made by individuals resident in India under the Liberalised Remittance Scheme from USD 200,000 to USD 75,000 per financial year; and
- The prohibition of the use of the Liberalised Remittance Scheme for the acquisition of immovable property outside India, directly or indirectly.
Let us consider the implications of these changes. We can conclude that, effectively, the RBI will treat any ODI in new joint ventures or wholly owned subsidiaries in excess of 100% of the net worth of the Indian investor, as an ODI investment that needs RBI approval.
Existing JVs and WOS
Now, the notification states that these changes will apply prospectively and not to existing joint ventures or wholly owned subsidiaries (“JVs/WOS”) set up under the extant regulations. What does this mean? Can we conclude that Indian entities can continue to invest in existing JVs/WOS set up under the extant regulations up to the 400% net worth limit? This does seem to be conclusion if you consider the following statement from the notification:
“These provisions shall come into effect with immediate effect and would apply to all fresh Overseas Direct Investment proposals on a prospective basis but would not apply to the existing JV/WOS set up under the extant regulations.”
Or is the intent to restrict all new investments irrespective of whether the investment is into a new JV/WOS or an existing one?
Nature of investment
Another point of concern, especially when considering the press note from the perspective of financing transactions, is whether the limit applies to guarantees extended to JVs/WOS by Indian entities.
The source of this uncertainty is the following choice of words in the notification:
“… the total overseas direct investment (ODI) of an Indian Party in all its Joint Ventures (JVs) and / or Wholly Owned Subsidiaries (WOSs) abroad engaged in any bonafide business activity should not exceed 400 per cent of the net worth of the Indian Party as on the date of the last audited balance sheet under the Automatic Route.”
Contrast this with the prohibition laid out in the Master Circular on ODI:
“The total financial commitment of the Indian party, in all the Joint Ventures / Wholly Owned Subsidiaries put together, shall not exceed 400% of the net worth of the Indian party as on the date of the last audited balance sheet.”
Is this a deliberate distinction created by the RBI? Can we assume that the new 100% limit applies only to direct investment into the JVs/WOS and not to loans or guarantees extended by the Indian entity?
The answers to these questions can significantly impact the way in which acquisition and financing transactions are structured, and we can be sure that the RBI will need to clarify their position on ODI in the near future.
(Deeksha Singh is part of the faculty at myLaw.net.)