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Regulatory alert


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Regulatory alert

  1. 1. Regulatory Alert Dec, 2012 OVERSEAS INVESTMENT BY CORE INVESTMENT COMPANIES(A recent notification issued by the Reserve Bank of India formulating the regulatory framework for overseas investment by Core Investment Companies)
  2. 2. Introduction preference shares, bonds, debentures, debt or loans in group companies;With the objective of regulating the creditsystem, the Reserve Bank of India (RBI) had (ii) its investments in the equity sharesissued a notification on 06.12.2012 wherein the (including instruments compulsorilyRBI has issued directions known as “Core convertible into equity shares within a periodInvestment Companies - Overseas Investment not exceeding 10 years from the date of issue)(Reserve Bank) Directions, 2012”. The RBI has in group companies constitutes not less thanmade these directions applicable to all Corporate 60% of its net assets;Investment Companies (whether registered withRBI or exempted from registration) that intend to (iii) it does not trade in its investments ininvest overseas. shares, bonds, debentures, debt or loans in group companies except through block sale for the purpose of dilution or disinvestment;What is Corporate Investment Companies (iv) it does not carry on any other financial activity referred to in Section 45 I (c) and 45 IThe Corporate Investment Companies (CICs) is (f) of the Reserve Bank of India Act, 1934defined in para 2(b) of the circular dated except:5.01.2011 titled as Regulatory Framework forCore Investment Companies. According to para a) investment in bank deposits, money2(b) of the said circular, Core Investment market instruments, governmentCompany means a non-banking financial securities, and bonds or debenturescompany carrying on the business of acquisition issued by group companies;of shares and securities and which satisfies thefollowing conditions as on the date of the last b) granting of loans to group companies; andaudited balance sheet:- c) issuing guarantees on behalf of group(i) it holds not less than 90% of its net assets in companies. the form of investment in equity shares,
  3. 3. Prior Approval of RBI stipulated format of quarterly return and also continue to submit the return quarterly.The RBI has made these directions applicable toall Corporate Investment Companies (whether Eligibility Criteriaregistered with RBI or exempted fromregistration) that intend to invest overseas. The key eligibility criteria for making overseas  Investment in financial sector overseas investments are as follows:The RBI made it mandatory for the registered  The Adjusted Net Worth (ANW) of the CICand unregistered CICs desirous of making shall not be less than 30% of its aggregateoverseas investment in financial sector to hold a risk weighted assets on balance sheet andCertificate of Registration (CoR) and comply with risk adjusted value of off-balance sheetall the regulations applicable to registered CICs. items as on the date of the last audited balance sheet as at the end of the  Investment in non-financial sector financial year.Exempted CICs making overseas investment in  The CIC shall continue to meet thenon-financial sector will not require registration requirement of minimum ANW, postfrom the Reserve Bank and hence, these overseas investment.Directions are not applicable to them.  The level of net Non-Performing Assets ofHowever, a registered CIC need not obtain prior the CIC should not be more than 1% ofapproval from Department of Non-Banking the net advances as on the date of the lastSupervision (DNBS), RBI, for overseas audited balance sheet;investment in non-financial sector. It ismandatory for the registered CIC to report to the  The CIC should be earning profitRegional Office of DNBS where it is registered continuously for the last three years andwithin 30 days of such investment in the its performance should be satisfactory during the period of its existence.
  4. 4. Key Conditions party to or on behalf of its overseas JV/WOS).The key conditions subject to which overseasinvestments may be made are as follows:  As CICs are non-operating entities, they will not, in the normal course, be allowed  Direct investment in activities prohibited to open branches overseas. CICs which under Foreign Exchange Management Act, have already set up branch(es) abroad for 1999 (FEMA) will not be permitted; undertaking investment business should approach RBI within 3 months from the  The total overseas investment should not date of these Directions for a review. exceed 400% of the owned funds of the CIC and total overseas investment in  The WOS/JV being established abroad financial sector should not exceed 200% of should not be a shell company i.e "a its owned funds; company that is incorporated, but has no significant assets or operations." However  Investment in financial sector shall be companies undertaking activities such as only in regulated entities abroad. financial consultancy and advisory  Entities set up abroad or acquired abroad services shall not be considered as shell shall be treated as wholly owned companies; subsidiaries (WOS) /joint ventures (JV) abroad;  The WOS/JV being established abroad by the CIC should not be used as a vehicle  Overseas investments by a CIC in financial for raising resources for creating assets in /non-financial sector would be restricted India for the Indian operations; to its financial commitment. (“Financial commitment" means the amount of direct  In order to ensure compliance of the investment by way of contribution to provisions, the parent CIC shall obtain equity and loan and fifty percent of the periodical reports/audit reports at least amount of guarantees issued by an Indian quarterly about the business undertaken
  5. 5. by the WOS/JV abroad and shall make  The parent CICs shall obtain periodical them available to the inspecting officials reports about the business undertaken by of the RBI; the representative offices abroad. If the representative offices have not undertaken The WOS/JV shall make disclosure in its any activity or such reports are not Balance Sheet the amount of liability of forthcoming, the Bank may advise the CIC the parent entity towards it and also to wind up the establishment. whether it is limited to equity / loan or if guarantees are given, the nature of such Penal Action guarantees and the amount involved; All the operations of the WOS/JV abroad The RBI has specifically stated in the directions shall be subject to regulatory prescriptions that any violation of these directions shall invite of the host country. penal action under the provisions of Reserve Bank of India Act, 1934. CICs will need prior approval from the DNBS, RBI for opening representative offices abroad. Conclusion The representative offices can be set up abroad for the purpose of liaison work, The core objective to issue the afore stated undertaking market study and research directions is to regulate the credit system and but not for undertaking any activity which to keep a check on the overseas investments by involves outlay of funds. the registered or unregistered Core Investment Companies. As it is not envisaged that such offices would be carrying on any activity other than liaison work, no line of credit should be extended.
  6. 6. ABOUT KALE LAW OFFICESKale is a research based corporate Law Firmdedicated to providing legal services to, local Firm Overviewnational and international businesses. Key People:The corporate lawyers and other consulting 1. Mr. Aritra Dasprofessionals associated with our Law Firm provide 2. Ms. Rashi Bansalthe depth and breadth of expertise necessary to 3. Ms. Priyanka Dassolve complex business challenges and deliver sound 4. Mr. Dheeraj Guptalegal services. Key Consulting ProfessionalsThe firm also provides „one-stop‟ transaction servicesincluding legal due diligence, drafting, negotiating 1. Mr. Uttam Datt (Advocate, former partner with Dua Assocites)and closing, corporate and regulatory advisory 2. Ms Lakshmi Gurung (LLb, ICWA, FCS)services. 3. Nikilesh Ramachandran (Advocate on Record, Supreme Court of India)As part of the global business community, we as aLaw Firm recognize that optimal results are driven by Main Offices: New Delhia spirit of collaboration and a team approach to Other Professionals: Chartered Accountants,service. With that understanding our Law Firm Company Secretariescollaborates with clients—and each other—every dayto handle the complex transactions, regulatory Key Practice Areas:matters and litigation that businesses face. Our Law Corporate Transactions Regulatory CompliancesFirm‟s Corporate Lawyers advice clients on all aspects Domestic and International Taxof Regulatory Compliance specific to an industry. We Intellectual Propertyare also experienced for compliance issues under Corporate Strategydirect and indirect taxation, SEBI guidelines, Policy Support.Company‟s Act, and regulatory compliance under Contact: E-25, Jungpura Extension, New Delhi-24FEMA regulations, mergers, acquisitions, customcompliances etc. Phone and Fax: 011-45123523 Email: Website: