Indian promoters likely to give personal guarantee on foreign assets

What is the news?

In a major shift from its earlier stance, the Reserve Bank of India (RBI) has proposed allowing Indian promoters to issue personal guarantees for overseas firms in which they have acquired a controlling stake, albeit with limits.

• At the same time, an Indian company can pledge its foreign shareholding to raise funds overseas, but within prescribed limits.
• Local companies can even pledge their Indian assets to raise funds for overseas entities, but within prescribed limits.
• There will be limits and conditions on how much guarantee can be issued by the Indian promoter or the parent Indian firm.

Who is a promoter?

In simple words, a promoter may be an individual, a firm or a company that does all the necessary preliminary duties to bring a company into existence. The promoter’s work is to formulate new ideas and to develop it, and also persuade others to join the company.

Key proposals

• Indian promoters can issue personal guarantees.
• Foreign assets can be pledged to raise funds for Indian entities
• Indian assets can also be pledged for raising funds for foreign entities
• NoC from banks to suffice instead of RBI permission in most cases
• ‘Strategic sector’, where govt would fix investment limit, introduced

Present rules

The rules were proposed through two draft guidelines on the RBI website. This is a change of stance by the central bank from its existing norms as spelt out in its Foreign Exchange Management Act (FEMA), 2000.

According to the earlier FEMA rules, giving of a guarantee or surety in respect of any debt or obligation is prohibited.

• by a person resident outside India; or
• by a person resident in India and owed to a person resident outside India

Rationale behind RBI’s Draft proposal

• The aim is to enable ease of doing business by offering fewer prior approvals and simplified processes.
• It will boost foreign direct investment.
• This is a major step towards capital convertibility.
• It tries to introduce a definition of ‘strategic sector’, which was missing in the earlier FEMA rules. “Strategic sector” will include energy and natural resources sectors such as oil, gas, coal and mineral ores or any other sector as advised by the Central government.

Terms to know:

• FEMA