April 22, 2014
The Chairman and Managing Director/Chief Executive Officer
All Scheduled Commercial Banks
(Excluding Local Area Banks and Regional Rural Banks)
Fund/Non-Fund based Credit Facilities to
Overseas Joint Ventures / Wholly Owned Subsidiaries /
Wholly owned Step-down Subsidiaries of Indian Companies
Please refer to our circular DBOD.IBD.BC.No.96/23.37.001/2006-07 dated May 10, 2007, in terms of which banks were permitted to extend fund/non-fund based credit facilities to overseas Joint Ventures (JV)/Wholly Owned Subsidiaries (WOS)/Wholly owned Step-down Subsidiaries (WoSDS) of subsidiaries of Indian companies upto 20 per cent of their unimpaired capital funds (Tier I and Tier II capital) subject to certain conditions. The resource base for such lending should be funds held in foreign currency accounts, such as FCNR(B), EEFC, RFC etc., in respect of which banks have to manage the exchange risk.
2. Further, as per paragraph 5(b) of Notification No.FEMA 8/2000-RB dated May 3, 2000, Authorised Dealer Banks were permitted to extend guarantees to or on behalf of overseas JV/WOS of an Indian company in connection with its business. In terms of A.P. (DIR Series) Circular No.29 dated March 27, 2006, guarantees issued by banks in India in favour of overseas JV/WOS of Indian companies would be subject to prudential norms issued by the Reserve Bank from time to time.
3. The above measures were intended to assist Indian companies in their overseas business. However, it has been observed that banks are extending non-fund based credit facilities like guarantees/stand-by letter of credits/letter of comforts etc. on behalf of JV/WOS/WoSDS for purposes which are not connected with their business, rather, in certain cases, used to avail foreign currency loans for repayment of Rupee loans.
4. Accordingly, it is advised that, banks, including overseas branches/subsidiaries of Indian banks, shall not issue standby letters of credit/guarantees/letter of comforts etc. on behalf of overseas JV/WOS/WoSDS of Indian companies for the purpose of raising loans/advances of any kind from other entities except in connection with the ordinary course of overseas business. We further advise that while extending fund/non-fund based credit facilities to overseas JV/WOS/WoSDS of Indian companies in connection with their business, either through branches in India or through branches/subsidiaries abroad, banks should ensure effective monitoring of the end use of such facilities and its conformity with the business needs of such entities.
5. In terms of circular A.P. (DIR Series) Circular No.134 dated June 25, 2012, Indian companies in the manufacturing and infrastructure sector were allowed to avail of external commercial borrowings (ECBs) for repayment of Rupee loans availed of from domestic banking system and / or for fresh Rupee capital expenditure, under the approval route, subject to satisfying certain conditions. However, if the ECB is availed from overseas branches/subsidiaries of Indian banks, the risk remains within the Indian banking system. It has, therefore, been decided that repayment of Rupee loans availed of from domestic banking system through ECBs extended by overseas branches/subsidiaries of Indian banks will, henceforth, not be permitted.
6. As per instructions contained in paragraph 4(1)(i) of Notification No.FEMA 8/2000-RB dated May 3, 2000, Authorised Dealer Banks have been allowed to issue guarantees in respect of a debt, obligation or other liability incurred by an exporter, on account of exports from India. It was intended to facilitate execution of export contracts by the exporter and not for other purposes. It has, however, come to our notice that some exporter borrowers are using export advances, received on the strength of guarantees issued by Indian banks, for repayment of loans availed of from Indian banks. This is a clear violation of our instructions except in cases where banks have received approvals under FEMA and banks are advised to desist from such practices.
Chief General Manager
Extension of Credit Facilities to Overseas Step-down Subsidiaries of Indian Companies
May 10, 2007
All Scheduled Commercial Banks
(Excluding RRBs and LABs)
Annual Policy Statement for the year 2007-08 -
Extension of Credit Facilities to Overseas Step-down Subsidiaries
of Indian Corporates
Please refer to our circular DBOD. IBD. BC. No.41/ 23.37.001/ 2006-07 dated November 6, 2006 in terms of which the prudential limit on funded / non-funded credit facilities extended by banks in India to Indian Joint Ventures (JVs) (where the holding by the Indian company is more than 51%) / Wholly Owned Subsidiaries (WOS) abroad, was enhanced from the then existing limit of 10% to 20% of their unimpaired capital funds (Tier I and Tier II capital).
2. In this connection, a reference is invited to paragraph 173 of the Governor's Annual Policy Statement for the year 2007-08 (copy of the paragraph enclosed as Annex). Accordingly, it has been decided to permit banks in India to extend funded and/or non-funded credit facilities to wholly owned step-down subsidiaries of subsidiaries of Indian companies (where the holding by the Indian company is more than 51%) abroad.
3. Before granting the facility, banks should ensure that :
- The set up of the step down subsidiary should be such that the banks can effectively monitor the facilities granted by them.
- Proper systems for management of credit and interest rate risks arising out of such cross border lending are in place.
- Section 25 of the Banking Regulation Act, 1949 is complied with.
- The resource base for such lending should be the funds held in foreign currency accounts such as FCNR (B), EEFC, RFC etc. in respect of which the banks have to manage exchange risk.
- Maturity mismatches arising out of such transactions are within the overall gap limits approved by RBI.
- All existing safeguards and prudential guidelines relating to capital adequacy, exposure norms etc. applicable to domestic funded /non-funded exposures are adhered to.
- Grant of such facilities is to be based on proper appraisal and commercial viability of the project and the countries where the step-down subsidiary is located.
- There should be no restriction in the countries where the step-down subsidiaries are located in regard to (a) the companies obtaining foreign currency loans and on repatriation or repayment thereof and (b) non-resident banks to have a legal charge on securities / assets in the country as well as right of disposal, in case of need.
4. Please acknowledge receipt.
Chief General Manager
Para 173 of Annual Policy Statement 2007-08
173. Over the years, Indian industry has been successfully building up its presence abroad with increasing overseas acquisitions and as a consequence, the exposure of banks to such financing is rising. As overseas markets are expected to offer better opportunities for growth and bring in higher revenue and volumes, it is proposed:
•to permit Indian banks to extend credit and non-credit facilities to step-down subsidiaries which are wholly owned by the overseas subsidiaries of the Indian corporates, within the existing prudential limits and some additional safeguards.