Foreign-owned companies looking to invest in their downstream operations or joint ventures are facing unexpected hurdles due to a recent RBI notification on foreign investments in Indian companies.
While the notification was only intended to operationalise Press Notes 2, 3 & 4 issued by department of industrial policy and promotion (DIPP) in 2009, some material changes have crept in on the use of internal accruals for downstream investments by foreign-owned and/or controlled companies.
?Downstream investments through internal accruals are permissible by an Indian company engaged only in the activity of investing in the capital of another Indian company/ies,? says the RBI circular.
This is in contrast to the DIPP?s existing rules which allowed interest accruals to be routed through a holding company or a holding-cum-operating company.
?The guidelines fall short of clarifying the usage of internal accruals for an operating-cum-holding company and, therefore, clarity on this front will be useful for foreign downstream investments,? says Vishal Shah, executive director, PwC India.
The change may impact a number of foreign-owned companies that have revenue-generating businesses in India.
For instance, take the recent restructuring announced by Holcim. Holcim plans to increase its stake in Ambuja Cements to over 61%, and in turn have Ambuja acquire Holcim?s 50% stake in ACC. Since the investment which is funded through internal accruals is being routed through Ambuja ? which is an operating company rather than a pure investment company ? the investment may not be strictly permitted as per the RBI?s new circular.
Other foreign-owned companies like HUL and Nestle from the FMCG space, and Siemens and ABB from the capital goods space may be among those affected since they all have revenue-generating Indian operations which may seek to invest internal accruals into other subsidiaries or joint ventures.
?Group companies would not be permitted to utilise internal accruals for downstream investments since they do not qualify as investing company/investment holding company,? explained a reputed law firm in a recent presentation.
These companies will now have to either bring in fresh foreign equity each time they need to make downstream investments or set up a core investment company (CIC) as defined by the RBI. In order to do that, FIPB approval will be required and the CIC will need to comply with the RBI?s regulatory framework.
Industry sources say clarifications have been sought from the RBI by consultants and legal experts as to whether the investments can be routed through operating-cum-holding companies, but a response from the RBI has not been fortcoming so far.
Some ambiguity also remains on whether the specific part of the notification dealing with internal accruals will be applicable retrospectively from 2009.
The RBI circular says that companies must inform the RBI of investments made between February 13, 2009 and the date of publication of the FEMA notification, that do not conform to the ?regulatory framework now being prescribed.?
The wording suggests that each of the conditions included in the RBI notification will be applicable retrospectively. However, experts feel that since the DIPP Press Note did not prevent downstream investments via an operating-cum-holding company, the RBI may not insist on this clause be applied from 2009 onwards.
?Bringing the policy in line with existing DIPP guidelines seems to be the more rational approach,? said Shah of PwC India.
