Extension Of Credit Facilties To Overseas Step-Down Subsidiaries Of Indian Corporates

MM
Mulla & Mulla & Craigie Blunt & Caroe

Contributor

Mulla & Mulla & Craigie Blunt & Caroe
In order to facilitate the expansion of the business of Indian corporates abroad, the Reserve Bank of India ("RBI") had on 6th November 2006 enhanced the prudential limit on credit and non-credit facilities extended by Indian banks to Indian Joint Ventures (where the Indian company’s holding exceeded 51%) / Wholly Owned Subsidiaries ("WOS") abroad from the then existent limit of 10% to 20% of the unimpaired Tier I and Tier II capital funds of such Indian Joint Vent
India Finance and Banking

In order to facilitate the expansion of the business of Indian corporates abroad, the Reserve Bank of India ("RBI") had on 6th November 2006 enhanced the prudential limit on credit and non-credit facilities extended by Indian banks to Indian Joint Ventures (where the Indian company’s holding exceeded 51%) / Wholly Owned Subsidiaries ("WOS") abroad from the then existent limit of 10% to 20% of the unimpaired Tier I and Tier II capital funds of such Indian Joint Ventures and WOSs.

On 10th May 2007, the RBI 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 of the Indian company is in excess of 51%) abroad.

Prior to grant of such facilities, banks would be required to ensure that:

  1. The step-down subsidiary’s set up is of such a nature as to permit banks to efficaciously monitor the facilities granted;
  2. The provisions of Section 25 of the Banking Regulation Act, 1949 is fulfilled;
  3. Grant of such facilities are based on proper appraisal and commercial viability of the project and the countries where the step down subsidiary is located;
  4. Suitable systems for managing credit and interest rate risks arising out of the cross border lending transactions are instituted;
  5. Maturity mismatches arising out of such transactions are within the overall RBI permitted gap limits;
  6. The resource base for such lending comprises funds held in foreign currency accounts such as Foreign Currency Non Resident Accounts, Exchange Earners' Foreign Currency Accounts, Resident Foreign Currency accounts etc. in relation to which banks are required to manage exchange risks;
  7. All extant safeguards and prudential guidelines relating to capital adequacy, exposure norms etc. applicable to domestic funded/non-funded exposures are adhered to;
  8. No restrictions exist in countries where the step down subsidiaries are located in relation to foreign currency loans obtained by the companies, repatriation, repayment and legal charge on securities / assets of non-resident banks.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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