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Overseas direct investment

An Indian company may invest directly in a joint venture (JV) or wholly owned subsidiary (WOS) abroad engaged in a bona fide business activity, provided that the total financial commitment/overseas investment of the Indian company does not exceed 200% of its net worth, according to the Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations 2004.

To provide enhanced flexibility to Indian companies in their overseas investments, the Reserve Bank of India (RBI) has, through its Circular dated June 14 2007, liberalized regulations governing overseas investments. Accordingly, the limit of total overseas investment by an Indian company in JVs/WOSs abroad is now 300% of its net worth.

Overseas investments by registered partnership firms would continue to be governed by the earlier limit of 200% of their net worth.

Financial commitment as contemplated by the Regulations includes the amount of direct investment made by way of contribution to equity, loan and 50% of the amount of the guarantees issued by the Indian company to or on behalf of its overseas JV/WOS.

To further liberalize existing norms, the RBI has decided that the financial commitment of an Indian company in JVs/WOSs abroad should now be calculated to include 100% of the amount of the guarantees issued by the Indian company rather than the previous 50%.

To provide improved opportunities for portfolio investments of listed Indian companies, the RBI has enhanced the limits of investment from the existing limit of 25% of the net worth of these companies, and permitted listed Indian companies to invest up to 35% of their net worth in the equity of foreign companies listed on a recognized stock exchange and having 10% shareholding in the listed Indian company, under the portfolio investment scheme.

Shardul J Thacker

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