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RBI tightens norms for extending credit by Indian companies to overseas subsidiaries

02 January 2016

Banks may extend credit facilities, funded and / or non-funded, to step-down subsidiaries of Indian companies, including to those beyond the first level, to finance the projects undertaken abroad if these are majority owned by Indian entities, Reserve Bank of India (RBI) has said .

The immediate overseas subsidiary of the Indian company must be directly controlled by the Indian parent company through any of the modes of control recognised under the Indian Accounting Standards. In addition, the Indian parent company must directly hold a minimum 51-per cent of its shareholding.

In the case of step-down subsidiary, including the intermediate ones, it must be a wholly-owned subsidiary of the immediate parent company or its entire shares should be jointly held by the immediate parent company and the Indian parent company and / or its wholly owned subsidiary. The immediate parent should, wholly or jointly with Indian parent company and / or its wholly-owned subsidiary, have control over the step-down subsidiary, RBI said.

RBI has asked banks to make additional provision of 2 per cent (in addition to country risk provision that is applicable to all overseas exposures) against standard assets representing all exposures to the step-down subsidiaries, to cover the additional risk arising from complexity in the structure, location of different intermediary entities in different jurisdictions exposing the Indian company, and hence the bank, to greater political and regulatory risk.

The modifications would apply to all credit facilities sanctioned after the issue of the circular and to all existing facilities as and when they are renewed hereafter, RBI said.

As per the Indian Accounting Standards, control has been defined as the ownership, directly or indirectly, through subsidiary(ies), of more than one-half of the voting power of an enterprise or control of the composition of the board of directors in the case of a company or of the composition of the corresponding governing body in case of any other enterprise so as to obtain economic benefits from its activities.

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