Published Editorial

New hurdles to foreign buys

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The Hindu Business Line

by

Raju Kumar
Associate Director, Tax & Regulatory Services
EY

Contributed by:

Vaibhav Luthra
Senior Tax Professional
EY

Over the past decade, through overseas acquisitions and investments Indian multinationals have been able to access technology and intellectual property, establish international consumer bases, and carve out a slice of the global market pie. Such outbound investments are important for their long-term growth and, perhaps, for the general economy. They would have not been possible without the impetus provided by the Government through economic reforms and liberalization.

In March 2003, the Government revised the ‘automatic route’ for overseas investment, allowing Indian corporates to invest up to 100 per cent of their net worth abroad without government approval. From September 2007, they could invest up to 400 per cent of their net worth and overseas investment increased significantly. Although the trend was moderately affected during the crisis year 2009–10, there was a sharp rebound in 2010–11.

However, the Reserve Bank of India recently reduced the net worth limit for overseas direct investment by resident entities (other than oil public sector undertakings) from 400 per cent to 100 per cent. This measure, together with the reduction in remittances under the Liberalized Remittance Scheme from $200,000 to $75,000 appears to be aimed at arresting the rupee’s decline by curbing foreign exchange outflow.

This will surely restrict the expansion plans of Indian multinationals and the M&As of Indian entities abroad. It could also adversely impact sourcing of foreign capital for Indian investors. Indian entities often use the leverage buyout route to fund acquisitions abroad to reduce the risk on the domestic balance sheet. The funding is often arranged through overseas banks, and backed by guarantees from the Indian parent.

Given that a portion of the guarantees is included in the overall ‘net worth’ limit, even sourcing of foreign money could pose challenges.

While the RBI has suggested that a corporate could always seek approval when it needs more money to acquire an asset abroad, and when the investment exceeds the limit, it is seen that the number of proposals under the approval route is negligible compared with that under the automatic route. It appears that the rationalization measures are aimed at easing pressure on the rupee, rather than capital control.

However, Government policies should necessarily consider the larger, long-term impact on business, and avoid knee-jerk reactions.

Indian multinationals desirous of growing their global footprint are hoping that the measure is for the short term, and that the Government will realize the need for a rollback.