Direct Foreign Investment Limits
Brief background:
An Indian company can invest in Joint Venture (JV) (above 51% holding) or Wholly Owned Subsidiary (WOS) up to a limit of 400% of its net-worth as on the last audited balance sheet without approval of RBI. Such investment may be in the form of any class of equity, loan or corporate guarantee or bank guarantee (performance guarantee is 50% limit). Hence total financial commitment shall not exceed 400% under automatic route.
This limit is not applicable when such investment is funded out of following:-
1. Balances in EEFC account of Indian company;
2. Funds raised by issuing ADRs/GDRs.

Current affairs:
As per the notification issued by RBI dated 14th August, 2013, the limit of 400% has been reduced to 100%. This means, effective 14th August 2013, the total commitment limit is 100% in lieu of 400%. Any investment which results in total commitment limit to exceed 100% of the net-worth as per the last audited balance sheet shall require approval of RBI.
Let’s discuss following issues under such a scenario:-
A. What is the limit if an Indian company wants to make any fresh/new investment in the JV/WOS acquired or settled on or before the effective date (14th August, 2013)?
RBI Clarification: The limit is 100% of the net-worth
B. What happens to the fresh financial commitments up to 400% of net-worth already made by the Indian Company on or before effective date?
RBI Clarification: Any financial commitment already made or contracted based on the earlier limit of 400%, limit of 400% will apply. However, any disbursement made by the AD banks will have to be intimated to RBI immediately.
C. An agreement/contract is executed for setting up JV/WOS based on the old limits on or before 14th August, 2013. Will this notification apply to it?
RBI Clarification: No. A limit of 400% under automatic route will apply and such disbursements will be intimated to RBI immediately.
D. Status of applications already lying for approval at RBI’s office or AD Bank’s office.
RBI Clarification: These applications will be approved under the guidelines earlier to 14th August, 2013.
E. How will the 100% limit be calculated for newly acquired or set-up JV/WOS? Will the investments made earlier be reckoned in it?
RBI Clarification: Yes. The calculation of 100% limit is explained in detail in this circular.
F. Will any fresh financial commitments made by Indian company by transfer of existing stake or by fresh contribution will qualify for calculating 100% limit?
RBI Clarification: Yes

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