RBI to fix tenor & rates for loans to foreign arms

NEW DELHI: The RBI is set to end the free-run enjoyed by Indian companies in extending loans and guarantees to their overseas arms, a tool often used to retain foreign earnings overseas.

Indian companies will now be able to provide such loans only on fixed rate of interest and for a fixed tenure, ensuring periodic interest is repatriated and principal comes back at the end of the tenure.

"There is no prescribed tenor for loans and guarantees nor interest rate ...This will ensure smooth repatriation," said a senior government official privy to the development.

The RBI is keen to ensure that steady inflows are maintained for the smooth financing of the current account deficit that touched record high levels last year and put pressure on the Indian rupee.

The central bank is expected to soon notify the new norm, which has been backed by government departments and ministries including finance, commerce and industry and overseas Indian affairs.

Outward investment had jumped after RBI eased controls in 2003. As per the current norms, Indian companies are allowed to invest up to 400% of their net worth overseas.

Indian companies had as on March, 2013 invested overseas $84 billion via equity and $35 billion through debt. They had extended $85 billion via guarantees.

The new norm will spell out the tenor and the interest rate ceiling in line with the prevailing benchmarks that Indian companies will have to follow when they extend loans to their overseas joint ventures or wholly-owned subsidiaries.

Most Indian companies that extend loans to their subsidiaries overseas enter into flexi repayment agreements that typically run for many years and often do not carry any fixed interest.

A fixed tenor will make repayments mandatory at the end of the period while fixed interest rate will allow for periodic repayments, ensuring that companies lends funds for business and not to maximize returns from foreign earnings.

"The move will end arbitrariness in the process," said the official. Experts say the move is in the right direction but should in line with taxation principles. "These norms will bring appropriate discipline in the outbound flows..

However, these should be consistent with the commercial realities of the business needs and also transfer pricing regulations," saiPunit Shah, Co-Head of Tax, KPMG. The prospects of depreciation in the value of the rupee may have prompted companies to keep their foreign exchange overseas through loan arrangements, which may have widened current account deficit.