A condition for undertaking financial commitments on behalf of a foreign entity is that the Indian entity has made equity investment and also acquired control in such foreign entities. This could pose challenges in cross-border transactions, as certain circumstances pursuant to an M&A/joint venture transaction could require stakeholders to agree to provide financial support and commitment for the business. For instance, for an Indian stakeholder who has a significant stake in the business but does not have control, the inability to make a financial commitment may be reason for concern.
In order to reckon the financial commitment limit, the considerations are: investment in the foreign entity’s equity capital; lending or investment in debt instruments issued by the foreign entity on an arm’s-length basis; and guarantee commitments, including corporate guarantee/performance guarantee/personal guarantees and bank guarantees, as well as pledge or charge over the Indian entity’s assets. In respect of guarantees, it is clarified that personal guarantees will count towards the Indian entity’s financial commitment; and where a guarantee is invoked, to that extent, the same shall be considered as lending and not as a non-fund- based commitment.
Please click here to read the full article by Raj Ramachandran, published in The Times of India.
Raj specializes in Corporate Commercial, Banking & Finance and Cross Border Investments & Acquisitions.