Tightening norms for foreign fund raising, the Reserve Bank of India (RBI) has banned domestic firms from raising such funds above the permitted levels. Firms are also banned from extending guarantees to meet domestic funding needs.
The RBI move came after considering that a number of big corporates in India like Essar group, Reliance Industries and Reliance Anil Ambani group and others have increased their access to cheap forex funds to repay rupee loans or to meet other capex needs in recent years. Overseas borrowings are raised at rates exceeding the ceiling applicable in terms of existing FEMA norms. India Inc's foreign borrowing increased by 44 per cent to$2.78 billion in October. Of this only $69.43 million came through approval route and the rest $2.71 billion through automatic route.
The RBI’s circular notified that domestic companies or their banks/category I authorized dealers are not allowed to issue any direct or indirect guarantee or create any contingent liability or offer any security in any form for such borrowings by their overseas holding/associate/subsidiary/group companies except for the purposes explicitly permitted in the relevant regulations. Further the central bank notification added that funds raised abroad by overseas holding/ associate/ subsidiary/group companies of domestic firms with support of their domestic companies or their category-I AD banks cannot be used in India unless it conforms to the general or specific permission granted under the relevant regulations. Those companies not following the norms will face penal action under FEMA.