The Reserve Bank of India (RBI) on Tuesday clamped down on Indian firms raising funds overseas and routing them to India through certain types of structures.

In a notification, RBI noted that some Indian firms access overseas markets for debt funds through overseas subsidiaries and associates and later route those funds back to their Indian operations.

One of the ways this has been done is through investment in rupee bonds floated by the Indian company. Taking note of such instances, RBI clarified that Indian companies 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.”

RBI further added that funds raised by an overseas subsidiary, associate or group company cannot be used in India unless it conforms to the general or specific permissions granted under the Foreign Exchange Management Act (FEMA) regulations.

RBI also stated that those Indian firms or their investment banks which are using or establishing structures that contravene these norms, shall be liable for penal action.

According to existing guidelines on external commercial borrowings (ECB), there are restrictions on the cost at which Indian firms can raise overseas borrowings. The “all-in-cost ceiling” is set at 350 basis points (bps) spread over six month London Interbank Offered Rate (Libor) for borrowings between three and five years. A ceiling of 500 bps over Libor is applicable for borrowings with maturity above five years. Firms also have to comply with restrictions on the end use of such funds. One basis point is one-hundredth of a percentage point. (PTI)