Guarantees to overseas JVs, subsidiaries rise in 2010-11

Following a sharp rise in foreign business expansion, including mergers and acquisitions, guarantees for overseas joint ventures and subsidiaries by Indian companies saw a three-fold rise at $ 27.23 billion in 2010-11, compared with $7.6 billion in the previous financial year.

According to Reserve Bank of India (RBI) data, total outbound foreign direct investment, which includes equity, loans and guarantees, stood at $43.29 billion in 2010-11.

However, this jump should not be seen as an alarming growth commitment. The rise in the amount of guarantees is in line with the sharp rise in merger and acquisitions by Indian companies, said a senior IDBI Bank executive.
 

ON A HIGH Outward FDI from India
Period ended Mar	Equity	Loan	Guarantee	Total
2008-2009	10,732.26	3,329.00	3,104.88	17,166.14
2009-2010	6,763.27	3,620.19	7,603.79	17,987.25
2010-2011	9,351.77	7,346.89	27,230.52	43,929.18
Apr-May 2011	731.41	3,193.24	1,166.23	5,090.88
Source: RBI                                                              Figures in$ million

Most of the guarantees are being issued to joint ventures and subsidiaries to raise funds at cheap rates in a global market that is flush with funds due to quantitative easing. Lenders to these ventures and subsidiaries are seeking comfort in the form of guarantees from the parent company.

Indian Inc's outward direct investments in April-May stood at $5.09 billion. Total investments in 2007-08 stood at $20.94 billion. The flow of investments declined and stagnated for two years---2008-09 and 2009-10---in the aftermath of the global financial crisis. The outflow revived in 2010-11, since companies availed of the cheap valuation of assets to acquire companies. Equity investments improved to $9.35 billion in 2010-11. RBI said overseas investments catalysed growth in India's exports, transfer of technology and skill, sharing of results in research and development and provided more access to the global market. They also promote India's brand image, generate employment and aid in utilising raw materials available in India and in the host country.

Indian overseas investment policies abroad have been progressively liberalised. Corporate entities and registered partnerships can now invest in businesses abroad a sum of up to 400 per cent of their net worth, under the automatic route.