Norms For Foreign Software Firms Acquisition Eased

The government has decided to allow software companies to use a part of their export proceeds to fund acquisition of information technology companies abroad.

At present, these companies have to fund these acquisitions through proceeds of global depository receipts floated abroad. This is aimed at keeping the deals relatively foreign exchange neutral.

The official announcement (along with a financial package) will be made jointly by finance ministry and the Reserve Bank of India over the next few days. The decisions have been endorsed by an inter-institutional group constituted by the government.

The new norms are applicable to software exporters with previous three years cumulative actual export realisation in excess of $25 million. They will be allowed to retain abroad 50 per cent or $25 million of their cumulative actual export earnings of the previous three years. For Fera approvals beyond this limit, the RBI would set up a mechanism for expeditious processing of applications from this sector.

 

The government is also revising the guidelines for Export Earners Foreign Currency Accounts to eliminate restrictions on staggered remittance, second and higher generation subsidiaries.

In addition, 20 per cent of EEFC balances can now be used for:

* Advance remittances for downloading software (upto $1 lakh per transaction);

* Purchase of equipment and related expenditure;

* Miscellaneous expenses not detailed in EEFC guidelines (upto 5 per cent). Such EEFC accounts shall be permitted for making payments from offshore branches of Indian banks directly.

The RBI will also be effecting changes to the list of allowable expenses under the present limit of 70 per cent of the contract amount permitted to be spent abroad. It believes that the present list is too restrictive and does not allow for flexibility for utilisation for the purpose of general corporate objectives or business growth purposes. This will be in addition to its decision to allow IT exporters to spend upto 5 per cent (of the total of 70 per cent) abroad for sundry expenses.

In addition, for overseas ventures, a dispensation shall be given by RBI for allowing for capitalisation of both goods and services. That is, the expenses incurred to operationalise the acquired goods and services can now be capitalised.

The government will also permit the use of international credit cards abroad for a variety of purposes required by the information technology sector. All payments currently made under the EEFC account will also be allowed to made through credit cards.

Similarly, advance payment for software and information technology services can be done through the use of credit cards. In addition, these cards may be used for paying for software and services purchased over the internet.

The financial package to be announced will include treatment of lending to the IT sector as priority sector (and to be closely monitored by the finance ministry) lending for next 5 years and allowing concessional refinance to commercial banks. Similarly, new criteria based on turnover for working capital for the IT sector would be announced by RBI. Banks will also be advised to give 25 per cent of the contract value for 18 months, with the first six months as term loan (without collaterals) and from the 7th month onwards annualised cash flow statments shall be accepted instead of collaterals. Further, commercial banks would be allowed to invest in dedicate venture capital funds. This would be forked out from the currently permitted corpus of 5 per cent of the incremental deposits of the previous year. ICICI, IDBI, UTI and SBI will form joint ventures with Indian or foreign companies to form dedicated venture capital funds with an individual corpus of Rs 50 crore.