Reserve Bank of India is questioning pharma companies operating in India over the transfer of their intellectual property (IP) assets to offshore subsidiaries. The central bank is looking at ways the foreign subsidiaries have raised loans abroad to pay for the intellectual property assets transferred to them, the Economic Times reported.
Under the new rules, the Reserve Bank of India collects annual performance reports of companies on their overseas subsidiaries and joint ventures. Based on the information, it has questioned at least five pharma companies in the last three months, requesting explanations of how the foreign subsidiaries have raised loans to pay for the intellectual property assets.
The central bank believes the way pharma companies transacted the assets is in violation of Foreign Exchange Management Act (FEMA) and against the rules on external commercial borrowings (ECB). According to ECB rules, funds borrowed by an overseas arm against the Indian parent's support should be used for overseas expansion or takeovers — and cannot be sent back to India, the Economic Times reported.
"Indian companies are allowed to extend guarantees for loan availed by their overseas subsidiaries under the ODI Guidelines. Under the ECB guidelines, while an overseas parent company can extend loan to its Indian subsidiaries, a foreign subsidiary cannot extend loan to its Indian parent company.
Clearly, if an overseas subsidiary raises loan overseas on the strength of guarantee from its Indian parent company and thereafter advances the funds to the Indian parent company as loan, it could be construed as non-compliance of the ECB guidelines," said Prem Rajani, partner at law firm Rajani Associates.
Source: The Economic Times
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