Financing Pattern of Indian Acquiring Firm

The foreign investment abroad by Indian firms, generally began after the liberalisation of investment policies with the introduction of Foreign Exchange Management Act (FEMA) in June 2000. In March 2003, the automatic route was liberalised significantly to enable Indian parties to fund to the extent of 100 per cent of their net worth.

This limit was further increased to 200 per cent of their net worth in 2005 and
to 300 per cent in June 2007. This has further enhanced to 400 per cent of the net worth in September 2007. The limit for portfolio investment by listed Indian companies in the equity of listed foreign companies was raised from 35 per cent to 50 per cent of the net worth of the investing company in September 2007.

Funding a large acquisition through local borrowings was difficult till mid-2000s as the local bond market was not deep enough. In April 2003, banks were permitted to extend credit only up to 10 per cent of their unimpaired capital funds, subject to certain terms and conditions.

In November 2006, the limit was extended to 20 per cent. However, this facility was available only to those firms where the company is a wholly owned subsidiary or Indian companies having holding of more than 51 per cent abroad. Since June 2005, Indian banks were allowed to extend financial assistance to Indian companies for acquisition of equity in overseas firms.

Companies were also allowed to raise resources by an overseas SPV
or joint ventures of an Indian company. RBI has also raised ceilings on foreign currency borrowings of an Indian company from $500 million to $750 million in October 2006. As a result of these policy changes, the ratio of Indian FDI outflows to Indian FDI inflows has increased from 0.21 per cent during
2000-01 to 0.59 per cent during 2007-08 . According to RBI statistics, majority of this FDI outflows took place in the form of equity.

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