Indians could conquer the world but for the quagmire of ambiguously and often irresponsibly drafted laws and policies which prevent Indian business houses from moving at the agility that is required of global market leaders. Innocent business houses have faced unwanted and unwarranted hardship because legislations and policies have not envisaged the scenarios that India is facing at this point in time and their interpretation is left to the whims and fancies of bureaucrats.

Take the case in point of guarantees given by an Indian parent company on behalf of its subsidiary. Generally, under the Foreign Exchange Management (Guarantees) Regulations, (Guarantee Regulations), guarantees are permitted to be provided by authorised dealers only. One of the carve-outs under the Guarantee Regulations, however, provide that a company in India promoting or setting up outside India, a joint venture company or a wholly owned subsidiary, to or on behalf of the latter in connection with its business.

Consequently, under the Guarantee Regulations, the Indian parent company can guarantee the obligations of its subsidiary if it is in connection with the subsidiaries’ business. However, the Guarantee Regulations are silent on the aspect of step-down subsidiaries of the Indian parent located outside India.

Further, a wholly-owned subsidiary has been defined under the Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2000 (ODI Regulations) as a foreign entity registered and incorporated in accordance with the laws and regulations of the host country, whose entire capital is held by the Indian party.

What happens if the entire share capital of the step-down subsidiary is held by the Indian party? Examining this concept in the light of the Indian Companies Act, 1956 (the Act) which recognises the concept of subsidiary, the step-down subsidiary would also be a wholly-owned subsidiary. This is because under the Act, if B is a subsidiary of A and C is a subsidiary of B then C is also the subsidiary of A.

Since the Guarantee Regulations are silent in this regard and the Act is not persuasive enough to convince all concerned, experience shows that a lot of unnecessary delay and harassment is caused due to the said issue, often at the cost of goodwill of the transacting companies.

Further, even under Section 2(k) of the ODI Regulations an Indian party has been defined to include Indian companies together with their foreign subsidiaries. Thus, even a step-down subsidiary would fall within the definition of a wholly owned subsidiary.

The other issue at hand is the permission for purchase/acquisition of foreign securities under the ODI Regulations granted to Indian resident individual employees (employees). Under the cashless mechanism employees may obtain any foreign security, which would include debentures, equity shares, bonds etc but under the cash mechanism, they can only purchase equity shares of the said foreign company. The rationale for such a provision is beyond comprehension.

Some more ambiguity is added in this regard by circular No. 68 dated January 1, ‘03 issued by the Reserve Bank of India (RBI). The said circular removes the statutory limit of USD 20,000 for purchase of foreign securities by Employees under the Employee Stock Option (ESOP) Scheme.

The circular further states that the other conditions as indicated below remain unchanged: The shares under ESOP should be offered at the concessional price. The foreign equity holding in the Indian company should not be less than 51%. This creates a nebulous area for Indian subsidiaries of foreign companies that are subsidiaries by virtue of control or are step-down subsidiaries.

Are we to construe that the Employees of such subsidiaries cannot claim the benefit that is extended to the Employees of subsidiaries by virtue of equity holding. Or are we to construe that the previous position prior to this circular stands, which means that Employees of Indian subsidiaries by virtue of control or step-down subsidiaries are eligible to purchase foreign equity shares up to USD 20,000 of the foreign parent company. Well, we are in a `go figure it out’ sort of scenario!!

Secondly, the ODI Regulations and the circular above, state that the shares in an ESOP scheme should be offered at a concessional price. But what they fail to clarify is at what point in time should the price of the shares be concessional. Should the shares be concessional at the time of grant of the option or at the time of exercise of the option?

Such ambiguous drafting may cause undue anxiety to companies who want to comply with the plethora of Indian regulations, notifications and circulars, if only they knew what the authorities were contending!

A lot of these hassles can be avoided if an advance ruling procedure could be established by foreign exchange regulatory authorities (authorities) also. The advance ruling could be sought by any person who is proposing to enter into a foreign exchange transaction. The authorities would make their ruling based on the facts of the case, which would be binding on the applicant and the authorities. This will provide a good source of revenue for the authorities and provide clarity to the applicants too. Thus it will be a win- win situation for all!!

Often, when clarifications are sought from the RBI, they are usually not forthcoming in writing, even though a bona fide non-compliance could lead to serious implications. Since the country is in transition, clarifications are bound to be sought on a frequent basis and as a part of good governance they must be provided in a timely fashion in the spirit of liberalisation.

Income tax and excise authorities have already established a mechanism for advance ruling, the Securities and Exchange Board of India (Sebi) have announced their intention of establishing an advance ruling authority and it is high time the RBI walks down this path.