27 July 2015

Corporate Guarantee – Certainty in taxation not guaranteed!

by S. Sriram

Affiliates of Multi National Enterprises (‘MNEs’), in the recent past, are moving more towards functioning independently from their parent, operational and financial.  The freedom given in managing their own affairs in growing economies like India, has helped the affiliates to grow faster in the local markets.  However, when it comes to financing their capital requirements or for gaining the goodwill of a customer, the affiliates are forced to look back their parents for a guarantee.

Indian banks, when lending to Indian affiliate of a MNE insist on a guarantee from its parent company, or in any case, the guarantee results in a significant saving on the lending rate.  Similarly, while awarding high value turnkey contracts or while entering into concession agreements, the awarders, primarily Government entities or Public Sector Undertakings, require a performance guarantee to be executed by the parent company of the MNE affiliate.

The vice versa is also true.  Indian MNCs operating in foreign jurisdiction, seek to take advantage of the low cost of borrowing in their home jurisdiction, rather than borrowing from its parent at twice the local market rates.  The borrowing is however required to be guaranteed by the Indian parent. Similarly, performance guarantees are as well given by Indian parent to its overseas subsidiaries in many cases.

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