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FED ER AL RESERVE BANK O F NEW YORK r Circular No. 6 1 0 2 ~1 L January 25, 1968 J Foreign Direct Investment Regulations of U. S. Department of Commerce Miscellaneous Amendments and General Authorization No. 1 To All Banks and Other Financial Institutions in the Second Federal Reserve District: The following statement was made public January 22 by the U. S. Department of Commerce: Secretary o f Commerce Alexander B. Trowbridge announced today certain amendments and a general authorization covering the treatment of foreign borrowing by U.S. companies in the new Foreign Direct Investment Program. General Authorization No. 1 permits U.S. companies to make repayments on their foreign borrowings and to honor guarantees made for the benefit of their foreign affiliates in case of default. This treatment of foreign obligations of U.S. firms has already been permitted in practice in specific cases; the General Authorization formalizes this practice. Repayments will be permitted on both existing and future loans and guarantees. General Authorization No. 1 has two provisions designed to dampen the impact o f any sub stantial net outflow of funds as a result of repayments on a foreign loan or on a guarantee. First, any company which uses U.S. funds to make these repayments will be required to deduct this amount from its allowable base in the future. Second, on new loans and guarantees, a certificate is required in order to screen out prospective borrowers who have no prospects of repaying from foreign source funds. General Authorization No. 1 also contains provisions clarifying the status o f international finance subsidiaries established for the purpose of borrowing in the Eurodollar market. It is expected that the General Authorization will be utilized by companies with the capability of generating sufficient foreign earnings to repay their borrowing. The amendments to the Regulations issued under Executive Order 11387 are principally technical in nature. Both the amendments and General Authorization No. 1 will be published in the Federal Register o f Tuesday, January 23, 1968. Additional general authorizations and amendments to the regulations can be expected in the future, with particular reference to accommodating the rules on repatriation o f liquid foreign assets to the new provisions o f General Authorization No. 1. Printed on the following pages are excerpts from the Federal R egister of January 23, containing the texts of the amendments and the general authorization referred to in the above statement. Additional copies of this circular will be furnished upon request. A lfred H ayes, President. RULES A N D REGULATIONS (a) A net contribution to the capital of an affiliated foreign national; (b) The acquisition of an interest in, or an increase in net interest in, an affil iated foreign national; (c) The acquisition of an obligation C hapter X — Office of Foreign Direct of an affiliated foreign national, regard Investm ents, D epartm ent of C o m less of the maturity date of the obliga tion, to the extent the principal amount merce of all such obligations exceeds that of obligations of the direct investor ac PART 1000— F O R E IG N DIRECT quired by such foreign national, except IN V E S T M E N T R E G U L A T IO N S obligations acquired by a direct investor by subrogation in connection with trans M isce lla n e o u s A m e n d m e n ts fers described in paragraphs (e) and (f) of this section; In order to clarify the scope of the (d) A net increase in loans or ad Foreign Direct Investment regulations, vances upon open account to an affiliated foreign national; certain amendments thereto are set out (e) A transfer to a foreign national below. Both the regulations and these in satisfaction of an obligation of a direct amendments implement Executive Order investor incurred as a result of (1) a 11387, 33 F.R. 47. Since a foreign affairs guarantee of an obligation of an affili function of the United States is involved, ated foreign national to a foreign the requirements of 5 U.S.C. 553 are not national, or (2) the assumption of a lia applicable. In any event, because of the bility of an affiliated foreign national to need for immediate clarification it is a foreign national; hereby found that notice and public pro (f) A transfer to any other person cedures prior to the promulgation of wheresoever located in satisfaction of an these amendments to the regulations, obligation of a direct investor incurred and making the amendments subject to as a result of (1) a guarantee of an ob the effective date limitation of subsection ligation of an affiliated foreign national (d) of that section, are impracticable to a person within the United States, or and contrary to the public interest. (2) the assumption of a liability of an 1. In § 1000.201, paragraph (a) (intro affiliated foreign national to a person ductory text) is amended to read as within the United States; follows: (g) A transfer of funds or other prop (a) Except as specifically authorized erty to a foreign national in repayment by the Secretary of Commerce (herein or satisfaction of indebtedness incurred after referred to as the Secretary) by before or after the effective date to the means of regulations, rulings, instucextent the use of the proceeds of such tions, authorizations, licenses, waivers, indebtedness, whether occuring before or exemptions or otherwise, all of the or after the effective date constituted a following transactions directly or indi transfer of capital. rectly by or on behalf of or for the bene 4. Section 1000.315 is revised to read fit of a direct investor are prohibited on as follows: or after the effective date, if any such § 1000.315 General authorization and transaction involves a direct or indirect exem ption. transfer of capital to or within any foreign country: The terms “ general authorization” and * * * * * “general exemption” mean those author izations and exemptions, the terms of 2. Section 1C00.305 is revised to read as which are set forth in this part or pub follows: lished in the F ederal R e g ist er . § 1000.305 Affiliated foreign nationals. § 1000.504 [A m ended] The term “affiliated foreign national” 5. In § 1000.504, paragraphs (a) and means any foreign national in which a (b) are revised to read as follows: person within the United States is, or (a) Subject to the provisions of para shall become as a result of a transfer of graphs (b) and (c) of this section, the capital, a direct investor. following provisions of this section shall 3. Section 1000.312 is revised to read apply to the whole of aggregate direct as follows: investment in any year if such aggregate investment is in excess of $100,000. § 1000.312 Transfer o f capital. (b) (1) In determining the existence, or the extent, of a transfer of capital The term “ transfer of capital” shall during any year within the meaning of mean a transfer of capital, directly or this section and in determining the ex indirectly, by or on behalf of, or for the tent to which a transfer of capital dur benefit of, a direct investor directly or ing any year is authorized by this section, indirectly to or on behalf of, or for the both the amount of direct investment benefit of an affiliated foreign national during the year or years and the average or in connection with the acquisition of amount of direct investment during the an interest in an affiliated foreign na years 1965 and 1966 inclusive shall be tional (including any foreign national calculated by deducting such portion o f which shall become affiliated as a result net borrowings (whether incurred in of or in connection with such transfer such year or any previous year) by the or acquisition), including, but not by way direct investor from foreign nationals of limitation: Title 15— COMMERCE AND FOREIGN TRADE other than affiliated foreign nationals as is or was expended in such direct invest ment (including for this purpose bor rowings occurring after the date of such direct investment but as part of one transaction or a group of integrated transactions, provided the borrowing oc curs within 90 days after such transfer of capital and during the same y e a r ): Provided, however, That amounts so bor rowed with an original maturity of less than 12 months from the original date of borrowing shall not be so deducted unless, in the case of a borrowing after the effective date, there exists provision for renewal, extension or continuance of such borrowing for a total term of at least 12 months, and the direct investor certifies to the Secretary that it reason ably expects that such borrowing will not be repaid in less than 12 months from its original date or, in the case of a borrowing expended in direct invest ment during 1965 and 1966 inclusive, such borrowing was not in fact repaid in less than 12 months from the original date of such borrowing; (2) In determining the existence, or extent, of a transfer of capital by cr on behalf of, or for the benefit of, a person within the United States who is a direct investor directly or indirectly to or on behalf of, or for the benefit of, a foreign nat'onal which is an aT:liated foreign national during any year within the meaning of this section, there shall be included any transfer of capital by which such person within the United States becomes a direct investor and all transfers to or on behalf of, or for the benefit of, such foreign national (which were not transfers of capital) by cr on be half, or for the benefit of, such person within the United States within 12 months (whether or not during the same year) prior to the date of the transfer of capital by which it became a direct investor. § 1000.505 f Am ended J 7. Section 1000.505 is amended by in serting “ ( a ) ” before the first paragraph thereof, by redesignating paragraphs (a) and (b) as subparagraphs (1) and (2), respectively, and by adding at the end thereof a new paragraph <b) reading as follows: (b) Nothing contained in this section shall prohibit a direct investor, although such direct investor is also a foreign national, from transferring the proceeds of any borrowing from or other credit ex tended by a foreign national outside the United States (other than an affiliated foreign national) to a national or na tionals of any country or countries listed in any Schedule or Schedules but such exemption shall not be deemed to exempt such direct investor from com pliance with S 1000.504(a). Dated: January 22, 1968. A. B. T r o w b r id g e , Secretary of Commerce. (F.R. Doc. 68-950; Filed, 3; 11 p.m.) Jan. 22, 1968 NOTICES DEPARTMENT OF COMMERCE agreement, application for letter of cred it, standby agreement, or contingent con tractual commitment involved in soOffice of the Secretary called “through put” agreements, “ take or pay” contracts, “ keep well” agree ments, and other similar agreements. <d i “International finance subsidiary” Office of Foreign Direct Investm ents means a corporation organized under the |G eneral A u th orization No. 1 1 laws of the United States or of any State, territory, possession, D ;strict of Colum T R A N SFER S O F C A PIT AL bia, or the Commonwealth of Puerto Rico, all of the stock (except directors’ qualifying shares) of which is owned directly or indirectly by a direct investor and the principal business of which is This is a General Authorization to borrow funds from foreign nationals, established to permit, subject to various other than affiliated foreign nationals, conditions and exceptions, certain trans or to hold debt or equity securities of fers of capital by direct investors in re affiliated foreign nationals, or both. payment of existing and future in S e c . 2. Authorized Transfers of Capi debtedness of direct investors and of tal. (a) Transfers of capital in connec affiliated foreign nationals. This General tion with indebtedness of a direct inves Authorization includes authorization of tor or an affiliated foreign national transfers between a direct investor and (whether incurred before or after the its international finance subsidiary and effective date of the regulations) are delivery of stock on the exercise of con authorized as follows: version rights incident to the issuance (1) If such transfer is made, pursuant of certain instruments of indebtedness to a guarantee, in payment of, or to en and certain other matters relating to able the affiliated foreign national to borrowings. pay, indebtedness of such affiliated for This General Authorization and the eign national (including an international clarifying amendments to the Foreign finance subsidiary) when and as due and Direct Investment regulations issued to payab’ e (not including payment pur day constitute the first of a series of suant to a call or like provision resting documents to be released and published control of the time of payment in the by the Office of Foreign Direct Invest direct investor or such affiliated foreign ments dealing, by way of authorization, national) : Provided, That, in the case of interpretation, amendment, or other a guarantee, made after the effective wise, with matters within the scope of date, of such indebtedness, the direct Executive Order 11387. Nothing con investor prior to the making of such tained herein should be construed as guarantee on or before March 1, 1968 expressing the position of the Office on (whichever is later), shall have delivered any but the matters covered hereby. to the Secretary a certificate executed This General Authorization is issued by a duly authorized representative of to implement further Executive Order the direct investor stating the amount of 11387, 33 F.R. 47, and the Foreign Direct indebtedness covered by the guarantee Investment regulations, 33 F.R. 49, as and certifying that the direct investor amended in this issue of the F ederal has no reason to believe, under existing R e g ist e r , supra (hereinafter called the circumstances, that the affiliated foreign “ regulations” >. national will be unable to pay or other wise satisfy such indebtedness without S ec tio n 1. Definitions. For purposes resort to performance under the guaran of this General Authorization: (a) “ Bank” means any domestic bank tee (except, if applicable, transfers of capital referred to in paragraph (d) of as described in section 1000.317 of the this section 2 >. regulations, any foreign branch or sub ( 2 ) If such transfer is made in pay part thereof within a foreign country, ment of, or to enable the affiliated foreign and any bank, trust company, private national to pay, indebtedness incurred bank, or merchant bank organized or prior to the effective date, of an affiliated incorporated under the laws of any foreign national (including an inter foreign country. national finance subsidiary) to a bank, <b) “ Indebtedness” means an obliga tion to pay money to creditors in respect when and as due and payable (net in cluding payment pursuant to a call or of bills, notes, bonds, debentures (includ like provision resting control of the time ing notes, bonds, and debentures convert of payment in the direct investor or such ible into stock), lines of credit, over affiliated foreign national >: Provided, drafts, letters of credit, and short term commercial paper, or installments or por That, the direct investor has determined in good faith that the affiliated foreign tions of any of the above. national has not sufficient funds avail <c) “ Guarantee” or “ guarantees” mean able to it to pay such indebtedness. (1) a written acknowledgement of sec <b) Transfers of capital in repayment ondary responsibility (whether or not of indebtedness of a direct investor legally enforceable) to a bank for the (other than transfers described in para indebtedness, or with respect to the fi graph (a ) of this section 2 ), when and as nancial condition of another, and <2) a due and payable (not including repay written guarantee, endorsement, surety ment pursuant to a call or like provision resting control of the time of payment in the direct investor), are authorized: Provided, That, a transfer of capital in repayment of such indebtedness shall have the effect described in section 3 of this General Authorization to the extent that (1) the use of the proceeds resulting therefrom constitutes a transfer of capi tal after the effective date which is not authorized or exempted pursuant to any provision of the regulations or which would have constituted such a transfer of capital prior to the effective date within the meaning of § 1000.312 of the regula tions had they been in effect when such indebtedness was incurred, or (2) the indebtedness was deducted from direct investment during 1968 or any subse quent year under § 1000.504(b) of the regulations: And further 'provided, That, with respect to indebtedness incurred after the effective date, the direct in vestor prior to incurring such indebted ness or on or before March 1, 1968 (whichever is later) shall have delivered to the Secretary a certificate executed by a duly authorized representative of the direct investor stating the amount of the indebtedness and to the effect that the direct investor has reason to believe that, under existing circumstances, the borrowing will ultimately be repaid or satisfied from sources outside the United States. (c) For purposes of t h i s General Authorization, any indebtedness which is incurred under a fixed loan commitment or line of credit established prior to the effective date shall be deemed indebted ness incurred prior to the effective date, whether or not such loan commitment or dine of credit or obligation is subse quently renewed or otherwise extended: Provided, That, (1) any indebtedness in curred pursuant to a material increase, after the effective date, in the maximum limit of such loan commitment or line of credit shall be deemed, pro tanto, to be indebtedness incurred after the effective date, and <2) any transfer of capital in repayment of indebtedness, whenever incurred, shall be deemed a transfer of capital in repayment of indebtedness in curred after the effective date t,o the extent such repayment is made without resort to the option in the debtor, if any, to renew or extend such indebtedness (except repayments involved in the re funding of such indebtedness with the same or another lender). <d) Transfers of capital consisting of delivery of equity securities pursuant to conversion or similar rights to holders of instruments of indebtedness issued by a direct investor or its affiliated foreign national (including an international finance subsid’ ary), which instruments were or are sold through underwriters in accordance with agreements limiting such jales (other than sales to under writers and dealers) to persons other than residents or nationals of the United States, are authorized. ISuch transfers of capital shall have the effect described in section 3 of this General Authorization, the amount of the. transfer in each year NOTICES to be equal to the aggregate principal United States (other than affiliated for amount of indebtedness surrendered in eign nationals) of any portion of the such year by the holders thereof in direct investor’s interest in an affiliated exchange for such equity securities.] foreign national, or the obligations Any acquisition by the direct investor of thereof, or portfolio securities of a non such instruments of indebtedness or the affiliated foreign national, not otherwise cancellation thereof or the transfer of deducted in determining the amount of such equity securities to the affiliated transfers of capital. foreign national which originally issued (b) Such reduction shall first be ap the instruments of indebtedness, in con plied to the amount of direct investment nection with the exercise of such con remaining authorized under § 1000.504 version or similar rights, will not consti (a) of the regulations for the current tute a transfer of capital. year at the date of such transfer of capi (e) Any person other than an affiliatedtal, and then to the total amount of di rect investment authorized thereunder foreign national who has extended credit or shall contemplate the extension of in each succeeding year, until aggregate reductions equal to such transfer of capi cred’t in connection with or in anticipa tion of transfers of capital authorized by tal shall have been made. In computing this General Authorization upon the the amount of such reductions, (1) the transfer of capital shall be allocated filing of any certificate with the Secre among Schedule A, B, and C countries in tary required by this General Authoriza tion, or who otherwise has or shall have the same proportions as the proceeds of the indebtedness satisfied by such trans reason to rely on the existence of such certificate, may rely on such certificate fer were originally employed (without as filed with the Secretary by the direct regard to interim or intermediate invest investor or an authorized representative m en t), and (2) in the case of the pay thereof attesting to the facts which would ment of indebtedness only part of which constitutes a transfer of capital subject make such authorization available. to this section 3, such payment shall be S e c . 3. Effect of certain transfers, ( a ) proportionately allocated to such trans Each transfer of capital authorized pur suant to paragraph (a) of section 2 or fer, all subject to the right in each case in the Secretary to reallocate such made subject to this section by the pro amounts, after notice to the direct in visions of paragraph (b) or (c) of sec tion 2 shall result in an equal reduction vestor, in a reasonable manner consistent of the amount of direct investment with the sense of the regulations. authorized by § 1000.504(a) of the regu (c) In calculating reductions of direct lations; provided that, such reduction investment under paragraphs (a) and shall not be made to the extent that (b) of this section 3, any such reduction such transfer of capital is offset by funds with respect to paragraphs <1) and (2) transferred after the effective date to of § 1000.504(a) of the regulations shall an account owned by such direct investor be applied both to transfers of capital denominated in U S. dollars at a domestic authorized by such subparagraphs and, bark if such funds, whether transferred to the extent necessary, in calculating before or after the date of such transfer the amount of total earnings of affiliated of capital, are from such of the direct foreign nationals required to be re investor’s resources ss are derived from patriated pursuant to paragraphs (a) (1) payments to it by affiliated foreign and <b), respectively, of § 1000.202 of nationals outside the United States in the regulations; any such reduction made excess of amounts representing earnings with resoect to paragraph (3) of required to be repatriated by § 1000.202 § 1000.504(a) of the regulations shall re of the regulations, or (2) the proceeds sult in an equal increase in the amount of total earnings required to be repa of sale to foreign nationals outside the triated pursuant to paragraph (c) (2) of § 1000.202 of the regulations. Any in crease in repatriation of earnings thus required by this paragraph (c) shall be applied to earnings of the current year and of each succeeding year until ag gregate increases equal to such transfer of capital shall have been made. S e c . 4. International finance subsidi aries. Unless in a specific case the Director shall give notice to the contrary to the direct investor, transfers of capi tal between a direct investor and its in ternational finance subsidiary or sub sidiaries are authorized. Sec. 5. Effect upon banks. A bank is authorized to transfer funds to a. foreign national or nationals by or upon the in structions of any direct investor or affil iated foreign national, to make loans and other extensions of credit, transfer the proceeds thereof, and to receive pay ments with respect thereto, all. without responsibility as to whether the same may be in contravention of the regula tions or the conditions of any authoriza tion issued pursuant thereto, except for requiring production of a copy of the certificate required by the regulations or by general or specific authorizations to be filed with the Secretary if such certifi cate is required for the repayment of the obligation to the bank: Provided, That nothing in this section 5 shall relieve any direct investor from compliance with the regulations or the provisions of any rul ing, instruction, authorization, license, waiver or exemption issued pursuant thereto. S ec . 6. Effective date. This General Au thorization shall be effective as of the effective date of the regulations. Dated: January 22, 1968. A. B. T r o w b r id g e , Secretary of Commerce. (F.R. Doc. 68—950; Filed, 3; 11 p.m.) Jan. 22, 1968