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Now the Reserve Bank of India (RBI) has started tightening its grip on the rapidly growing global empire and foreign investment of the Indian corporate world (India Inc). According to the ET report, the central bank has significantly intensified the scrutiny (investigation and monitoring) of outbound direct investment (ODI) made by Indian companies abroad. This step has been taken at a time when Indian companies are making a huge global investment (Global Push) of about 34 billion dollars to expand their foothold in the markets around the world. In such a situation, RBI has now come forward in the role of a strict ‘gatekeeper’ for this entire fund flow.
Why did the Reserve Bank become strict?
According to banking sources and regulatory experts, there are several major financial and economic reasons behind this sudden increase in strictness by RBI:
- Prohibition on round-tripping: The central bank’s main focus is on whether, under the pretext of sending Indian money abroad, it is being diverted back (through shell companies) and invested in India’s stock market or real estate.
- Keep an eye on tax haven countries: Investment proposals that involve routing through tax haven countries like Mauritius, Cayman Islands or British Virgin Islands have to undergo very close scrutiny by the RBI.
- Strict adherence to FEMA rules: Ensuring 100% compliance with the rules of foreign investment under the Foreign Exchange Management Act (FEMA) has become the priority of the Central Bank.
Scope of investigation: Where will the problem lie now?
RBI has instructed Authorized Dealer (AD) banks to not only examine the paper applications related to foreign investment, but also to scrutinize their actual purpose in depth. Now companies will have to give more answers on these three fronts:
- Multi-Layered Structure: If any Indian company is investing money by forming several subsidiaries or Special Purpose Vehicle (SPV) instead of investing directly abroad, then it is being closely scrutinized.
- Real objective of business: Companies will have to prove that the foreign investment is for the expansion of their core business and not just to park the funds elsewhere.
- Track Record of Promoters: The financial history of the parent Indian investing company and its promoters is also being re-examined to rule out any possibility of default or money laundering.
What will be its impact on India Inc and deals?
Experts believe that this new vigilance of RBI will have both immediate and long-term impact on the Indian corporate world. Due to this increased scrutiny, the completion time (turnaround time) of cross-border deals (acquisition or merger of foreign companies) may increase in the future. Companies will now have to take more time for paperwork and approvals.
However, experts also say that in the long term it is very important for the financial stability of the Indian economy. This will strengthen the global credibility of Indian companies and they will remain protected from getting entangled in any international legal or financial disputes.
The dominance of Indian companies on the global stage is continuously increasing, but this step of RBI is a reminder that along with aggressive expansion, strong corporate governance and compliance with rules is equally essential. In the coming days, companies planning foreign investment will have to make their legal and finance structures more transparent.
