RBI Action: Now the Reserve Bank of India (RBI) has drawn attention to the issue of Indian companies investing money abroad on a large scale. On one hand, foreign portfolio investors (FPIs) are withdrawing money from the Indian market, on the other hand, the challenge of managing the rupee against the dollar remains. Amidst this environment, the banking regulator has tightened scrutiny of large foreign investments, namely Overseas Direct Investment (ODI) of Indian companies.

According to a report in Economic Times, last week the RBI has submitted a detailed and fixed norms checklist to the country’s major banks. This list details all the information that banks have to collect from corporates investing abroad and provide to the RBI. The new rule will apply to all foreign investments above $1 billion. Apart from this, if any Indian company invests more than the prescribed limit of four times its total net worth abroad, it will also have to go through this strict scrutiny.

There will be no restrictions but a close watch will be kept

The Central Bank has not imposed any restrictions or restrictions on investing abroad. But with the logic behind the deals, concrete reasons and financial details sought from the remittance banks, it is clear that the RBI is keeping a close eye on large funds moving out of the country. If we look at the statistics, foreign investments have been the main reason for the outflow of dollars from the country in recent times. Five years ago, foreign investment by Indian companies was around $11 billion, which is expected to cross $30 billion in fiscal 2026.

The RBI has given clear directions to the banks that they should not proceed with the deal just by looking at the valuation report of the foreign company, but should also give full satisfaction on the basis of that report. Banks have to specifically look at how much premium is being paid for the deal. They have to check whether more money is being paid compared to the intrinsic value of the foreign company.

Whereas if the deal is being done through a swap of shares, the exchange ratio should be absolutely correct based on the valuation of both the companies. According to Suhas Bendre, an expert on the Foreign Exchange Management Act (FEMA) and founder of Bendre Consultancy, this is a precautionary move by the RBI so that large foreign investments do not become loss-making deals in the future, causing losses to Indian companies as well as the country.

Companies have to answer the questions

Under the new system, banks will not only have to check the investee company’s accounts in general, but also the quality of its earnings, past experience of overseas investments and current foreign liabilities. Apart from this, it also has to be seen how much the company is able to withstand any financial shocks in the future. Banks will have to ask corporate customers direct questions about why they chose a foreign company instead of buying an Indian company.

Companies will also have to explain how the deal relates to their current business. They have to specify whether the foreign entity is actually an operating company or just a holding company. How much profit is expected from the deal, how long the company will hold the investment and what is the exit path from the investment in the future, all this has to be stated.

Moin Ladha, partner at Khaitan & Company, says that these rules have increased the onus of proof on the applicant companies. Banks also have to independently examine the rationale and risks behind the deal. Now through stress testing and other methods, the financial strength of Indian investors, feasibility of deals and benefits to India are being thoroughly scrutinized.

The benefits to the country’s economy have to be accounted for

Banks have to assess the legitimacy of the foreign company as well as the country risk. According to Harshal Bhuta, co-founder of tax and regulatory consultancy firm Ascentium India, this detailed checklist given to banks is purely due diligence. The old master directive already had the general rules like capacity of the foreign company, benefit to India and track record of the Indian company, but the new checklist asks for every minute information that was often missed earlier. Amid ongoing fluctuations in the rupee, approval will be granted only in cases where banks are fully satisfied with the genuineness of the deal.

For example, if a deal involves related parties or is likely to transfer value outside India, banks will scrutinize it more rigorously. Apart from this, the banks have to give a full account and time frame of how the massive foreign investment will help the Indian economy.

How much the deal will increase India’s exports, how much dependence on imports will decrease, how new markets will be accessed, how new technology or intellectual property (IP) will come to India and how much money will come back to the country in the form of dividends or fees. At the same time, if the Indian parent company gives a guarantee to its foreign unit to provide cheap loans, banks also have to assess the risk of encashing that guarantee in the future.