The Reserve Bank of India (RBI) is considering implementing a new policy of formally reviewing companies’ eligibility to proceed with foreign subsidiaries and joint ventures. The central bank would reach its conclusions based on firms’ track record of investing abroad.
According to reports in the Economic Times, the Indian banking regulator is increasingly concerned that overseas investments have frequently been exploited to transfer capital and divert funds out of the country. Current guidlines allow firms based in India to remit, unchecked, up to 400% of their net worth abroad.
Mitil Chokshi, senior partner at Chokshi and Chokshi told the Economic Times: “Track record could mean at least past three years of profitability or average profitability. Probably, there could be other conditions like the minimum age of the company, absence of defaults on bank loans and any outstanding with the government,” a person aware of the matter told the ET.
“Forensic audits of companies following bank defaults demonstrated how the ODI route was used to take money out of India, the report highlighted. “Many believe such an exercise could have pre-empted some of the fund diversions. The track record criterion existed in the past. It was done away with to encourage businesses. The investment limit (linked to net worth) was also progressively raised.”
A few weeks ago, the RBI cautioned eight Indian firms for allegedly using offshore companies to channel out borrowed money, which was then returned to the Indian companies under the guise of FDI.