MUMBAI: Reserve Bank of India (RBI) has slapped notices to at least eight companies — including some software firms — amid concerns of round-tripping of fund and violation of rules on foreign borrowing.
The banking regulator has questioned the investments made by overseas joint ventures and wholly-owned subsidiaries of these companies into other Indian entities.
The central bank suspects that some Indian groups and business families have misused overseas arms to raise cheap dollar loans and bring back the money as foreign direct investment (FDI) into local outfits owned by the same group.
RBI, in its letter sent over the last one month, has asked the companies whether specific approvals were taken for creating such structures, a senior banker told ET.
The regulator has in similar cases directed companies to unwind such investments, accept contravention committed under the Foreign Exchange Management Act (FEMA), and cough up a settlement fee for compounding the offence.
The nature of the fund-flow could typically be like this: company A floats a subsidiary or acquires an offshore company (say B, in the US), with B subsequently raising external commercial borrowing to buy equity of company C in India.
According to RBI’s order, either B will have to sell off its stake in C or A will have to divest its holding in B. But this would not be painless if a business group — particularly infotech firms which operate in multiple jurisdictions and post their engineers in various locations — have genuine business reasons and commercial considerations that justify such fund-flow.
According to sources in the financial markets, offshore structures such as these have indeed been used in the past by Indian manufacturing and a few real estate companies to sidestep stringent regulations on external commercial borrowings (ECBs) in accessing inexpensive loans overseas.
The regulator is taking a closer look to figure out whether a slice of the inflow masquerading as FDI is actually leveraged offshore money and round tripping of the undeclared fund that was earlier parked in the bank account of foreign unlisted companies where the Indian group has a sizeable control.
“However, RBI is yet to question the inflow from old overseas JVs or subsidiaries which have been in existence since the days of FERA. While some firms do indulge in such sharp practices, it will be unfortunate if genuine operating companies with bona fide businesses are pulled up,” said another person familiar with the development.
Under the circumstances, RBI may have to come out with a certain clarification to spell out the nature of overseas subsidiaries and investments that are permissible. “One is not clear about the ‘specific approval’ that RBI is taking about in its notices. An overseas company that is acquired may have pre-existing subsidiary or surplus cash,” said the person.