RBI Tightens Scrutiny On India Inc's Overseas Deals

India's regulatory framework for Indian companies investing abroad is becoming increasingly stringent with time, as the authorities are increasingly attaching foreign exchange regulations to the anti-money laundering safeguards for companies investing abroad through joint ventures and subsidiaries.

The Compliance Backbone

The Foreign Exchange Management (Overseas Investment) Rules, 2022, framed by the Reserve Bank of India govern the Overseas Direct Investment by Indian companies. In this scheme, the overseas investor will be required to submit the following documents:

Undertaking certifying compliance with the FEMA and the Prevention of Money Laundering Act; Net worth certifications; Reporting through authorised dealer banks.

A Widening Due-Diligence Net

In recent changes, banks and financial intermediaries are required to check the source of capital before it leaves the country.

The new provisions increase and strengthen the collection of information from banks and financial institutions regarding senior management, beneficial owners, and the ultimate source of funds, and may even require the complete disclosure of the structure of beneficial ownership and control of small overseas investments.

Authorised dealers are also expected to carry out enhanced due diligence – they must check whether the money is being transferred to an overseas investment as it is reported in income and declared in business activity and purpose, and if it is not clear, it will be marked as suspicious for the Financial Intelligence Unit-India.

Further, there has been growth in cross-agency data sharing. Changes to FEMA's overseas investment information now allow for the exchange of information with agencies that enforce the Prevention of Money Laundering Act, establishing a single data trail for overseas transactions.

Rectifying Past Lapses

The RBI has also indicated a more stringent approach towards legacy non-compliance. The Reserve Bank of India (RBI) issued a significant order, cautioning Indian corporations that are currently in the process of conducting overseas direct investments that they must complete the past disclosure obligations before entering into new ODI transactions, or risk going through adjudication prior to making future foreign monetary investments. The Reserve Bank of India is the banking authority in India.

What the implications of that are for business

The rules are much more demanding for Indian conglomerates that are now increasingly creating joint ventures and step-down subsidiaries in foreign countries.

The beneficial ownership thresholds have been reduced, and anyone who owns 10% or more of a company or trust, or who has voting rights in or effective control over a company or trust, is deemed to be a beneficial owner, and will need to be disclosed at KYC and compliance checks.

Consequences for noncompliance are very real and have a definite financial and legal impact. Property attachment, including of foreign properties suspected to be involved in money laundering by the Enforcement Directorate is possible and fines up to ₹ 5 lakh per violation for FEMA are also applicable. FEMA can, of course, be penalised under PMLA with a prison term as well.

The Bigger Picture

Combined, these measures make up India's wider push to make its capital-outflow regime compliant with international money-laundering regulations established by groups like the Financial Action Task Force (FATF) while its outward investment flows remain robust, with India's manufacturing, technology, and financial services companies all continuing to expand their overseas operations at a strong rate.