Mumbai: Indian businesses are facing a higher scrutiny from banks on overseas direct investments (ODIs). Companies moving funds abroad are being inundated with questions on the business rationale of the offshore venture and its viability.
A company can invest up to four times its net worth in an ODI.
A closer examination of such offshore fund deployment by the banks comes at a time when there has been a dramatic fall in the net foreign direct investment (FDI), which fell over 96% in 2024-25. Net FDI is gross FDI net of ODI and repatriation by foreign investors. Besides fund repatriation, an increase in ODI contributed to the drop in net FDI.
Under the circumstances, a number of authorised dealer (AD) banks, which handle the cross-border transfer of money, are reluctant to approve transactions which do not pass muster. Among the financial institutions at least three large private sector banks have been particularly demanding.
"When it comes to outward remittance transactions, we have lately seen a rise in instances where AD banks are requesting chartered accountant certifications to verify the factual accuracy of varied specific details in cases under their processing. This cautious approach may be attributable to the liberalisation of regulations, resulting in fewer cases being referred to the Reserve Bank of India (RBI) or to the greater responsibility being placed on the banks by the regulator before it accepts their recommendations in approval-related matters," said Harshal Bhuta, partner at the CA firm P. R. Bhuta & Co which specialises in taxation and foreign exchange related regulations.
Another reason for leading banks to looks into ODI proposals could stem from the greater freedom since mid-2022 to write-off foreign investments which turned out to be unviable.
Besides standard details like memorandum of association of the Indian entity, ID of authorised representative, shareholding of the foreign investee company, documents related to its incorporation, and share subscription agreement, banks are asking for undertaking from the resident and non-resident entity on the line of business activity of the overseas entity along with a CA or CPA certificate confirming the correct business activity, profile of the applicant indicating justification for investment abroad, project feasibility report, mentioning why the ODI is being done, profitability, business viability, future projections, business rationale for making remittance.
According to Moin Ladha, partner at the law firm Khaitan & Co, "Such information is requested to assess the commercial substance of the transaction and ensure that the proposed investment is bona fide in nature. Accordingly, entities contemplating an overseas investment should approach the process with a clear, well-prepared plan and have all necessary supporting documents ready." This proactive approach not only facilitates timely regulatory approvals but also helps in demonstrating the legitimacy and commercial rationale of the investment to the AD bank, said Ladha.
Rajesh Shah, partner at Jayantilal Thakkar & Co, a CA and advisory firm, said even when an ODI is for bona fide purpose, the AD banks are making sure that the fund remittance is used for the right purpose. "We have seen AD banks asking for end-use of remittance made from India, and probably because RBI wants a strict monitoring," said Shah.
Industry circles said there are cases where the regulator has put a question on transfer towards meeting outstanding expenses in an ODI venture-- asking banks how they had ascertained that services were actually provided.
After 2022 when the overseas investment regulations were changed, investing companies have to give a declaration confirming that the capital instrument they were subscribing to were in the nature of equity shares and would be fully and compulsorily convertible into equities.
A company can invest up to four times its net worth in an ODI.
A closer examination of such offshore fund deployment by the banks comes at a time when there has been a dramatic fall in the net foreign direct investment (FDI), which fell over 96% in 2024-25. Net FDI is gross FDI net of ODI and repatriation by foreign investors. Besides fund repatriation, an increase in ODI contributed to the drop in net FDI.
Under the circumstances, a number of authorised dealer (AD) banks, which handle the cross-border transfer of money, are reluctant to approve transactions which do not pass muster. Among the financial institutions at least three large private sector banks have been particularly demanding.
"When it comes to outward remittance transactions, we have lately seen a rise in instances where AD banks are requesting chartered accountant certifications to verify the factual accuracy of varied specific details in cases under their processing. This cautious approach may be attributable to the liberalisation of regulations, resulting in fewer cases being referred to the Reserve Bank of India (RBI) or to the greater responsibility being placed on the banks by the regulator before it accepts their recommendations in approval-related matters," said Harshal Bhuta, partner at the CA firm P. R. Bhuta & Co which specialises in taxation and foreign exchange related regulations.
Another reason for leading banks to looks into ODI proposals could stem from the greater freedom since mid-2022 to write-off foreign investments which turned out to be unviable.
Besides standard details like memorandum of association of the Indian entity, ID of authorised representative, shareholding of the foreign investee company, documents related to its incorporation, and share subscription agreement, banks are asking for undertaking from the resident and non-resident entity on the line of business activity of the overseas entity along with a CA or CPA certificate confirming the correct business activity, profile of the applicant indicating justification for investment abroad, project feasibility report, mentioning why the ODI is being done, profitability, business viability, future projections, business rationale for making remittance.
According to Moin Ladha, partner at the law firm Khaitan & Co, "Such information is requested to assess the commercial substance of the transaction and ensure that the proposed investment is bona fide in nature. Accordingly, entities contemplating an overseas investment should approach the process with a clear, well-prepared plan and have all necessary supporting documents ready." This proactive approach not only facilitates timely regulatory approvals but also helps in demonstrating the legitimacy and commercial rationale of the investment to the AD bank, said Ladha.
Rajesh Shah, partner at Jayantilal Thakkar & Co, a CA and advisory firm, said even when an ODI is for bona fide purpose, the AD banks are making sure that the fund remittance is used for the right purpose. "We have seen AD banks asking for end-use of remittance made from India, and probably because RBI wants a strict monitoring," said Shah.
Industry circles said there are cases where the regulator has put a question on transfer towards meeting outstanding expenses in an ODI venture-- asking banks how they had ascertained that services were actually provided.
After 2022 when the overseas investment regulations were changed, investing companies have to give a declaration confirming that the capital instrument they were subscribing to were in the nature of equity shares and would be fully and compulsorily convertible into equities.
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