RBI cracks the whip on banks, companies over past reporting lapses

Banks, business houses and the Reserve Bank of India (RBI) are in a tangle with the regulator taking a hard stand on past compliance lapses over funding of overseas subsidiaries and joint ventures by corporates.

Several companies, according to banking circles, are unable to make fresh financial commitments to their offshore arms after the central bank made it clear that remittances would be allowed only after the lapses have been identified and fines are paid.

At a meeting a fortnight ago, RBI senior officials turned down a proposal from banks to let corporates transfer funds over on the back of an escrow account mechanism which would facilitate the payment of fines as and when penalties are crystallised.


“But RBI has put its foot down on the matter. It wants banks to go through old records of cross-border transfers to find out all reporting lapses, following which the regulator would review the data to fix the late submission fee and generate a code. Only after that, a company would be allowed to send money abroad. In some cases, it’s an impractical demand, causing inconvenience to the industry,” a senior banker told ET.

The RBI spokesman did not comment on the matter. Financial support to an overseas subsidiary of JV could be in the form of equity infusion, loans, and corporate guarantees.

The reporting lapses could relate to delayed or inaccurate information submitted to RBI. Up to April 13, 2016, there was an additional period of 30 days for submission of the overseas direct investment (ODI) form to the authorised dealer (AD) bank which handled the fund transfer. Since April 14, 2016, companies are required to submit the form on or before the date of financial commitment. Besides, there could be late or incorrect reporting of details on the foreign entity or its step-down subsidiary.

Each foreign entity has a unique identification number (UIN) which is generated at the time of the first remittance. “As things stand, banks will have to check transactions spanning over two decades under each UIN to measure the lapse. A few banks have said it may be difficult to trace old data,” said another banker.

Till now the regulation was taken lightly by banks as well as companies. Most banks did not sensitise their clients on the reporting times lines while corporates were either unaware or under the impression that transgressions like unrecovered export proceeds and over-invoicing/under-invoicing mattered more than the delayed submission of a form on the bank transfer.

Now, banks are chasing their clients with the regulator breathing down their necks. “Our top management has received a letter from RBI on the speedy reconciliation of all the ODI transactions. Therefore, the matter is very urgent. We request you to send us the information to enable reconciliation of the same,” said a letter from a large bank to one of the companies.

According to Harshal Bhuta, partner at the CA firm PR Bhuta & Co, “As the reporting procedure for overseas investment-related transactions is still manual (unlike in the case of foreign direct investment, or FDI transactions), the corresponding LSF (late submission fee) procedure for overseas investment transactions is manual too. As a consequence, the generation of conditional acknowledgement emails by the RBI for payment of LSF is taking an unusually long time —anywhere between 2-3 months. The challenge faced by Indian entities and resident individuals is that they cannot undertake any further overseas investment related transactions such as further infusion of capital or debt, issuing a corporate guarantee, sale of shares of overseas entities, etc. till the conclusion of the LSF procedure.”

The AD bank branches maintain a party-wise record for all overseas wholly-owned subsidiaries and JVs of corporate clients for onward submission to the RBI.

What probably escaped the attention of most corporates was a clause in the `Foreign Exchange Management (Overseas Investment) Directions, 2022’ issued last August, which said, “Restriction on further financial commitment or transfer — AD bank shall not facilitate any outward remittance/further financial commitment by a person resident in India towards a foreign entity until any delay in reporting is regularised.”