RBI tightens scrutiny of $1 billion-plus overseas investments amid rupee pressure

Mumbai: The Reserve Bank of India (RBI) is mounting scrutiny on large-value overseas direct investments (ODIs) by India Inc, amid battle to defend the rupee.

Last week, the banking regulator gave leading banks a detailed and standardised checklist, spelling out a slew of ODI information that banks have to collect from corporate clients investing abroad and submit to it. This pertains to all ODIs above $1 billion and beyond the regulatory cap of four times the net worth of the domestic company investing abroad, two persons aware of the development told ET.

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While no controls or curbs have been imposed by the central bank, the rationale, justification, financials, and explanations sought from the banks handling remittances indicate a closer vigil on large ODI outflows at a time India is grappling with pressure on the currency and FPI selloffs.

ODIs, which have significantly contributed to outflows in recent times, crossed $30 billion in FY26 from about $11 billion five years ago.

RBI has categorically laid down that banks while facilitating ODI transactions shall not simply rely on the availability of a valuation report on the overseas entity but also satisfy themselves on the basis of the report. The appraisal, the regulator said, should specifically examine the premium paid and whether the consideration is significantly above intrinsic value, and, in case of a swap, the exchange ratio is independently defensible on the valuation of both entities.

"It is clearly a preventive measure by RBI so that in future large value ODIs do not become impaired investment resulting in loss for Indian entities as well as for the country," said Suhas Bendre, founder of Bendre Consultancy, which specialises on the Foreign Exchange Management Act (FEMA).

Besides doing a customary analysis of the investing company's financials and proposed ODI, banks have to assess the company's quality of earnings, previous ODI experience, existing overseas commitments, and ability to absorb adverse events. Banks have to question corporate clients why a foreign entity is preferred over an Indian acquisition, how is the transaction related to the Indian company's existing business, whether the foreign entity is an operating or holding vehicle, expected commercial return and holding period, and the proposed exit route.

"All this places a stronger evidentiary burden on applicants and greater responsibility on banks to independently assess the rationale and risks underlying these commitments. We are seeing a shift towards closer scrutiny of commercial viability of investments, their benefits to India, and financial resilience of Indian investors through stress testing and other methods," said Moin Ladha, partner at Khaitan & Co.

Banks have to assess the bona fide nature of the foreign entity and country risk. "The detailed checklist shared with banks is closer to an ODI due diligence exercise. While the existing Master Direction on Overseas Investments outlines indicative approval criteria, including foreign entity's viability, benefits to India, and the Indian entity's track record, the checklist fleshes out all information required in great detail which may have been missed out in the past. Given a volatile rupee, this would help facilitate approvals for only those cases where banks are convinced about the genuineness of proposed transactions," said Harshal Bhuta, cofounder at Ascentium India, a tax and regulatory consultancy.

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For instance, where a related-party element exists or the transaction is capable of resulting in a transfer of value outside India, a heightened standard of scrutiny will be done by banks.

In estimating how a large ODI would help the Indian economy, banks have to submit the amounts and timeline of potential benefits like incremental exports from India, import substitution, access to new markets and technology-IP transfer to India, and inflow of dividend and fees. In cases when the Indian parent offers guarantee to lower borrowing cost of the overseas entity, banks have to assess the likelihood of invocation of such guarantees.