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

The Reserve Bank of India (RBI) is tightening its oversight on overseas direct investments (ODIs) by Indian companies exceeding $1 billion, as the nation battles the pressure on the rupee. The central bank recently issued a comprehensive checklist to major banks, outlining extensive information that needs to be gathered from corporate clients involved in large ODI transactions and submitted to the RBI.

This applies to ODIs surpassing $1 billion, which surpasses the regulatory cap of four times the net worth of the domestic company investing abroad.

While no formal controls or restrictions have been imposed, the regulator is taking a closer look at these large ODI outflows to ensure financial stability and mitigate potential losses for Indian entities and the country. RBI has made it clear that banks must not solely rely on valuation reports but also conduct thorough appraisals to ensure the premium paid is justified and defensible.

The banks are required to delve into the investing company's financials and evaluate its earnings quality, previous ODI experience, overseas commitments, and capacity to handle adverse events.

Banks are also tasked with questioning why a foreign entity is chosen over an Indian acquisition, understanding the transaction's relation to the Indian company's existing business, and determining the foreign entity's nature, expected returns, and exit strategy. They must also assess the foreign entity's credibility and country risk.

The RBI's detailed checklist functions as an enhanced ODI due diligence exercise, aiming to approve transactions only when banks are confident about the transaction's merits for India and the financial resilience of Indian investors.