No overseas investment if old lapses not fixed: RBI
May 7, 2025
Synopsis
The RBI is cracking down on corporates with unresolved ODI violations, setting an August 25, 2025 deadline. Companies failing to rectify past lapses face compounding or adjudication before making further foreign financial commitments. This move aims to address non-disclosure of financial details on old ODIs, potentially impacting future overseas deals if compliance isn't addressed promptly.
Corporates will soon be barred from making overseas direct investments (ODIs) unless they come clean on past violations.
The RBI, in an email in end-April, told compliance heads of banks to alert all corporate clients that if they do not fix the old lapses by August 25, 2025, they will have to either undergo the compounding process or face adjudication by the Enforcement Directorate before they can make "further foreign financial commitments", people in banking circles told ET.
The contraventions pertain to a company's failure to disclose financial details on old ODIs-either inadvertently, or due to slack compliance, or simply to hold back particulars about shady deals done to move money or bankrolled with undisclosed funds.
Under the regulations, new financial commitments by an Indian company could include a variety of transactions: forming an offshore subsidiary, buying a tiny stake in an unlisted foreign company, acquiring more than 10% in an entity listed on any overseas exchange, giving loans, or even giving a guarantee to an outfit.
RBI has also spelt out that even a stake sale in a foreign business would be disallowed if the directions are not followed.
The compounding process entails a company or individual in question admitting the lapse and paying a penalty to the central bank while adjudication under the Foreign Exchange Management Act (FEMA) involves personal hearing before an ED official whose seniority depends on the quantum of contravention.
Since the compounding or adjudication process can stretch for six months, a company runs the risk of losing out on an ODI opportunity.
According to Harshal Bhuta, partner at the CA firm PR, Bhuta & Co, "Due to the RBI directive, starting August 22, 2025, new overseas investments that otherwise would have been possible upon mere initiation of the compounding procedure for past reporting delays under the earlier regulations, may now be permitted only after the compounding procedure has been fully completed. Interestingly, this approach contrasts with the existing foreign direct investments (FDI) norms where new transactions are generally permitted even if previous reporting delays exceeding three years have not yet been compounded."
The regulator has set a deadline of August 21, 2025, when a company pulled up for not reporting financial details on old ODIs (i.e., those before August 22, 2022) can take the quicker route to regularise and settle the matter by paying a late submission fee to RBI. Unlike compounding or adjudication, this is a far simpler process which is typically completed in about a fortnight.
The August 25 deadline comes three years after the announcement of the new overseas investment regulations by RBI on August 22, 2022.
To sensitise corporates on the consequence of delaying the process, RBI has cautioned that compounding or adjudication of contravention under FEMA is a comparatively longer process vis-a-vis regularisation by payment of late submission fee. "Therefore, to avoid inconvenience to overseas business operations of residents, you may follow up with all your customers having overseas investments, to regularise all past reporting delays, well within the prescribed timeline," the regulator told banks.
According to Moin Ladha, partner at the law firm Khaitan & Co, "Now, it's absolutely important to address any past non-compliances or rather complete the ODI compliance audit before August 21. Or else, a company may miss out on an overseas deal as the compounding or adjudication process can go on for months."
While unintended errors and reporting lapses can be corrected over the next three months, Indian groups which have bought shares with undisclosed overseas funds or undertook ODIs simply to siphon out money by writing off the investments few years later, would find it tough to resolve the matters.
[The Economic Times]
