All Things FinReg


Our postings on All Things FinReg sometimes can take us far afield – in this case, to India.

Multinational companies, including those in the financial services and technology worlds, incorporate or acquire Indian subsidiaries to lower their costs and access a vast and growing market for customers and talent. If you want to be in India, however, you’ll need to understand and engage with the complex—and sometimes mystifying—local regulatory regime, because not doing so may cost you, as well as your banks and other financial services providers.

A number of international companies with operations in India use their Indian subsidiaries to provide technology, back-office, and other support services to their international operations, including those in the United States. But, while these international companies may account for inter-company obligations between their Indian and non-Indian operations, and may even issue inter-company invoices for those services, these companies may only deal with cash on a consolidated basis, and collect the funds due to the Indian subsidiary only when there is a need for additional cash in India.

Under applicable Indian foreign exchange control regulations, amounts representing the full value of the services provided to parties based outside of India are to be repatriated to the Indian entity within nine months of the date of the invoice being issued. In special circumstances, after showing sufficient and reasonable cause, the Reserve Bank of India may permit the nine-month period to be extended to 15 months. Violations of the exchange control regulations in India can be expensive, inviting penalties from the Reserve Bank of India, which could amount to multiples of the outstanding amounts that violated the exchange control regulations. Recent advances in technology and reporting have enabled Indian regulators to enforce these requirements more strictly, and experience shows that these regulators have been and will continue to enforce them. Companies operating in or seeking to enter the Indian market—or to acquire a company with operations in India—would do well to keep them top of mind.

Contravention of the foreign exchange control regime could also impact the financial institutions through which the monetary amounts are routed. All foreign exchange that comes in or goes out of India must be routed through an authorized dealer. These authorized dealers are specifically authorized by the Reserve Bank of India, India’s central bank, and are generally banking institutions, including international banks that have operations in India. The authorized dealers have been entrusted with the responsibility of ensuring that entities operating in India comply with India’s foreign exchange control regime. In the event of any violation of the foreign exchange control laws by the multinational companies and their Indian subsidiaries, the relevant authorized dealer could also be penalized for their inability to monitor such violation.