Govt’s new overseas investment rules to aid banks’ loan recovery, stop asset theft: Bankers

Bankers have given thumbs up to the government's new investment rules that make it difficult to move money overseas for those having NPA accounts and wilful defaulters, saying it will stop siphoning off of assets and aid loan recovery by banks.

“While this could impede the overseas investment strategy of a person who has defaulted or is under scrutiny, it gives power to banks to either give or deny a no-objection certificate (NOC) only after conducting appropriate due diligence,” said a banker at a stressed asset vertical of a state-run bank, requesting anonymity.

Also read: Government issues overseas investment rules to promote ease of doing business

What are the new rules?

Under the notified rules, any person resident in India who has an account appearing as a non-performing asset (NPA), or is classified as a wilful defaulter by any bank or under investigation by a financial service regulator or by investigative agencies in the country shall, before making any financial commitment or undertaking disinvestment overseas, obtain a NOC from the lender bank, regulatory body or investigative agency.

If the lender bank or regulatory body or investigative agency concerned fails to furnish the certificate within 60 days from the date of receipt of such application, it may be presumed that there was no objection to the proposed transaction, the finance ministry said.

Keep assets in the country

“These protective measures will ensure the availability of assets and resources to satisfy the debts of the banking sector,” said Soayib Qureshi, associate partner at PSL Advocates & Solicitors. “These steps were necessary as various questionable investments were being made overseas which resulted in depletion of assets of a person resident in India. This has been done to ensure availability of funds for Indian banks and to curtail any circuitous use of funds for a benefit which may have a ripple effect and de-stabilise the economy.”

Qureshi said there have been instances in the past when investments were being made with a view to earn profit or to circuitously evade taxes and create assets overseas to the detriment of the creditors in India.

What has changed?

Before the new regulations were put in place, an Indian party which was on the Reserve Bank of India's exporters caution list, on the list of defaulters, or otherwise under investigation by any investigation or enforcement or regulatory agency, was not permitted to undertake overseas investment without the approval of the RBI.

In the absence of clear regulation, there was also a likelihood that defaulters siphoned off funds to overseas entities as there was no requirement of obtaining a NOC after considering whether the person’s domestic bank account is declared as NPA.

Bankers said while the government is probably tightening the noose on wilful defaulters siphoning off funds overseas, it is also making it easier for domestic corporates to invest abroad. This could ensure that Indian banks are better placed to secure assets and protect their balance sheets while ensuring ease of doing business.

According to Jyoti Prakash Gadia, managing director at Resurgent India, a corporate financial advisory firm, the stipulation of obtaining NOC in case of NPA or wilful defaulter account has been brought to prevent the possibility of diverging funds through overseas remittance in the guise of investments. To this extent, it is the right step to strengthen the banking system, he added.

Crackdown on wilful defaulters

In India, there have been multiple instances where wilful defaulters have diverted funds overseas. Wilful defaulters are a category of borrowing entities and individuals who default on payments or other repayment obligations to the lenders, even when they have the means to honour the said obligations.

Also read: India’s top 25 wilful defaulters owe about Rs 59,000 crore to banks, says Centre

The most prominent case is that of embattled liquor baron Vijay Mallya, who along with his firms - Kingfisher Airlines and United Breweries – was charged for fraudulently diverting over Rs 3,700 crore bank loan funds to a UK-based Formula 1 motorsport firm, a T20 IPL team, and for enjoying private jet sorties.

Mallya, declared a wilful defaulter, owed Rs 9,000 crore in principal and interest to a consortium of banks led by the State Bank of India.

India’s top 25 wilful defaulters owed a total of Rs 58,958 crore to various lenders as of March 31, according to the government. Mehul Choksi-promoted Gitanjali Gems topped the list with Rs 7,110 crore of loans yet to be repaid. Like Mallya, Choksi is also charged with siphoning off funds received as Letters of Undertaking from banks to his overseas companies through alleged foreign suppliers.

"Under the erstwhile regime, the RBI would ordinarily seek inputs from the concerned regulatory body/ investigation agency as part of the approval application itself," said Sahil Arora, Partner, Saraf & Partners. "With this move, the buck has been placed on the concerned regulatory body/ investigation agency to determine whether in the given facts, overseas investments can be undertaken by relevant person/ entity.”

Implementation key

While the government’s new rules are a step in the right direction, experts said that the key lies in implementation. To achieve the objective, there needs to be coordination among multiple stakeholders and banks, they added.

“The level of effective implementation of the rules is of utmost importance,” said Resurgent India’s Gadia. “That will require a robust mechanism of regular sharing of information among banks by use of technology to prevent instances of circumventing such regulations.”

Further, the information to be shared should relate to the status of account of such entities and the details of proposed investment transactions, he added.