RBI Tightens Scrutiny of Billion-Dollar Overseas Investments by Indian Companies

Last week, the banking regulator provided leading banks with a detailed, standardised checklist specifying the information they must collect from corporate clients investing abroad and submit to the RBI. According to two people aware of the development who spoke to ET, the requirements apply to all ODIs exceeding $1 billion and those beyond the regulatory cap of four times the net worth of the domestic company making the overseas investment.

The RBI's demand for detailed information on the rationale, justification, financial position and explanations behind these transactions indicates a closer watch on large ODI outflows. The scrutiny comes at a time when India is facing pressure on its currency alongside foreign portfolio investor selloffs.

Overseas direct investments have contributed significantly to capital outflows in recent years. Such investments crossed billion in FY26, compared with approximately billion five years ago, highlighting the scale of the overseas investment activity now under greater regulatory scrutiny.

The RBI has specifically instructed banks facilitating ODI transactions not to rely solely on the availability of a valuation report for the overseas entity. Instead, banks must independently satisfy themselves on the basis of the report. Their appraisal must specifically examine the premium paid and determine whether the consideration is significantly above the entity's intrinsic value. In cases involving a swap, the exchange ratio must be independently defensible based on the valuation of both entities.

Suhas Bendre, founder of Bendre Consultancy, which specialises in the Foreign Exchange Management Act (FEMA), described the move as a preventive measure aimed at protecting Indian investors from potential losses.

"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," Bendre said.

Beyond the customary analysis of the investing company's financials and proposed ODI, banks must assess the company's quality of earnings, previous experience with overseas investments, existing overseas commitments and ability to absorb adverse events.

Banks are also required to question corporate clients about why a foreign entity has been preferred over an Indian acquisition, how the transaction relates to the Indian company's existing business, and whether the overseas entity is an operating company or a holding vehicle. They must examine the expected commercial return, intended holding period and proposed exit route.

Moin Ladha, partner at Khaitan & Co., said the requirements place a greater evidentiary burden on applicants and increase banks' responsibility to independently evaluate the rationale and risks associated with overseas investment commitments.

"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," Ladha said.

The checklist also requires banks to assess the bona fide nature of the foreign entity and the risks associated with the country in which it operates.

Harshal Bhuta, cofounder at Ascentium India, a tax and regulatory consultancy, said the detailed requirements amount to a more comprehensive due diligence exercise for overseas direct investments. While the existing Master Direction on Overseas Investments outlines indicative approval criteria, including the viability of the foreign entity, benefits to India and the Indian entity's track record, the new checklist specifies the information required in greater detail.

"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," Bhuta said.

Transactions involving related parties or those capable of resulting in a transfer of value outside India will face a heightened level of scrutiny by banks.

To assess how large overseas investments could benefit the Indian economy, banks must also submit details of the potential benefits, including their estimated amounts and timelines. These benefits may include incremental exports from India, import substitution, access to new markets, technology and intellectual property transfers to India, and inflows from dividends and fees.

Where an Indian parent company provides a guarantee to reduce the borrowing cost of its overseas entity, banks must assess the likelihood of that guarantee being invoked.

The expanded checklist places greater emphasis on the commercial rationale, financial viability and potential domestic economic benefits of large overseas investments. By requiring banks to examine transactions more closely before facilitating them, the RBI is seeking stronger scrutiny of substantial ODI outflows at a time when the rupee remains under pressure.