Eight companies under RBI scanner on concerns of fund round-tripping

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Reserve Bank of India has cracked its whip on eight companies who are allegedly involved in misusing offshore companies to raise funds and then bring back that money in India in the form of foreign direct investment (FDI).

Reserve Bank of India has cracked its whip on eight companies who are allegedly involved in misusing offshore companies to raise funds and then bring back that money in India in the form of foreign direct investment (FDI).

Companies under the scanner are few software firms that have received notices from the central bank on concerns of violation of round-tripping of fund and breach of rules on foreign borrowing

The term round-tripping of funds involves the transaction of black money through various routes including payment to shell companies, hawala route, etc. Through various channels money leaves the country, but after a while the cash finds its way back home, thus completing the process of fund round-tripping.

The banking regulator is seeking explanations from these companies on whether the right procedures were followed and if specific approvals were taken to create these structures.

What can RBI do in cases of violation of fund round-tripping?

The regulator can ask the companies to end the investment of black money in their businesses, agree that they have breached laws under the Foreign Exchange Management Act (FEMA), and also pay fine for their violating actions.

This isn’t the first incident of bringing back black money by investing in overseas arms that has come to light. Earlier, real estate companies and manufacturing firms would raise cheap dollar funds by investing in foreign subsidiaries and also to get away with strict regulations on external commercial borrowings (ECBs).

There are also concerns on whether companies are using FDI route to bring back the black money to the country that was sitting in bank accounts of the unlisted foreign firms of which the Indian companies have a sizeable share.

As of now only recent violations have been taken into consideration but the old cases are yet to be dug out of the grave. Investigations of such cases will spill whether genuine operating companies with bona fide businesses were involved in fund round-tripping.

For investors, it is important to keep track of companies that are involved in using overseas firms to bring back illegal cash as it is a sign of poor governance. Also, if the government starts chasing black money to get rid of this menace then that will impact the ongoing rally as much of it is driven by the liquidity generated from foreign portfolio investors.

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