Corporates in India are facing additional liquidity challenges related to trapped cash given the nation’s complex regulatory environment. Having cash fungibility is vital and will help with overall business performance.
Businesses that are expanding operations into India, which has restrictive capital and regulatory controls like India face additional liquidity obstacles related to cash trapped in those markets. Domestically, corporates in the South Asian nation are not even freely able to embark on intercompany lending activity.
“Though you might find situations where some companies within the group are cash rich and some are in a borrowing mode. In India, there is no free flow of money between those and at a net level, it’s difficult for the group to use its cash surpluses from one entity against another entity unless specific shareholder approval and prescribed limits are adhered to,” said Ambika Ravi, head of products South Asia at Standard Chartered to Asiamoney PLUS in a telephone interview on May 23.
“Similarly if you have cash flows trapped in other regions. Bringing it in and out for cross border transactions is not possible without regulatory approvals," she added.
The reason for this is because corporates in India are governed by the nation’s Companies Act. The ruling stipulates that while intercompany loans are permitted, these flows are subject to a cap, which is a percentage of a company’s net worth and varies on a case-by-case basis.
When applying for an intercompany loan quota, the group would need to list the names of the subsidiaries that will participate in the structure; the amount, terms and purpose of the loan and date on which the loan has been made. Once a corporate wants to execute an intercompany loan, the particulars of the exercise need to be registered within seven days.
There are rules that also defeat the purpose of using an intercompany loan, including the fact that a loan made to another corporate should not be executed at an interest rate that is lower than the prevailing bank rate.
As a result, restrictions of cash movements present a number of challenges to corporate cash management teams. The most noteworthy issue is the unavailability of their cash.
“Cash trapped in India cannot be included as part of a company’s global liquidity optimisation strategy,” said a head of liquidity for transaction banking. “Likewise, profits generated in these markets cannot be readily redeployed into normal corporate cash uses.”
Because of these restrictions, experts note that both multinational and local corporates operating in India are calling for a change in ruling that will permit the free flow of cash between subsidiaries.
“This is some of the steps that Indian corporates would like to see where they can have more fungibility to their group finances to maximise their internal liquidity,” said Ravi. “It’s under evolution and clearly aligned to what is permitted by current laws. So it will take some time to see that level of sophistication within the intra-group and intra-region.”
A global head of global corporate products agrees: “In terms of getting access to those cash, say moving them to a regional concentration centre like Hong Kong and Singapore. That would be subject to challenges and needs to change.”
Once the issue of trapped cash is addressed in India, market participants highlight that this will have substantial impact on the country’s economy in the long-term.
“For money to be stuck somewhere, it will create inefficiency in the system. The corporate will not able to churn the money in the supply chain. Any company works on its inventory being turnover and the higher the turnover on the inventory, the greater sales they can achieve,” said an India head of cash management. “The same could be said for a country’s GDP as well – the higher the turnover on the money, the better the performance of the economy. The velocity of money creates a huge impact on the country.”
Although it could take some time for corporates to get the full approval for free flow of intercompany loans, the Indian government has been taking gradual steps to boost efficiency domestically.
For example, the recent launch of the National Automated Clearing House (NACH) platform in India is seen as a big improvement on the existing Electronic Clearing Services (ECS) is a good start. The system enables pan-India processing of bulk payments and receipts, and also has the capacity to manage company mandates electronically.
The NACH helps boost both working capital and supply chain management capabilities of corporates in India.
Addressing trapped cash
The best approach for handling cash investments in local markets is to avoid getting trapped in the first place, say experts. By drawing up specific investment policies for local markets, companies can retain control in overseas markets and ensure that their investment standards are duly maintained.
Additionally, banks should ensure that corporates operating in India have access to technology that enables them to effectively manage their liquidity in line with the regulatory environment.
“Banks should have regulatory-considered liquidity management solutions that factors in the boundaries of prevailing laws and regulation. For example, auto-checking of intercompany limits against company-specific debt-equity limits," said Ravi.
Financial institutions could, for example, help provide a fully functional automated system that could provide the company with customised or standard reports that can directly go to the enterprise resource planning (ERP) and accounting system.
“This will help as they know that the parameters that are allowed to operate within are being adhered to and again on an automated basis, so there is no physical creation of these reports that are required,” said a Mumbai-based head of cash management.