RBI Tightens Scrutiny on Large Overseas Investments by Indian Companies Amid Rupee Volatility

The Reserve Bank of India has adopted a much stricter stance on large-scale investments made by Indian companies abroad. At a time when foreign portfolio investors are pulling money out of the domestic market and the challenge of managing the Indian rupee against the US dollar persists, the banking regulator has Notably tightened the verification process for Overseas Direct Investment by Indian corporations.

According to a report by the Economic Times, the Reserve Bank of India handed over a detailed and standardized checklist to the country's leading commercial banks last week. This list outlines all the information that banks must gather from corporate entities investing abroad and submit directly to the central bank. This new regulation applies to all foreign investments exceeding one billion dollars. Plus, if any Indian company invests funds abroad that exceed the prescribed limit of four times its total net worth, it will also be subjected to this rigorous scrutiny.

No Outright Ban, But Strict Monitoring in Place

The central bank has not placed any formal ban or restriction on making investments abroad. However, the nature of the information demanded by banks from the remitting entities—including the rationale behind the deal, concrete justification, and comprehensive financial details—makes it clear that the RBI is closely monitoring large funds moving out of the country, while looking at the data, a major driver behind the outflow of US dollars from the country in recent times has been these very foreign investments. Five years ago, the total overseas investment by Indian companies stood at approximately 11 billion dollars, which has now surged past 30 billion dollars in the financial year 2026.

The Reserve Bank of India has issued clear instructions to banks stating they shouldn't clear deals simply by reviewing a foreign company's valuation report. Instead, banks must independently verify the contents of that report, while specifically, banks are required to check how much premium is being paid for the transaction. They must evaluate whether the money being paid Importantly exceeds the intrinsic value of the foreign target company.

Also, if the transaction is structured through a share swap, the exchange ratio derived from the valuations of both companies must be entirely accurate and equitable. According to Suhas Bendre, a Foreign Exchange Management Act expert and founder of Bendre Consultancy, this is a precautionary measure by the RBI to ensure that large foreign investments don't turn into loss-making deals in the future, which could harm both Indian companies and the national economy.

Companies Must Answer Tough and Probing Questions

Under this new framework, banks aren't merely expected to conduct standard account checks on the investing corporate entity. They must also examine the quality of its earnings, its past track record of overseas investments, and its existing foreign liabilities. Also, banks must assess the company's financial resilience to withstand any unforeseen economic shocks in the future. Banks are mandated to directly question corporate clients about why they chose to acquire a foreign entity instead of investing in a domestic Indian company.

Along with this, companies must explain how the proposed deal aligns with their existing core business operations. They need to clarify whether the foreign entity is an active operating company or merely a holding company designed to park investments. Disclosures regarding the expected profitability from the deal, the intended duration for holding the investment, and the precise exit strategy for the future must also be provided.

Moin Ladha, partner at Khaitan and Co, noted that these new rules have increased the burden of proof on the applying companies. Banks are now required to independently evaluate the economic rationale and associated risks of the transaction. Through stress testing and other analytical methods, the financial strength of Indian investors, the commercial viability of the deal, and the tangible benefits accruing to India are being thoroughly investigated.

Accountability Required for Benefits to the National Economy

In addition to verifying the authenticity of the foreign company, banks must also assess the country risk of the jurisdiction where the investment is being made, while according to Harshal Bhuta, co-founder of tax and regulatory consultancy firm Asensia India, this detailed checklist provided to banks functions akin to a rigorous due diligence process. While older master directions already included general guidelines regarding the capabilities of the foreign company, benefits to India, and the past track record of the Indian firm, this new checklist mandates every minute detail that was previously often overlooked.

Amid ongoing fluctuations in the rupee, approvals will now be granted exclusively in cases where banks are fully satisfied with the absolute veracity of the transaction. For example, if a deal involves related parties or raises suspicions of value transfer out of India, banks will conduct an even stricter investigation. What's more, banks must submit a comprehensive account and timeline detailing how these large foreign investments will aid the Indian economy.

This comprehensive disclosure must specify the expected increase in India's exports resulting from the deal, the extent to which import dependency will be reduced, the new international markets that will become accessible, the manner in which new technology or intellectual property will be brought into India, and the exact amount of capital expected to flow back into the country in the form of dividends or fees. On the other hand, if an Indian parent company provides financial guarantees to help its foreign subsidiary secure cheap international loans, banks must carefully evaluate the future risk of those guarantees being invoked.