RBI Steps Up Scrutiny of Corporate Foreign Ventures as Banks Face Massive Due Diligence Requirements

RBI Steps Up Scrutiny of Corporate Foreign Ventures as Banks Face Massive Due Diligence Requirements​

The Reserve Bank of India (RBI) has significantly intensified its oversight regarding Overseas Direct Investments (ODIs) undertaken by Indian corporations. A report from the Economic Times indicates that banks are being instructed to collect substantially more granular information from their corporate clients concerning their foreign ventures and business partners.

This regulatory push aims to bolster financial stability and increase visibility into capital flows moving abroad, signalling a higher level of supervisory scrutiny for investors in the multinational landscape.

Comprehensive New Disclosure Requirements for Foreign Ventures​

Companies that operate overseas joint ventures or subsidiaries now face stringent disclosure demands regarding their international dealings. Corporates must disclose the complete anti-money laundering (AML) and due diligence procedures implemented on all foreign business partners and co-investors.

Furthermore, companies are required to document the processes used to verify the credentials of these offshore entities—a requirement that was rarely sought in previous reporting cycles. The RBI reportedly circulated this detailed questionnaire to several private and multinational banks near the end of June.

Expanding Operational Visibility Beyond Financials​

The scope of the investigation extends deeply into the operational fabric of the foreign companies. Banks must now gather extensive details concerning these overseas entities, including financial performance since Fiscal Year 2022.

Required data points include energy consumption metrics, Research and Development (R&D) expenditure, employee strength, staff costs, and confirmation of whether these businesses maintain independent physical offices. These demands highlight the central bank’s focus on substance over mere transactional completion.

Curbing Misuse and Increasing Investor Visibility​

The regulatory tightening is partly a response to concerns over capital misuse in international dealings. The RBI has sought details regarding dividends received, loan interest payments, trade transactions with parent companies, dealings with step-down subsidiaries, and any instances where capital was written off.

Moin Ladha, Partner at Khaitan & Co., noted that the focus on partners' Know Your Customer (KYC) procedures is critical as it provides greater visibility into the due diligence practices adopted by Indian investors. He added that while foreign investment requires businesses to be bona fide, such investments often already undergo multi-layered due diligence by various international regulators and intermediaries.

RBI's Stated Objectives and Market Dynamics​

The RBI has stated that the objective of this regulatory exercise is to gain a complete understanding of the business rationale and capital flow dynamics associated with these overseas commitments. The central bank aims to assess how these ODIs align with India’s broader macroeconomic objectives and capital account management strategies.

Ayush Tandon, Partner at AZB & Partners, offered expert perspective, stating that the RBI is reacting to a genuine concern. He pointed out that once money departs as an ODI, Indian regulators' visibility narrows significantly in a multi-jurisdictional chain. This focus comes after past cases where overseas investments resulted in assets difficult to recover.

Overview of India’s ODI Outflows​

India’s outbound investment activity has shown considerable growth, with ODI outflows reportedly rising sharply. The figures show outflows reaching approximately $34 billion in FY26, significantly up from nearly $11 billion five years prior. This growing capital outflow underscores the necessity for enhanced scrutiny regarding its deployment and management overseas.