Mumbai: An NRI takes out money after selling property in India. A corporate house floats a company abroad. A local business repays a foreign lender. And, a private equity fund remits money overseas after an exit. All such deals could come up against finicky bankers-particularly, if a transaction looks faintly suspicious.
Today, banks count on certificates from chartered accountants (CAs) and valuers as they clear funds flowing in and out of the country. The reports on valuation of securities, source of money, and payment of tax are key documents supporting most cross-border payments. And banks rely on them, often blindly. This trust has now come under test.
In a message that could impact many individuals and businesses, a quasi-judicial authority deciding on matters involving alleged foreign exchange irregularity and money laundering, recently said that banks cannot merely act as a "post office for onward remittance" and blindly take reports of CAs as the final word.
The April 17 ruling by appellate tribunal SAFEMA pertains to a case where the enforcement directorate questioned HDFC Bank's decision to allow outward remittance of ₹140 crore by the JP Morgan. In 2010 the US bank had invested ₹85 crore in the troubled realty group Amrapali which later bought back the shares for ₹140 crore. The transaction did not require any prior Reserve Bank of India (RBI) approval.
HDFC cleared the ₹140 crore outflow to JP Morgan based on a valuation report justifying the steep buyback premium. The tribunal said that HDFC should have scrutinised the CA's report as the methodology (discounted cash flow) to value the shares was based on questionable assumptions. The company did not have distributable profits that justified the high buyback price, said the ruling.
The ruling, unless overturned by a high court, means that banks cannot take CA certificates at face value. If a company's valuation defies logic, banks must dig into the CA's or valuer's report, though HDFC has argued (as most banks would) that it is neither obliged to examine such reports nor seek RBI's permission.
According to Harshal Bhuta, partner at the CA firm PR Bhuta & Co, "This would impact many, especially those planning outward remittances. Scrutiny of even legitimate transactions will rise. Banks would turn demanding. They would closely examine all documents to avoid violations. Since many certificates and valuation reports could come under scrutiny, professionals like CAs, merchant bankers, and registered valuers must be prepared to explain." He felt the ruling could also jeopardise RBI's plan to give banks more regulatory responsibilities.
The ruling said the exemption from RBI approval was conditional and under Section 10(5) of the Foreign Exchange Management Act (FEMA), HDFC Bank was required to check the deal's genuineness besides serving as a remittance channel. Under the rules, a valuation arrived by a professional is a floor for inflows but a cap on outflows.
The ruling has caused a flutter among professionals. "If certificates issued by professionals, as required under the law, are viewed with suspicion, it could create an unending chain of uncertainty under FEMA," said Ashish Karundia, founder of the CA firm Ashish Karundia & Co. "While it may be justified to question documentation in cases that appear suspicious, it is unreasonable to expect banks to scrutinise every transaction in depth, including verifying the end-use of funds," said Karundia.
LRS to be linked to income?
In recent years banks have examined outward remittances by individuals under the liberalised remittance scheme (LRS), questioned overseas direct investments by corporates, while RBI has denied many NRIs' requests to remit beyond $1 million a year. "We feel the LRS limits could soon be rationalised. We won't be surprised if it is linked to an individual's income level, so that minors or persons with little or no earnings are stopped from remitting large funds to buy properties and shares abroad. Also, cryptos may be disallowed explicitly under LRS," a banker told ET.
Today, banks count on certificates from chartered accountants (CAs) and valuers as they clear funds flowing in and out of the country. The reports on valuation of securities, source of money, and payment of tax are key documents supporting most cross-border payments. And banks rely on them, often blindly. This trust has now come under test.
In a message that could impact many individuals and businesses, a quasi-judicial authority deciding on matters involving alleged foreign exchange irregularity and money laundering, recently said that banks cannot merely act as a "post office for onward remittance" and blindly take reports of CAs as the final word.
The April 17 ruling by appellate tribunal SAFEMA pertains to a case where the enforcement directorate questioned HDFC Bank's decision to allow outward remittance of ₹140 crore by the JP Morgan. In 2010 the US bank had invested ₹85 crore in the troubled realty group Amrapali which later bought back the shares for ₹140 crore. The transaction did not require any prior Reserve Bank of India (RBI) approval.
HDFC cleared the ₹140 crore outflow to JP Morgan based on a valuation report justifying the steep buyback premium. The tribunal said that HDFC should have scrutinised the CA's report as the methodology (discounted cash flow) to value the shares was based on questionable assumptions. The company did not have distributable profits that justified the high buyback price, said the ruling.
The ruling, unless overturned by a high court, means that banks cannot take CA certificates at face value. If a company's valuation defies logic, banks must dig into the CA's or valuer's report, though HDFC has argued (as most banks would) that it is neither obliged to examine such reports nor seek RBI's permission.
According to Harshal Bhuta, partner at the CA firm PR Bhuta & Co, "This would impact many, especially those planning outward remittances. Scrutiny of even legitimate transactions will rise. Banks would turn demanding. They would closely examine all documents to avoid violations. Since many certificates and valuation reports could come under scrutiny, professionals like CAs, merchant bankers, and registered valuers must be prepared to explain." He felt the ruling could also jeopardise RBI's plan to give banks more regulatory responsibilities.
The ruling said the exemption from RBI approval was conditional and under Section 10(5) of the Foreign Exchange Management Act (FEMA), HDFC Bank was required to check the deal's genuineness besides serving as a remittance channel. Under the rules, a valuation arrived by a professional is a floor for inflows but a cap on outflows.
The ruling has caused a flutter among professionals. "If certificates issued by professionals, as required under the law, are viewed with suspicion, it could create an unending chain of uncertainty under FEMA," said Ashish Karundia, founder of the CA firm Ashish Karundia & Co. "While it may be justified to question documentation in cases that appear suspicious, it is unreasonable to expect banks to scrutinise every transaction in depth, including verifying the end-use of funds," said Karundia.
LRS to be linked to income?
In recent years banks have examined outward remittances by individuals under the liberalised remittance scheme (LRS), questioned overseas direct investments by corporates, while RBI has denied many NRIs' requests to remit beyond $1 million a year. "We feel the LRS limits could soon be rationalised. We won't be surprised if it is linked to an individual's income level, so that minors or persons with little or no earnings are stopped from remitting large funds to buy properties and shares abroad. Also, cryptos may be disallowed explicitly under LRS," a banker told ET.
