India ranked top among countries of the world that companies had considered investing in but were dissuaded from doing so by its regulatory and tax regime, with Iran ranked second and the United Arab Emirates and China joint third.
Treasurers and finance directors of companies across industries with combined annual revenues of more than $250 billion responded to the pulse survey on trapped cash, in which India ranked second behind China as one of the world’s worst countries for companies to try to repatriate company cash from.
Taken together, these results will come as a blow to Asia’s third-largest economy, re-enforcing long-held frustrations among the world’s business and finance community over Indian policymakers’ progress on needed structural reforms.
One of the main criticisms has been that the current Indian government has largely failed to capitalize on rising global economic growth to push through reforms, and now India is faced with the triple-whammy of economic growth at a near 10-year low, high inflation and unsustainable twin deficits.
With elections in India next month, hope is building that any newly formed government can and will engage in a policy shift to tackle these issues head-on.
Progress on some reform has been brought about in recent years, but large and mid-sized international companies remain encumbered by India’s onerous framework, and especially in their cash and liquidity management.
In essence – the difficulty of moving money in and out of India is such that it is dissuading companies from investing in the country at a time when India needs investment most to spur on growth.
The global head of liquidity management services at one of the world’s biggest banks describes some of the complexities involved for companies operating in India. “They still require a lot of reporting and filing with the central banks,” he says. “Intercompany lending is still very difficult to set up in India requiring a board of directors’ resolution among other things.
“It’s difficult to earn any interest on funds in Indian bank accounts. Companies need to keep as little money in India as possible so a company has to estimate how much its operation in India needs for working capital. It’s not that easy to move money in and out of India, but it’s not impossible. I haven’t seen any moves to liberalize India.”
Julian Oldale, head of international cash management origination, North America, global transaction services, at Royal Bank of Scotland, shares this view. “The regulatory landscape remains restrictive for multinationals from a liquidity management perspective,” he says.
“There are few options for repatriation other than dividends, and there is no sign that this will change in the near future.”
And for Christian Edelmann, partner and head of the Asia Pacific region at Oliver Wyman, he is not surprised to see India ranked top.
“In India, cross-border pooling is not allowed by regulations,” he says. “Royalty payments and transfer pricing between parent and subsidiary are also strictly monitored and regulated. The issue is not payment systems or banking infrastructure – it has to do with convertibility and transferability.”
He adds: “The Indian rupee is not convertible on capital account. All repatriations of capital have to be approved individually. Also, remitting profits out is a long process as accounts have to be audited and tax returns assessed and approved before a company can remit out dividends or capital.”
However, John Laurens, head of global payments and cash management, Asia Pacific, at HSBC, says that gap is closing between developed markets and faster-growing markets, such as India and China, where the cash-management landscape is evolving quickly.
“While the payments and cash-management infrastructure in India may have been seen historically as complex and fragmented, growth in the Indian economy has created a need for a capable payments infrastructure,” he says.
“The creation of NACH [National Automated Clearing House] last year, complemented by other innovations such as interbank mobile payment service and the cheque truncation system, means that India is developing platforms to continue to grow.”
He adds: “These developments help customers to reduce their working capital requirements; deliver faster transaction settlement; enhanced debit mandate management; greater efficiency and wider branch coverage across India.”
Euromoney contacted the Indian ministry of finance and the Federation of Indian Chambers of Commerce and Industry seeking comment on the survey results, but no one at either institution was available.