International Cash Pooling - Cross-border Cash Management Systems and Intra-group Financing

India (S. 175-176)

Ramesh Vaidyanathan

1. Cash management systems

Cash management is a wide term that envelopes concentration, collection and disbursement of cash of a corporate entity. It encompasses a company’s level of liquidity, its management of cash balance, and its short-term investment strategies, instruments and models. From a micro point of view, it can be considered as one of the most important tasks of a business manager in as much as all the operational objects of a company flow from the sufficiency and proper allocation of the company’s finances and treasury.

1.1 Overview

Cash management or more effectively treasury management is practised in a very restricted sense in India, in as much as it is closely controlled and supervised by the regulatory bodies of the country. Among the various cash management mechanisms, cash pooling is a common practise among the corporate entities, where cash is swept from different accounts of subsidiaries and transferred to the concentration account of the mother company for effective management and proper usage and disbursal of excess cash, for the purpose varying from financing internal loans to short term investments.

The mechanism of cash sweeping / zero balancing, as far as a single corporate entity and its branches are concerned, is not legally restrictive, but if practised between different corporate entities within a group is subject to various restrictions – like ceiling on the amount of money to be transferred, minimum chargeable interest rate, disclosures in the balance sheet, etc.

Another common treasury management mechanism in vogue in India is leading / agging, whereby the corporate entity delays or advances its payments to overseas vendors depending upon the prevalent and anticipated exchange rates. Commercial banks in India are regulated by the central bank which is the Reserve Bank of India (“RBI”), a statutory body constituted under the Reserve Bank of India Act, 1934. A commercial bank, before the start of its operation, is mandatorily required to obtain licence from the RBI,1 which will grant the same only after satisfying itself of the present and future credibility of the commercial bank in meeting its deposit claims from its customers, the general character of the proposed management of the bank, the adequacy of the capital structure and earning prospects and impact on public interest by such incorporation.

A commercial bank, which has been incorporated outside India, is also required to obtain license from the RBI before starting its operations in India, and shall be subject to the same scrutiny of books of account as of a commercial bank incorporated in India. The Reserve Bank of India Act, 1934 also requires the non banking institution to furnish statements, information or particulars, and to comply with any directions given to it by the RBI.