Corporate Treasury in India Today

by Muzammil Patel, Partner, and Rahul Murthi, Senior Manager, Deloitte Touche Tohmatsu India LLP

In 2016 we have already witnessed seismic global events that shed light on the uncertainties that treasurers have to navigate in global financial markets. India too has witnessed its fair share of events in 2016 – a new governor of  the Reserve Bank of India (RBI), India’s central bank, who is expected to take office post September, a new Monetary Policy Committee, a landmark taxation bill that is nearing finalisation, convergence with IFRS accounting standards, relaxations in FDI norms and policies to further promote foreign investments in India.

These local developments coupled with global uncertainties have thrown up opportunities and challenges for CFOs and corporate treasurers in India. They have also opened up avenues for foreign investors and multinational corporations operating in India. With increased need to risk management and potential for greater flows, the spotlight on treasury operations has never been so bright.

The results of Deloitte’s 2015 India Corporate Treasury Survey show that some of the key concerns and challenges of corporate treasurers operating in India include difficulties in managing volatility in financial markets, dynamically aligning and adhering to changes in domestic and global regulations, managing cross-border exposures and minimising impact of treasury performance on the organisation’s financial  results. In spite of these challenges, corporate treasurers in India appeared to be fairly content with the RBI’s stance in the current environment while accepting the impact on Taxation and Companies Act related laws on overall treasury management.

The article focuses on some of the more recent regulatory and market developments that have implications for the manner in which CFOs and corporate treasures manage risk and opportunities within the organisation and in financial markets.

Key regulatory and market developments

Converging towards the IFRS standards 

The Ministry of Corporate Affairs (MCA) issued the Companies (Indian Accounting Standards) Rules, 2015 on February 2015 with the objective of bringing the accounting standards and practices in harmony with the IFRS standards. 

Prior to the announcement, there were several difficulties of interpretation and clarification concerning the Indian GAAP – for example, there were key deficiencies in  the scope and coverage of the accounting treatment for financial instruments and its divergence from the IFRS standards – which led to myriad challenges faced by global treasuries having significant Indian operations, with respect to measurement, accounting and reporting of exposures and treasury performance under various accounting standards. With the issuance of the Indian Accounting Standards or Ind-AS, the scope and methodology now brings greater convergence to the IFRS standards. Ind-AS is mandatory for companies having net worth of INR5bn (approximately USD75m) or more from April 1, 2016. See Figure 1:

   

Fig 1 - An illustration of the manner in which the Ind AS standards converge with the IFRS accounting standards Source: Deloitte Report – Indian GAAP, IFRS and Ind AS – A Comparison

  

 [[[PAGE]]]

Broadening the derivatives market

The RBI is looking at broadening the market participation in the over-the-counter (OTC) derivatives market by reviewing the existing OTC guidelines and putting in place a policy framework by the end of 2016 for authorisation of electronic platforms with linkage to an approved central counterparty for settlement. 

The RBI has already also permitted any institutional entity regulated by the RBI, SEBI, IRDAI, PFRDA and NHB respectively to trade in interest rate swaps on electronic trading platforms where the Central Clearing Corporation of India is the central counterparty. Moreover, the central bank has also permitted non-resident Indians to directly participate in the Exchange-Traded Currency Derivatives (ETCD) market on exchanges recognised by SEBI. 

Increasing market participation in currency options

Another objective of the central bank is to encourage further participation in hedging of foreign exchange exposures and enhancing the liquidity of the currency options market. While foreign exchange forwards are currently exempt from the stringent suitability and appropriateness norms, the central bank is leaning towards exempting plain vanilla options from such norms so as to bring it in line with with foreign exchange forwards on regulatory requirements.

The RBI had permitted only back-to-back currency options involving corresponding purchase and sale of options as a part of an entire option strategy – however, the buyer of the option was not permitted to be the receiver of premium. Recently, the central bank  relaxed the previous guidelines by permitting resident exporters and importers to write currency options (call as well as put options) on the basis of actual contracted foreign exchange exposures, subject to fulfillment of conditions relating to minimum net worth and disclosures. 

It is expected that documentation norms relating to linkage of each hedge transaction with an underlying exposure will be relaxed further. This could potentially reduce the overheads associated with executing hedging transactions in India.

Introducing another channel for raising debt

Initially, few international financial institutions were permitted to issue rupee bonds in the overseas markets. Given that the appetite and acceptance of international investors for rupee debt showed many positive signs, the central bank in consultation with the Indian government permitted Indian corporates to be eligible to raise rupee bonds in overseas centres as an external commercial borrowing – so that an amount equivalent to USD750m did not require specific approval from the central bank. Moreover, overseas investors are also allowed to hedge their rupee exposure through permitted derivative products with banks in India. 

Enhancing participation in cross border payments

SWIFT established the global payments innovation initiative (GPII) to deliver a new standard in cross-border payments and improve correspondent banking activities and was able to onboard over 70 leading banks across the world last year to join its initiative. Indian banks too have recognised the need for enhanced corporate banking service offerings such as payments by facilitating better cross-border business-to-business payments. As a result, two of India’s leading private sector banks became the first domestic banks to join this global initiative with the objective of adding value to their corporate clients by way of same day use of funds, transparency and predictability of fees, end-to-end payments tracking, and transfer of rich payment information. 

Key treasury trends observed in India

Increased involvement in strategic initiatives

The corporate treasurer who was earlier tasked with managing market volatility and providing liquidity is now expected to monitor the margin of error in business strategy execution and take counter-measures to keep it in within acceptable limits. The success of today’s corporate treasurer is defined by the ability to manage internal and external stakeholder expectations. 

The role of the corporate treasurer is now enhanced to manage internal stakeholder expectations by establishing a strategic partnership with the senior management as well as various businesses to provide strategic growth, financial and risk management solutions while managing key financial metrics like return on equity, free cash flows and dividend distribution in order to manage the external stakeholder expectations. See Figure 2:

   

Fig 2 - Strategic expectations of the corporate treasurer Source: Deloitte Report – The Strategic Corporate Treasurer: Backbone of a successful organisation

 

[[[PAGE]]] 

De-linking Indian and global treasury operations by multinational businesses headquartered in India

Given that the regulatory climate in India continues to be fairly closed-ended, corporate treasurers of multinational businesses typically adopt the approach of structuring the Indian treasury operations to be fairly self-sustaining and de-linking them from the global treasury operations. A typical treasury organisation of a multinational business having significant Indian operations is summarised in Figure 3 (below).

From shared service centre to centre of excellence 

Traditionally, shared service centres were primarily seen as an extended back office of the treasury organisation having responsibilities largely limited to documentation management, payment processing, book-keeping and data management. Today, there is an emphasis on effective data quality management, maintenance of greater traceability and accuracy of information and establishment of internal controls across operational procedures by  regulators across the world. 

As India is a relatively low-cost region with an adequate level of skilled talent, many global corporates and financial institutions have enhanced their existing shared service centres in India into  strategic centres of excellence – providing strategic and operational support to the treasury, finance, risk and regulatory reporting organisation in the form of data sourcing and processing quality management, IT and business change management assistance, research & market intelligence reporting, regulatory assessment, monitoring & reporting assistance and more.     

     

Fig 3 - Typical treasury organisation structure with de-linking of Indian treasury operations

 

Increased investment in treasury automation

As highlighted in the Deloitte 2015 India Corporate Treasury Survey report, automation of treasury and trade finance operations remains a key near-term investment objective for most corporate treasurers in India – this continues to be high on corporate treasurers’ wish lists. 

Market developments coupled with internal initiatives have enhanced the scope and role of corporate treasurers in India. While these are some of the most challenging times for corporate treasurers, these are also times of opportunity. Treasurers who are able to seize this opportunity are likely to play a more strategic role in the future of the organisation. Focus on talent skill, automation and integration with business are the keys to success for the Indian corporate treasurer.    

  

Muzammil Patel Partner, Deloitte Touche Tohmatsu India LLP Muzammil is a Partner with the Financial Services Risk Management practice at Deloitte Touche Tohmatsu India LLP. He specialises in process re-engineering, RCSAs, treasury operations, internal audits, governance and reporting framework, regulatory compliance, asset liability management, liquidity risk, balance sheet management and market risk management. He has worked with more than 150 banks, corporates and financial institutions in the area of financial risk. He has led multiple regulatory compliance and cash management process re-engineering engagements for leading public and private banks and financial institutions in India and abroad.

    

Rahul Murthi  Senior Manager, Deloitte Touche Tohmatsu India LLP Rahul is a Senior Manager in the FSI Risk Advisory practice at Deloitte Touche Tohmatsu India LLP and a member of the Deloitte Global Treasury Advisory Services practice. He has over nine  years of professional experience in risk advisory and consulting and has worked with banks, financial institutions and corporates operating in India, Middle East, United Kingdom and the USA around treasury and risk advisory initiatives – including treasury strategy and operating model development, operational advisory, internal audit & process reviews and treasury system implementations.  Rahul’s expertise within the treasury domain includes financial risk (currency, commodity and interest rate risk) management, financial supply (liquidity, working capital and long term borrowings) chain management, payments and investment management. He has a Certificate of Business Accounting from CIMA, UK and has completed his Bachelors in Management Studies from the University of Mumbai, India.