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Getting to grips with trapped cash

Companies need easier access to their cash across the globe as regulatory changes are expected to make borrowing more expensive. But strict rules on getting funds out of emerging markets – where many have invested heavily – are a major roadblock. Fortunately, regulatory reforms mean cash previously caught behind a country’s borders is becoming more accessible.

The biggest impact of ‘trapped cash’ is that it prevents companies from using surplus funds they hold in one part of the world to offset their borrowing elsewhere. This makes it more expensive for them to borrow and hits their balance sheets hard.

It can also restrict investment decisions to within each country, hampering an overarching, global plan for a business’s growth from central management.

Accessing trapped cash has grown in importance since new Basel III regulations proposed stricter capital and liquidity requirements on banks – potentially reducing their ability to lend to clients significantly.

Lending rates are expected to rise by 40-85 basis points as a result, and consultants PricewaterhouseCoopers predict that the regulation will remove up to GBP1 trillion of liquidity from the UK market alone.

Regulatory reforms dealing with the issue in countries including China, India, Russia and Turkey are easing the cross-border flow of funds and helping companies ensure strong liquidity management across their business.

To ensure they manage their liquidity in the best way possible, companies need to understand fully how these reforms can benefit their global operations.

The reforms include:

  • Changes to a UK-China treaty which reduced tax rates on dividends, royalties and service fees, making it more tax efficient for UK companies to remove funds from China

  • The People’s Bank of China (PBoC) continuing to relax broader controls on cross-border renminbi flows, and reiterating its long-term aim to allow renminbi conversion to other currencies for capital account transactions

  • Pilot schemes to repatriate cash trapped in China, approved by the central bank. They target cross-border intercompany lending – in renminbi and foreign currencies – and cross-border netting, enabling firms to tap into internal sources of liquidity and reduce funding costs. A growing number of firms operating in China with spare cash in Shanghai are taking advantage

  • Companies in India now being able to lend money to their overseas subsidiaries as long as it doesn’t exceed 400 per cent of their net worth

  • Capital account restrictions being lifted in Malaysia Regulatory changes in Russia and Turkey now allowing companies to invest abroad

Meanwhile, banks are offering financial structures to help clients manage their global currency positions. They include cross-border cash optimisation and cross-currency notional pooling, both of which drive greater value from cash balances that would otherwise remain trapped in either the affected jurisdiction or subsidiary.

Broadly, cash may be trapped in some parts of the world due to local or external factors, or the firm holding minority shares. Limitations on certain financial structures, regulatory insistence on compulsory reserves for loans and deposits, or tax implications on financial transactions are all key factors.

External causes include restrictions on investing abroad or intercompany lending, controls on converting and transferring currencies, high withholding taxes on dividends paid, and heavy administrative and central bank reporting overheads.

Issues around holding minority shares in a country are more difficult to solve as the company cannot decide on its own how to use the cash.

It is essential that businesses get access to and make the best use of all their cash around the world. The host of regulatory changes happening in emerging markets provides the opportunity they need to access funds they couldn’t previously get to. A number of businesses have already started making use of these changes.

Any approach to releasing trapped cash needs to be tailor-made to the company and the regulations involved. It requires in-depth analysis of the relevant countries’ laws, the business’s organisational structure and its tax set-up.

Businesses that fully understand all this, and how their banks’ solutions fit in with their plans, will find themselves a big step closer to managing their liquidity in the most efficient and effective way.

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