-Suhail Hasan Khan
(A Finance Scholar, Author & Researcher in Finance Private Equity and Venture Capital)
When Cash Is Stuck?
For companies that operate in many countries, having billions of dollars in cash does not always mean having billions of dollars that can be used right away. The place where the cash is and how easy it is to move it can be just as important as how cash there is. For any business cash means freedom. It pays employees, helps the company grow, buys companies, pays for new tools and gives the company a safety net when the market is not doing well. But for a company that operates in different places there is another question that can be just as important as how much money the company has:
Where is the Cash?
A company may say it has billions of dollars in cash and cash equivalents. At the time it may need to borrow money to invest in a good opportunity. This might seem strange. There is a reason: some of the company's money may be in a local office or a country where it is hard to move to another place. This is the problem usually called cash.
This is becoming a problem for big companies because money does not move between countries as easily as it moves between different parts of the same company. Rules about exchange taxes, limits on moving money, restrictions on lending between companies, taxes taken out before money is sent and the need for approval from officials can all make it difficult. The result is a situation for a company: it can have a lot of money on its balance sheet but not have enough money in the place where a decision to invest needs to be made.
What is trapped cash?
Trapped cash is not lost money. Does it necessarily mean that management has made a mistake? Broadly it refers to cash generated by a company or its subsidiary that is legally owned by the group but cannot be transferred freely to another part of that group. The reason may be a government restriction on foreign-exchange transactions. It may be the tax cost of repatriating earnings. It could be a requirement for approval restrictions on dividend payments, limitations on cross-border loans or simply a combination of legal, tax and administrative hurdles. There is a distinction here between ownership and accessibility. A parent company may own 100 per cent of a subsidiary but that does not mean the parent can necessarily instruct the subsidiary to transfer its entire bank balance to headquarters tomorrow morning. For treasury professionals therefore the relevant question is not simply how cash the group owns. It is how much of that cash is actually deployable, where it is located, in what currency it's held and how quickly it can be moved.
Academic research has found that tax costs associated with repatriating earnings can influence how much cash multinational companies hold overseas. Other research has linked cash and repatriation frictions with distortions in investment and internal capital allocation.
A multinational example
Consider a consumer goods multinational called Bharat Global Consumer Products (BGCP). Bharat Global Consumer Products (BGCP) has subsidiaries in India, Europe, Africa and Asia. The company has subsidiaries in India, Europe, Africa and Asia. One of its subsidiaries—let us call it BGCP Asia. Has performed exceptionally well. Strong sales over years have generated the equivalent of $500 million in cash. The local business does not currently have attractive investment opportunities to deploy all of that money. Meanwhile BGCP’s management identifies an opportunity in another country to build a manufacturing plant at a cost of $150 million. The project is strategically important. Is expected to generate a return comfortably above the group’s cost of capital. Ordinarily the financing decision would seem straightforward. The group has $500 million. The project needs $150 million.. There is a complication.
The country where BGCP Asia operates has exchange and capital movement restrictions. Converting currency into foreign currency and transferring substantial amounts overseas may be subject to regulatory conditions and approvals. The parent company therefore cannot simply move $150 million from BGCP Asia to the project. If the approval process takes long BGCP has another option: borrow the money. Suppose the company raises $150 million through a bank loan. The corporate balance sheet now presents a picture. BGCP has borrowed $150 million while still holding $500 million of its cash elsewhere in the group. The company is paying interest, on borrowed money while its surplus cash remains stranded. That is the cost of trapped cash.
The problem is not limited to borders
The same idea can happen in a different way even inside one country. Big companies often have separate companies that are owned by the same group. One company might have a lot of money while another needs money to grow. The two companies might have the owner, the same name or the same main company but they are still separate in the law. Because of this money can't just be moved between them like they are parts of the same company. An internal loan, a dividend, a contribution of money or another allowed way of moving money might be needed, depending on the situation. In India when money moves across borders or deals with money it is controlled by the Foreign Exchange Management Act and other rules. FEMA splits transactions into account and capital account and says what the government and the central bank can do to manage certain kinds of transactions.
Taxes and reporting rules can also affect payments to people who don't live in India. For example the Income Tax Department says that some payments to people who're not residents or, to foreign companies can require tax to be taken out and reported.
Why trapped cash matters to shareholders
At glance trapped cash looks like a problem only for the treasury department.. Trapped cash is far more than that. The first cost of trapped cash is the cost of borrowing. If a company must raise debt because its own cash cannot be accessed then interest becomes a cost. The second cost is the opportunity cost. Money that sits idle in one market could instead finance a project that yields a return elsewhere.The third issue is capital‑allocation distortion. Management may invest cash in a less attractive local project simply because cash cannot move to a more profitable opportunity elsewhere. Academic research shows that repatriation frictions can disturb companies’ internal capital markets and shape investment decisions.There is also an issue: how investors read cash. A consolidated balance sheet may display a cash position yet the headline figure does not reveal how much of trapped cash the parent company can deploy right away. In other words, reported liquidity is not the same as usable liquidity.
Why multinationals have an advantage - not a free pass
A multinational corporation owns tools that a purely domestic company may not have. A multinational can run treasury centers, use cash‑pooling arrangements, set up inter‑company loans or finance one subsidiary directly instead of sending money through the headquarters. When the law allows these arrangements can cut down the need to move cash back to the home country. One must not mistake them for ways to dodge capital controls. Every transaction must follow the laws of each jurisdiction such as foreign‑exchange rules, tax laws, transfer‑pricing rules and other corporate regulations. The goal of treasury management is not to get around restrictions. It is to arrange the group’s money so that real liquidity is used well as possible while staying within the rules.
How companies can manage the problem
The first step is very simple: know where the cash is. A multinational should keep a view of cash in each country in each currency and in each legal entity. A multinational must tell the difference between cash that is used for day‑to‑day work cash that's free to use and cash that must stay in its place because of laws, rules or practical limits.
Second, a multinational can look at cash‑pooling and netting arrangements if local rules allow. These can help balance surplus and shortfall between subsidiaries that share the group. Third, if a multinational really cannot send money out of a country the best move may be to reinvest.
Building production, adding new technology, improving logistics or expanding supply‑chain capacity can turn unused cash into useful work. Fourth a well‑designed inter‑company loan can sometimes move money inside the group without sending all the money back to the parent company. Still those arrangements must meet the required tax rules. Finally a multinational should tackle the problem before cash gets stuck. Treasury planning must look at repatriation rules, tax outcomes, currency risks and local borrowing conditions when deciding how to fund each subsidiary.
The policymaker’s dilemma
Capital controls and foreign-exchange restrictions are not always policy. Governments might use them to protect foreign-exchange reserves, deal with instability or handle pressure on their currencies. The policy goal might therefore be completely valid. The corporate consequences however need attention. If companies cannot move earnings easily they might hold more cash locally, delay investments, take on more debt or change where they invest.
This is why the design of rules is important. A clear and steady system helps a company plan. A confusing approval process can make planning much harder. For countries trying to attract direct investment this becomes very important. Investors care not about making profits but also about how easily they can reinvest, pay out or take profits back.
The new meaning of liquidity
For years finance books have seen cash as the most liquid asset. The experience of companies makes that simple idea more complex. A dollar in an open bank account in one place is not the same as a dollar in a subsidiary where rules make it hard to change or move. That leads to a way to think about corporate liquidity:
Liquidity is not just how much cash a company has. It is how cash can actually reach and use, where and when it needs it without high costs. This is the meaning of trapped cash.For the CFO it is a treasury challenge. For the investor it is a question about the quality of reported liquidity. For the board it is a capital-allocation issue.. For policymakers it is a reminder that rules meant to solve big economic problems can also affect how companies invest.
In a business world cash has a location.. Sometimes the most costly cash a company owns is not the cash it lacks. It is the cash it has. Cannot use.