Several top corporates and banks are experimenting with virtual currency as a more transparent treasury management tool for optimal utilisation of working capital, settlement among subsidiaries and paying vendors and suppliers while being cautious about regulatory compliance.
Even as bitcoin loses sheen, some companies and banks are looking to use digital currency for their internal operations based on blockchain technology, said people with direct knowledge of the matter. They said Hindustan Unilever Ltd (HUL), Reliance Industries Ltd (RIL), HDFC Bank and ABG Shipyard are among those running such pilots for internal treasury management, record keeping and trade finance functions. ET spoke to some of the people working directly on blockchain pilots.
HUL said it is constantly looking to bolster digital capabilities. RIL, HDFC Bank and ABG Shipyard didn’t respond to queries.
“The cryptocurrency would only be used by the companies and banks internally,” said one of the persons cited above. “It will mainly be effective as a working capital management tool, where rather than actually transferring money, cryptocurrency will be transferred and accounts shall be reconciled at a later date.” The companies and banks involved in the pilot projects have not yet set a definite timeline for scaling up usage.
A company with several subsidiaries has to move money back and forth among the various entities. These transfers can number in the millions annually, especially in infrastructure and banking. Currently, these could be book entries or actual money may have to be paid and received. This is where an internal cryptocurrency comes handy, experts said.
“Several large companies are evaluating various use cases of blockchain, including in areas such as managing intra-group transactions and as a logical extension, looking at its use as a group treasury management tool for more efficient cash and working capital management,” said Sai Venkateshwaran, partner and head of CFO advisory, KPMG, in India. “Apart from greater efficiency and accuracy, it has the potential to bring enhanced levels of transparency for group treasury management and also cost savings.”
India’s biggest consumer goods company said it’s working on several test projects.
“In line with our vision of ‘re-imagining HUL,’ we are constantly looking to augment digital capabilities in our business,” a company spokesperson said. “We are currently working on a number of experimentation projects across our value chain which will propel us into the future and redefine the landscape in which we operate.”
Corporates are experimenting with cryptocurrencies to reconcile accounts, with actual money being transferred only at the end of the financial year or quarter.
“There is a legal angle to it, there is a tax angle and then there is an accounting angle. Those would be dealt with at a later stage,” said another person handling one of such projects.
One of the concerns is the Reserve Bank of India’s guidelines on cryptocurrency. Industry experts said this may not prove to be a challenge as companies are limiting such currency to internal usage.
“Many banks and consortiums like BIC (Blockchain Investors Consortium) have also tried to bring in blockchain technology in the trade finance area and results are positive especially around ecosystems like buyer-supplier or logistics,” said Vivek Belgavi, partner and fintech leader, PwC India. “The concern for the regulators is the speculation that was happening in bitcoin or the other cryptocurrency. There is no problem with using the underlying blockchain technology.”
Corporates will need to tread carefully considering the legal and regulatory requirements, said Venkateshwaran.
“Several existing regulatory requirements, including the restrictions on inter-company loans, need for maintenance of balances in separate bank accounts, and FEMA (Foreign Exchange Management Act) regulations, may pose a challenge in realising the full potential of these,” he said. “Nonetheless, for several companies, this could become a tool for trade finance and settlement within closed eco-systems of customers and suppliers.”
For some companies, this offers an improved way of record keeping as they fear that in a situation like that has befallen (IL&FS), they may not be able to justify millions of transactions among subsidiaries and special purpose vehicles (SPVs) due to the lack of detailed records.
“The biggest problem in for several companies is that there are several transactions between subsidiaries and the only record of these is minutes of meetings,” said a senior technology official working on one of the pilot projects. “Many companies have huge cash transactions and to keep records of all these is tough, but blcokchain can be a good source for record keeping too.”