What is trapped cash, and what are your options when a subsidiary holds large balances in a jurisdiction with capital controls?
A core Corporate Treasury interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
Trapped cash is liquidity that legally or practically can't be moved to the parent — capital controls, withholding or repatriation taxes, regulatory minimums, or thin convertibility (classic examples: China, India, parts of Latin America/Africa). It overstates group liquidity if you count it as freely available. Options: deploy it locally (fund local capex, working capital, or intercompany lending within the jurisdiction); use dividends, royalties, or management fees within legal limits to extract it tax-efficiently; net it through in-house bank/pooling where permitted; or, last resort, accept the cost of conversion. The key discipline is to report 'available' versus 'trapped' cash separately so the buffer and covenant headroom aren't overstated.
WHAT INTERVIEWERS LISTEN FOR
- ✓Trapped cash can't move freely (controls/tax/regulation)
- ✓Don't count it as available group liquidity
- ✓Deploy locally or extract via dividends/fees within limits
- ✓Report available vs trapped separately
COMMON MISTAKES
- ✗Counting trapped cash in usable liquidity
- ✗Ignoring repatriation tax cost
- ✗No separate reporting of restricted balances
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