Over the years since liberalisation of the Indian economy in
1991, India witnessed a significant interest of foreign investors
in the Indian NBFC sector.
An NBFC is a company registered under Indian company law and
engaged in the business of loans and advances, acquisition of
shares/stocks/bonds/debentures/securities issued by Government or
local authority or other marketable securities of a like nature,
leasing, hire-purchase, insurance business, chit business. However,
the definition does not include any institution whose principal
business is that of agriculture activity, industrial activity,
purchase or sale of any goods (other than securities) or providing
any services and sale/purchase/construction of immovable
NBFCs are governed under the policies and guidelines as issued
from time to time by the Reserve Bank of India. FDI in NBFCs has
been allowed up to 100% since 1997 subject to the minimum
capitalization norms as issued by the Government.
Foreign investment is allowed in the following activities:
Portfolio Management Services
Investment Advisory Services
Credit Rating Agency
Leasing & Finance
Credit Card Business
Money Changing Business
Micro Credit and Rural Credit.
FDI in such NBFCs is allowed through the automatic route, i.e.,
there is no requirement of an FIPB or RBI approval before making
the proposed investment. The Government has also brought about
various other changes to the guidelines for investment in the NBFC
sector. NBFCs, however, have to comply with the guidelines as
issued by their respective regulators.
Till very recently, these investments were be subject to the
following minimum capitalization norms:
1. $ 0.5 million for foreign capital up to 51% to be brought
2. $ 5 million for foreign capital more than 51% and up to 75%
to be brought upfront.
3. 50 million for foreign capital more than 75% out of which $
7.5 million to be brought upfront and the balance in 24 months.
4. NBFCs having foreign investment more than 75% and up to 100%,
and with a minimum capitalisation of $ 50 million, can set up step
down subsidiaries for specific NBFC activities, without any
restriction on the number of operating subsidiaries and without
bringing in additional capital.
5. Joint Venture operating NBFCs that have 75% or less than 75%
foreign investment can also set up subsidiaries for undertaking
other NBFC activities, subject to the subsidiaries also complying
with the applicable minimum capitalisation norm mentioned
6. Non- Fund based activities: US $0.5 million to be brought
upfront for all permitted non fund based NBFCs irrespective of the
level of foreign investment. Non Fund activities include Investment
Advisory Services, Financial Consultancy, Forex Broking, Money
Changing Business and Credit Rating Agencies.
However, on 10th August 2016, the Government of India approved
further changes to the FDI requirements pertaining to NBFC's.
100% FDI through the automatic route is now permitted in
"Other Financial Services" as well, provided such
services are regulated by any financial sector regulator. Further,
minimum capitalisation norms as mandated under FDI policy have been
eliminated as most of the regulators have already fixed minimum
These recent changes of doing away with the minimum
capitalization norms is a boon since this will spur economic growth
by increasing FDI in the NBFC sector. NBFCs have had a major impact
on the growth of SMEs and businesses in rural areas.This is
primarily based on strong local knowledge and consumer relations.
Increasing FDI will be beneficial for these businesses due to the
relatively easier and faster sanction of loans with favourable
However, a major issue facing the NBFC sector is the
multiplicity of regulators. Both RBI and SEBI exercise regulatory
control over NBFC's. Whilst the regulators try to avoid
encroaching upon the others domain, there is consistent tussle
between the regulators as to which activity would fall under which
regulator's domain. A clarity and consistency in this regard
would be very welcome.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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