FDI in NBFC Sector Relaxed

Foreign direct investment (FDI) in
non-banking finance companies (NBFCs) has been subject to minimum
capitalisation norms. For example, any foreign investment of more than 75% in
an NBFC requires a minimum capitalisation of US$ 50 million through foreign
inward remittances.
As far as downstream investments
are concerned, the Conslidated
FDI Policy Circular
provides that the relevant caps and conditionalities
shall apply to downstream investments as well. However, there is a specific
exception for 100% foreign-owned NBFCs where there is no restriction on
establishing downstream subsidiaries without further capitalising each
subsidiary with the minimum required foreign investment. However, this specific
dispensation was not available to NBFCs where foreign investment is between 75%
and 100%. By way of a Press Note No. 9 (2012) Series, the Government has now
brought such NBFCs on par with 100% foreign-owned NBFCs, whereby they can also
set up downstream subsidiaries without further capitalising each one of them with
the requirement minimum amount.
A report
in the Business Standard sets out some of the advantages of this change:
The rule has made the business
very capital intensive for companies that have FDI, as most of them prefer a
subsidiary structure to carry out different types of businesses.
This was not the only problem.
Norms say that a NBFC has to set up separate arm for different set of activity.
It means a NBFC who is in the business of custodian service and then it decides
to go into leasing and finance, it needs to set up a different arm.
Previous
regulation meant such a NBFC, if having more than 75 per cent FDI but less than
100 per cent and a capital base of $50 million, it would need to bring another
$50 million. Now this will not be required.

  • Update (October 11, 2012): The above amendment has also been implemented by the Reserve Bank of India through a Circular.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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