After the liberalization of the Indian economy in 1991, India has witnessed a significant interest of foreign investors in the Indian Non-Banking Financial Company (NBFC) sector. While the provisions of foreign investment and foreign exchange are now regulated by the FEMA, 2000, the working and operations of NBFCs are regulated by the Reserve Bank of India (RBI) within the framework of the RBI Regulation Act 1934 and the directions issued by it.
The Reserve Bank of India on 9 September 2016 released a notification amending the Foreign Exchange Management (Transfer and Issue of Securities to Persons Resident Outside India) Regulations, 2000, as a measure to make the foreign investments in the ‘non-banking financial services’ sector easier. In order to boost up the economic activity in financial sectors, government incorporated some changes in the budget of 2017-2018 and introduced new FDI norms for NBFCs.
RBI’s FDI Policy, 2017 for NBFC
Following are the key changes in FDI norms for NBFCs in 2017:
FDI in NBFC
FDI in NBFC has seen a liberal point of view as the demand for funding in the NBFC sector is huge and growing. The foreign banks and venture capitalists can now invest in NBFCs. This is crucial because the Fintech companies are growing at a very good rate because of the secure and easy process of lending.
100 % FDI in Automatic Route in NBFC
The new norm states 100 % FDI through the Automatic route for NBFC, under Section 47 of the FEMA Act. Investment in the automatic route was limited to the 18 specified NBFC activities. Furthermore, investment activities were not part of these 18 NBFC activities.
Foreign investment was allowed under automatic route only in the specific non-banking financial service activities which are :Merchant Banking, Underwriting, Portfolio Management Services, Stock Broking, Asset Management, Venture Capital, Custodial Services, Factoring, Leasing & Finance, Housing Finance, Credit Card Business, Micro Credit, Rural Credit, on-fund based activities, Investment Advisory Services, Financial Consultancy, Forex Broking, Credit Rating Agencies, and Money Changing Business.
As per the new amendment, the investment is now subject to sectoral regulations and provisions for Foreign Exchange Management Regulations, 2000 with the amendments incorporated from time to time.
Elimination of Minimum Capitalization Norms
The minimum Capitalization norms will now be eliminated as most of the regulators have now got the fixed minimum Capitalization norms in place. Moreover, the list on non-fund based activities are said to be subjected to minimum capitalization requirements.
Regulatory Compliance and Risk Management for NBFC
There is a complex and strict regulatory environment under which marketplace lending operates. It is not easy to make NBFCs conform to compliance. Moreover, foreign funding in NBFCs must meet RBI compliance. However, RBI has now simplified the filing process with an online form through RBI portal.
The two key relaxations which have been introduced by this Notification are:
100% FDI through the automatic route is now permitted in “Other Financial Services” as well, provided such services are regulated by any financial sector regulators.
Any form of additional capitalization norms linked to foreign ownership under FDI policy has been eliminated as most of the regulators have already fixed minimum capitalization norms and which are not regulated by any financial sector regulators i.e. unregulated NBFCs will require prior government approval.
These recent changes of doing away with the minimum capitalization norms is a boon since it will spur economic growth by increasing FDI in the NBFC sector. Increasing FDI will be beneficial for the business due to the relatively easier and faster sanction of loans with favorable interest rates. This is certainly a welcome move and is expected to provide a much-needed boost to this sector.
The new set of FDI norms is intended to bring huge foreign investments to the Indian shore. Whether regulated on not, the aim of the Government is to encourage foreign investment in all sectors. The difference lies in the fact that the activities which are not regulated need prior Government approval.
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