Requirements for Foreign Investment in NBFCs under RBI’s latest Master Circular, 2014
RBI Master Circular on Foreign Investment in India dated July 1, 2014 (“RBI Master Circular”) which lays down the legal requirements for foriegn direct investment in Non-banking Financial Companies (“NBFCs“).
As per this Master Circular, foreign investment into Non-Banking Finance Companies is allowed to the extent of 100% under the automatic route in only the following activities, viz. Merchant Banking, Under Writing, Portfolio Management Services, Investment Advisory Services, Financial Consultancy, Stock Broking, Asset Management, Venture Capital, Custodian Services, Factoring, Credit Rating Agencies, Leasing & Finance, Housing Finance, Forex Broking, Credit Card Business, Money Changing Business, Micro Credit and Rural Credit.
In addition, the NBFC will have to comply with the guidelines of the relevant regulator/s, as may be applicable. For instance, those companies, which are Core Investment Companies (CICs), will have to additionally follow RBI’s Regulatory Framework for CICs[1].
Furthermore, such FDI in an NBFC would also be subject to the following minimum capitalisation norms[2]-
- US $0.5 million for foreign capital up to 51% to be brought upfront;
- US $ 5 million for foreign capital more than 51% and up to 75% to be brought upfront;
- US $ 50 million for foreign capital more than 75% out of which US$ 7.5 million to be brought upfront and the balance in 24 months;
- NBFCs (i) having foreign investment more than 75% and up to 100%, and (ii) with a minimum capitalisation of US$ 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. The minimum capitalization condition as mandated by para 3.10.4.1 of DIPP Circular 1 of 2012 dated April 10, 2012, on Consolidated FDI Policy, therefore, shall not apply to downstream subsidiaries;
- 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 in (a), (b) and (c) above and (f) below;
- Non- Fund based activities[3]: US$ 0.5 million to be brought upfront for all permitted non-fund based NBFCs irrespective of the level of foreign investment subject to the condition that it would not be permissible for such a company to set up any subsidiary for any other activity, nor it can participate in any equity of an NBFC holding/operating company.
- This will be subject to compliance with the guidelines of RBI.
It is to be noted that wherever there is a requirement of minimum capitalization, it shall include share premium received along with the face value of the share, only when it is received by the company upon issue of the shares to the non-resident investor. Amount paid by the transferee during post-issue transfer of shares beyond the issue price of the share, cannot be taken into account while calculating minimum capitalization requirement.
Image from here