FDI in NBFC

A Non-Banking Financial Company (NBFC) is a company whose primary business operations involve providing loans/ advances, acquisition of securities, insurance business, etc. But any business involved in agriculture activities, industrial activity, or dealing in the immovable property will not be covered under NBFC.

NBFCs have been working towards extending the scope of financial services to economically weaker sections of society, which leads to benefit the entire economical structure of the country. The RBI’s Notification No. 375/2016-RB dated 09 September 2016 bought the wave of change for NBFCs in terms of FDI, which allowed 100% FDI in the NBFC sector through an automatic route.

What is FOREIGN DIRECT INVESTMENT (FDI)?

When investment is done in an Indian company by an entity/a person based outside India is termed as Foreign direct investment (FDI).

As per RBI, the investment is an FDI when:

• Investment is done by a person resident outside India
• Investment is done in an unlisted Indian company.
• Investment in listed Indian companies is made 10% or more of the paid-up equity capital (post issue) on a fully diluted basis

How can an Indian Company receive Foreign Investment?

An Indian company can receive foreign investment in the following two ways:

1. Under Automatic Route: Under Automatic Route, prior approval of the Government or the RBI is not required for a specified group of activities.
2. Under Government Approval Route: Under this route, prior approval of the Government is mandatory.

What are the FDI guidelines for NBFC sectors?

FDI is considered an important source of funding in our country. After the 1991 crisis, FDI slowly gained momentum in the country, and now India is amongst the top 10 FDI destinations around the globe.

Foreign Exchange is regulated by the Foreign Exchange Management Act (FEMA), and NBFC is governed by the Reserve Bank of India (RBI) as per RBI Regulation Act 1934.

Foreign Investment was allowed (100%) under automatic route for some specified activities subject to minimum capitalization norms. The list of specified activities includes Financial Consultancy, Stock-broking, Credit Card Business, Factoring, Merchant Banking, Underwriting, Portfolio Management Services, Asset Management, Investment Advisory Services, Venture Capital, Custodial Services, etc.

As per the RBI notification dated September 09, 2016, some relaxations in FDI policies were introduced as:

• 100% FDI is allowed for ‘other financial services’ by NBFC through the automatic route.
• “Other Financial Services” shall include such activities which are regulated by a financial regulator such as RBI, SEBI, IRDA, Pension Fund Regulatory and Development Authority, or any other regulator notified by the Government of India.
• The NBFCs which are not governed by regulators in the financial sector shall need prior government approval.

FDI forms a significant portion of the source of funds in the NBFC sector after the liberalization of FDI policies for NBFC. The changes have been proved as a favorable factor for the growth of NBFC in the competitive financial market.