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07 November 2016

Foreign Direct Investment (FDI) in Non-banking Finance Companies

The Reserve Bank of India by its Notification dated September 9, 2016, amended the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000. The said amendment substituted the existing caps under paragraph F.8 to annexure B under Schedule 1 of the Regulations, thereby revising the foreign investment caps and entry route in the non-banking financial services sector.

Following this, parallel amendments have now been recently effected in the Consolidated Foreign Direct Investment Policy, 2016 (‘FDI Policy’), vide Press Note. No.6 dated October 25, 2016. Prior to these amendments, foreign direct investment in non-banking finance companies (‘NBFCs’) under the automatic route was permitted only in NBFCs that were involved in any of the 18 specific activities mentioned in the Regulations.

With the rapid growth of innovative non-banking financial services including financial technology services in India, these amendments now facilitate the inflow of FDI beyond the limited ambit of the 18 activities prescribed under the earlier FDI Policy. Therefore, post the amendment, 100% foreign direct investment is now allowed under the automatic route in any non-banking financial services which are governed by financial sector regulators, viz., Reserve Bank of India, Securities and Exchange Board of India, Insurance Regulatory and Development Authority, Pension Fund Regulatory and Development Authority, National Housing Bank or any other regulator as may be notified by the government.

In relation to non-banking financial activities which are not yet regulated by any financial sector regulatory body in India or where there is a doubt regarding regulatory oversight, FDI up to 100% will be allowed with prior Government approval, subject to such conditions including minimum capitalization requirements, as may be prescribed by the Government.

Previously, investments in NBFCs under the FDI regime were subject to minimum capitalization norms and other conditions prescribed under the Consolidated FDI Policy. To give a glimpse, for foreign capital upto 51%, $ 0.5 million was required to be brought upfront. For foreign capital more than 51% and up to 75%, $ 5 million was required to be brought upfront. For foreign capital exceeding 75%, the minimum capitalization was $50 million out of which $ 7.5 million was required to be brought upfront and the balance within 24 months.

Given that such entities are already required to comply with minimum capitalization norms prescribed by financial regulators, the removal of minimum capitalization norms under the FDI Policy will now ease FDI in non-banking financial services.