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.