foreign investment in nbfc - concerns limitation final

Foreign Investments in NBFCs

Concerns & Limitations

THE INSTITUTE OF CHARTERED

ACCOUNTANTS OF INDIA

Sahil Shah | Karan Kalra

Concerns & Limitations

|September 3, 2011|

�Key Regulations

�Types of NBFCs

�FDI Regime

Topics

�FII Route

�Setting-Up vs. Acquisition

�Capital Requirements

�Credit Concentration Norms

© Nishith Desai Associates 2

�Key Regulations

�Types of NBFCs

�FDI Regime

�FII Route





RBI Act

Prudential Norms

RBI directions

Key Regulations

NBFC

Companies ActExchange

control

Regulations

4© Nishith Desai Associates

� Definition:

Non Banking Financial Company has as been defined under Section

45–I (f) of the RBI Act, to mean:

(i) A financial institution which is a company;

Key Regulations

5

(ii) A non-banking institution which is a company and which has as its

principal business the receiving of deposits, under any scheme or

arrangement or in any other manner, or lending in any manner;

(iii) Such other non-banking institution or class of such institutions, as the

Bank may, with the previous approval of the Central Government and

by notification in the Official Gazette, specify.

© Nishith Desai Associates

�Registration:

� Mandatory registration / acquiring the license for carrying out business of

an NBFC

� Eligibility: Minimum Net Owned Fund of INR 2 crore / INR 25 lacs

� Application before 20 April 1999

Key Regulations

6

� Versus Net Worth under SEBI PMS Regulations

� Valid until surrendered or revoked

� Activities exempt from registration requirement

�Housing Finance Companies, Merchant Banking company, Micro Finance

Companies (not lending more than INR 50,000), Mutual Benefit Companies,

Government Companies, Venture Capital Fund Company, Insurance Companies,

Stock Exchange Stock Brokers / sub broker Nidhi Companies and Chit Funds


�Key Regulations

�Types of NBFCs

�FDI Regime

�FII Route





Types of NBFCs

� Systemically Important NBFCs

� Not accepting / holding public deposits

� Total assets of INR 100 crore and above

� Capital: Tier II cannot exceed Tier I

� Credit Concentration Norms

8

� Core Investment Companies

� NBFC in business of acquisition of shares and securities

� At least 90% of net assets in the form of investment in group companies

� equity and debt

� at least 60% should be in equity shares (including <10 year tenure CCPS)

� No trading in group co. investments – except dilution and disinvestment

� No other financial activity


� Infrastructure Finance Companies

� 75% of total assets deployed in infrastructure loans

� Non deposit accepting

� NoF of INR 300 crore

� Minimum credit rating ’A’

Types of NBFCs

� Minimum credit rating ’A’

� CRAR of 15 percent (with minimum Tier I capital of 10%)

� ECB route available

� Liberalized credit concentration norms


Routes for Foreign Investments

� FDI

� FII

� FVCI

� ECB


�Key Regulations

�Types of NBFCs

�FDI Regime

�FII Route





� Restriction in terms of sector

FDI Regime

Restricted sector Regulated Sector (few examples)

� Atomic Energy

� Lottery business

� Gambling and Betting

� Retail trading (except single

� Banking (74%)

� Telecom services (49%)

� Insurance (26%)

� ARCs (49%)

12

� Restriction in terms of securities

• Equity shares (including shares with differential rights)• Compulsorily Convertible Preference Shares (CCPSs)• Compulsorily Convertible Debentures (CCDs)

� Retail trading (except single

brand retailing)

� ARCs (49%)

� Single brand retail (51%)

� NBFCs

� Real Estate


FDI Regime

� Downstream Investments

� 50% Test

� FDI in NBFCs

� Minimum Capitalization

FDI Minimum Capitalization

13

FDI Minimum Capitalization

Non Fund based[Investment advisory, financial consultancy, forex broking, money changing and credit rating agencies]

US $ 0.5 million irrespective of the FDI

Fund based

Up to 51%; US $ 0.5 million

Above 51% and up to 75% US $ 5 million

Beyond 75% and up to 100%. US $ 50 million; US $ 7.5 million -upfront and balance in 24 months


� Automatic route activities

• Merchant Banking, Underwriting, Portfolio Management Services, Investment

Advisory Services, Financial Consultancy, Stock Broking, Asset Management,

Venture Capital, Custodial Services, Factoring, Credit Rating Agencies,

Leasing & Finance, Housing Finance, Forex Broking, Credit Card business,

Money changing business, Micro credit and Rural credit

• Investment companies not included

FDI Regime

• Investment companies not included

� Downstream of Investment/ JVs

• 100% foreign owned NBFCs can set up step down subsidiaries for specific

NBFC activities without any capitalisation requirements.

• Joint Venture operating NBFCs that have up to 75% of foreign investment

can also set up subsidiaries for undertaking other NBFC activities subject to

fulfilling capitalization requirements.

• No provision for NBFCs having 75% to 99.99% foreign investment !!


�Key Regulations

�Types of NBFCs

�FDI Regime

�FII Route





FII Route

� Equity Investments

� Only portfolio investments in listed shares

� Limit of 10% of the issued share capital of the investee

� Debt – Listed NCDs

� No restriction on the quantum of subscription (up to 100%)

� Limitations

� Availability of debt limits

� Procedure

� Private placement with appointment of debenture trustee

� Listing of NCDs on WDM

� Subscription of NCDs by FII / sub-account using debt allocation limits

� Non applicability of FDI and ECB restrictions!!


�Key Regulations

�Types of NBFCs

�FDI Regime

�FII Route





Setting-Up vs. Acquisition

Particulars Set-up a new NBFC Buy an existing NBFC by non residents by way of transfer of

shares

Buy an existing NBFC by a resident and future infusion of

FDI by non- resident

Regulatory

approvals

NBFC licence

required from RBI

RBI approval for transfer of shares

from resident to non resident

None

Disclosures • Post facto

intimation of FDI

to RBI - through

form FC - GPR

• 30- day Public notice to be

given for change in control /

management

• Intimation to RBI – due

• 30- day Public notice to be

given for change in control /

management


18

�Debt Funds - An alternate route?

form FC - GPR • Intimation to RBI – due

diligence by RBI?

• Post facto intimation of FDI to

RBI - through form FC – GPR


diligence by RBI?

• Post facto intimation of FDI to

RBI - through form FC - GPR

• If fresh FDI leads to further

change in control, public

notice and intimation to be

repeated

Time frame

(approx.)

1 – 1.5 years • 6 – 8 months • 2 – 3 months

Valuation No restrictions Pricing guidelines – floor price as per DCF valuation

Commercial Risk NA Successor liability


�Key Regulations

�Types of NBFCs

�FDI Regime

�FII Route





� Tier I

� Tier II

NBFC SI – Capital Requirements

Equity + CCPS + Free

Reserves + Securities

Premium a/cA

Revaluation reserves + accumulated losses +

deferred revenue expenditure + intangibles

B

Outstanding loans / advances and investments made in subsidiaries and

companies in the same group and investments in other NBFC’s In excess of 10% of (A- B)

• Preference shares other than those compulsorily convertible into equity • Revaluation reserves at discounted rate of 55%• Subordinated debt• General provisions and loss reserves to the extent these are not attributable to actual

diminution in value or identifiable potential loss in any specific asset and are available to meet unexpected losses, to the extent of one and one fourth percent of risk weighted asset

• Hybrid debt capital instrument

�Tier II capital shall not exceed Tier I capital

�Where are OCDs and superior debt covered?


NBFC SI – Credit Concentration Norms

� Credit Concentration / Investment: (limit subject to owned funds)

Single / Group Exposure Limits Lending Investment

Both lending and investment

Single borrower 15% 15% 25%

21

Single Group of Borrowers 25% 25% 40%

Infrastructure Loan / Investment•Single borrower•Single group of borrowers

Add 5%Add 10%

Add 5%Add 10%

Add 5%Add 10%


NBFC SI – Credit Concentration Norms

� Waiver of Credit Concentration limits

� Pre-requisites for application:

� No access to public funds

� Not in the business of issuance of guarantees

� Public Funds� Public Funds

� Includes funds raised either directly or indirectly through public deposits,commercial papers, debentures, inter-corporate deposits and bank finance

� Issues & Concerns:

� Plain paper application – no parameters

� Definition of public funds

� Appears that approvals are deal specific


Nishith Desai Associates

Legal & Tax Counseling Worldwide

Thank You


foreign investment in nbfc - concerns limitation final

Documents

government companies

insurance companies

group companies equity

crore inr

minimum tier i capital

mutual benefit companies

merchant banking company

nonbanking institution