THE INSTITUTE OF CHARTERED

ACCOUNTANTS OF INDIA

Foreign Investments in NBFCs

Concerns & Limitations
|September 3, 2011|

Sahil Shah | Karan Kalra

Topics

Key Regulations

Types of NBFCs

FDI Regime

FII Route

Setting-Up vs. Acquisition

Capital Requirements

Credit Concentration Norms
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Key Regulations

Types of NBFCs

FDI Regime

FII Route

Setting-Up vs. Acquisition

Capital Requirements

Credit Concentration Norms
Nishith Desai Associates

Key Regulations

RBI Act
Prudential Norms
RBI directions

NBFC

Exchange
control
Regulations

Companies Act

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Key Regulations

Definition:
Non Banking Financial Company has as been defined under Section
45I (f) of the RBI Act, to mean:
(i) A financial institution which is a company;
(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.

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Key Regulations

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
 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

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Key Regulations

Types of NBFCs

FDI Regime

FII Route

Setting-Up vs. Acquisition

Capital Requirements

Credit Concentration Norms
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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

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
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Types of NBFCs

Infrastructure Finance Companies


75% of total assets deployed in infrastructure loans

Non deposit accepting

NoF of INR 300 crore

Minimum credit rating A

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

ECB route available

Liberalized credit concentration norms

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Routes for Foreign Investments

FDI

FII

FVCI

ECB
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Key Regulations

Types of NBFCs

FDI Regime

FII Route

Setting-Up vs. Acquisition

Capital Requirements

Credit Concentration Norms
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FDI Regime

Restriction in terms of sector
Restricted sector





Regulated Sector (few examples)

Atomic Energy
Lottery business
Gambling and Betting
Retail trading (except single
brand retailing)









Banking (74%)
Telecom services (49%)
Insurance (26%)
ARCs (49%)
Single brand retail (51%)
NBFCs
Real Estate

Restriction in terms of securities

Equity shares (including shares with differential rights)

Compulsorily Convertible Preference Shares (CCPSs)
Compulsorily Convertible Debentures (CCDs)

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FDI Regime

Downstream Investments
 50% Test

FDI in NBFCs
 Minimum Capitalization
FDI

Minimum Capitalization

Non Fund based

US $ 0.5 million irrespective of the FDI

[Investment advisory, financial

consultancy, forex broking, money
changing and credit rating agencies]

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

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FDI Regime

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

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 !!
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Key Regulations

Types of NBFCs

FDI Regime

FII Route

Setting-Up vs. Acquisition

Capital Requirements

Credit Concentration Norms
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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!!

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Key Regulations

Types of NBFCs

FDI Regime

FII Route

Setting-Up vs. Acquisition

Capital Requirements

Credit Concentration Norms
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Setting-Up vs. Acquisition

Particulars

Set-up a new NBFC

Regulatory
approvals

NBFC licence
required from RBI

Disclosures

Post facto
intimation of FDI
to RBI - through
form FC - GPR

Buy an existing NBFC by non

Buy an existing NBFC by a
residents by way of transfer of
resident and future infusion of
shares
FDI by non- resident
RBI approval for transfer of shares None
from resident to non resident

30- day Public notice to be

given for change in control /
management
Intimation to RBI due
diligence by RBI?
Post facto intimation of FDI to
RBI - through form FC GPR

6 8 months

30- day Public notice to be

given for change in control /
management
Intimation to RBI due
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
2 3 months

Time frame
(approx.)
Valuation

1 1.5 years

No restrictions

Pricing guidelines floor price as per DCF valuation

Commercial Risk

NA

Successor liability

Debt Funds - An alternate route?

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Key Regulations

Types of NBFCs

FDI Regime

FII Route

Setting-Up vs. Acquisition

Capital Requirements

Credit Concentration Norms
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NBFC SI Capital Requirements

Tier I
Equity + CCPS
+ Free
Reserves +
Securities
Premium a/c
A

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 NBFCs
In excess of 10% of (A- B)

Tier II

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?
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NBFC SI Credit Concentration Norms

Credit Concentration / Investment: (limit subject to owned funds)
Single / Group Exposure
Limits

Lending

lending and
Investment Both
investment

Single borrower

15%

15%

25%

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%

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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
 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
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Thank You

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