Foreign Investment in NBFC - Concerns Limitation Final
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Transcript of 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
�Setting-Up vs. Acquisition
�Capital Requirements
�Credit Concentration Norms
© Nishith Desai Associates 3
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.
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�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
© Nishith Desai Associates
�Key Regulations
�Types of NBFCs
�FDI Regime
�FII Route
�Setting-Up vs. Acquisition
�Capital Requirements
�Credit Concentration Norms
© Nishith Desai Associates 7
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
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� 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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� 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
9© Nishith Desai Associates
Routes for Foreign Investments
� FDI
� FII
� FVCI
� ECB
10© Nishith Desai Associates
�Key Regulations
�Types of NBFCs
�FDI Regime
�FII Route
�Setting-Up vs. Acquisition
�Capital Requirements
�Credit Concentration Norms
© Nishith Desai Associates 11
� 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%)
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� 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
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FDI Regime
� Downstream Investments
� 50% Test
� FDI in NBFCs
� Minimum Capitalization
FDI Minimum Capitalization
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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
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� 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 !!
14© Nishith Desai Associates
�Key Regulations
�Types of NBFCs
�FDI Regime
�FII Route
�Setting-Up vs. Acquisition
�Capital Requirements
�Credit Concentration Norms
© Nishith Desai Associates 15
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
© Nishith Desai Associates 17
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
• Intimation to RBI – due
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�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
• 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
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
© Nishith Desai Associates
�Key Regulations
�Types of NBFCs
�FDI Regime
�FII Route
�Setting-Up vs. Acquisition
�Capital Requirements
�Credit Concentration Norms
© Nishith Desai Associates 19
� 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?
20© Nishith Desai Associates
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%
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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%
© Nishith Desai Associates
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
22© Nishith Desai Associates
Nishith Desai Associates
Legal & Tax Counseling Worldwide
Thank You
23© Nishith Desai Associates