NBFC in India has witnessed huge growth in the market. It looks forward to set up the same in abroad as JV/ subsidiary. RBI has paved the path for NBFC to set up business or undertake investments abroad as subsidiaries or joint venture or overseas branch or by opening representative offices. It is mandated by RBI to get No objection certificate from RBI.
Applicable regulations
NBFC is controlled by NBFC outbound investment direction which lays down general and specific conditions on which NOC will be issued. Directions are applicable to both deposit taking and non- deposit NBFC’s. Other than this, FEMA regulations shall apply.
Procedure for setting up subsidiary/ wholly owned subsidiary abroad by NBFC
Eligibility criteria:
- Investments shall be made only in financial sector.
- Direct investmets in activities shall not be prohibited by FEMA.
- Investment shall be made in those entities which have core activity which is regulated by financial regulator in the host country.
- Investments made abroad, only which have single intermediate holding entity will be permissible, other than those with multidimensional or cross jurisdictional structures will not be possible.
- The NBFC will be permitted only if it has been making profits for the past 3 years and has got a satisfactory business.
- The level of non- performing assets (NPA) for the NBFC should not be more than 5%.
Investment ceiling
- Maximum investment abroad is 100% of the net owned funds.
- Overseas investment with single entity including subsidiary by a way of equity or fund based investment is up to 15% of the NBFC’s owned funds.
- Any deposit taking NBFC making investment overseas shall maintain CRAR post overseas investment and follow directions of companies prudential norms as changed from time to time.
Post overseas investment conditions’
- Maintain CRAR post overseas investment and follow directions of companies prudential norms as changed from time to time.
- Any non- deposit NBFC making investment overseas in any subsidiary shall maintain 10% of CRAR post overseas investment.
- NBFC should maintain a required level of NOF after overseas investment in proposed subsidiary as mentioned in the RBI act.
Reporting and compliances
- The NBFC shall comply with rules of FEMA.
- The NBFC shall comply with the KYC norms.
- Comply with the overseas investment guidelines.
- A quarterly return shall be submitted by the NBFC to regional office and also to the department of statistics and information management.
If opening a branch abroad
Subsidiary or Joint Venture
- All the conditions stated above must be duly comply with.
- Subsidiaries abroad shall be subject to regulatory prescriptions of the host country.
- NOC from bank required for overseas investment approval.
- No request for letter of comfort from subsidiary abroad to any institution in India shall be permitted.
- NBFC’s liability to be restricted to equity or fund based commitment.
- Subsidiaries should have significant assets and operation.
- Subsidiary NBFC’s cannot raise resources for/ from Indian operations.
- NBFC (the parent) shall regularly take audits and regulatory measures to check the work of subsidiary.
- Balance sheet disclosure to the parent NBFC by the subsidiary.
Opening a representative office abroad
The representative office can be set up abroad for the following purposes-
- Liaison work.
- Undertaking market study
- Research purposes.
The representative office shall also comply with all the above mentioned guidelines.
Outbound investment regulations under FEMA
The NBFC other than the regulations has to comply with regulations given under FEMA. According to FEMA, outbound investments RBI approval is needed when-
- Investee entity outside India is engaged in financial services activities.
- Investor entity in India has regulated entity in financial sector.
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Summary:
NBFC to make any investments abroad has to comply with certain guidelines and also FEMA guidelines. The investments abroad should follow certain rules and maintain CRAR, investments in compliance to India, etc. They have mentioned eligibility criteria as well as, investment ceiling and also rules as to opening of joint venture or subsidiary or representative office overseas.
