Over the years since liberalisation of the Indian economy in 1991, India witnessed a significant interest of foreign investors in the Indian NBFC sector.

An NBFC is a company registered under Indian company law and engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business. However, the definition does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property.

NBFCs are governed under the policies and guidelines as issued from time to time by the Reserve Bank of India. FDI in NBFCs has been allowed up to 100% since 1997 subject to the minimum capitalization norms as issued by the Government.

Foreign investment is allowed in the following activities:

Merchant Banking

Under Writing

Portfolio Management Services

Investment Advisory Services

Financial Consultancy

Stock Broking

Asset Management

Venture Capital

Custodian Services

Factoring

Credit Rating Agency

Leasing & Finance

Housing Finance

Forex Broking

Credit Card Business

Money Changing Business

Micro Credit and Rural Credit.

FDI in such NBFCs is allowed through the automatic route, i.e., there is no requirement of an FIPB or RBI approval before making the proposed investment. The Government has also brought about various other changes to the guidelines for investment in the NBFC sector. NBFCs, however, have to comply with the guidelines as issued by their respective regulators.

Till very recently, these investments were be subject to the following minimum capitalization norms:

1. $ 0.5 million for foreign capital up to 51% to be brought upfront.

2. $ 5 million for foreign capital more than 51% and up to 75% to be brought upfront.

3. 50 million for foreign capital more than 75% out of which $ 7.5 million to be brought upfront and the balance in 24 months.

4. NBFCs having foreign investment more than 75% and up to 100%, and with a minimum capitalisation of $ 50 million, can set up step down subsidiaries for specific NBFC activities, without any restriction on the number of operating subsidiaries and without bringing in additional capital.

5. Joint Venture operating NBFCs that have 75% or less than 75% foreign investment can also set up subsidiaries for undertaking other NBFC activities, subject to the subsidiaries also complying with the applicable minimum capitalisation norm mentioned above.

6. Non- Fund based activities: US $0.5 million to be brought upfront for all permitted non fund based NBFCs irrespective of the level of foreign investment. Non Fund activities include Investment Advisory Services, Financial Consultancy, Forex Broking, Money Changing Business and Credit Rating Agencies.

However, on 10th August 2016, the Government of India approved further changes to the FDI requirements pertaining to NBFC's. 100% FDI through the automatic route is now permitted in "Other Financial Services" as well, provided such services are regulated by any financial sector regulator. Further, minimum capitalisation norms as mandated under FDI policy have been eliminated as most of the regulators have already fixed minimum capitalisation norms.

These recent changes of doing away with the minimum capitalization norms is a boon since this will spur economic growth by increasing FDI in the NBFC sector. NBFCs have had a major impact on the growth of SMEs and businesses in rural areas.This is primarily based on strong local knowledge and consumer relations. Increasing FDI will be beneficial for these businesses due to the relatively easier and faster sanction of loans with favourable interest rates.

However, a major issue facing the NBFC sector is the multiplicity of regulators. Both RBI and SEBI exercise regulatory control over NBFC's. Whilst the regulators try to avoid encroaching upon the others domain, there is consistent tussle between the regulators as to which activity would fall under which regulator's domain. A clarity and consistency in this regard would be very welcome.

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