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Companies and NBFCs make foreign investments by taking loans, Foreign Direct Investment etc. In this blog we are going to learn about what types of foreign investment are allowed for NBFCs particularly.
Table of Contents
NBFC is the abbreviated term for Non Banking Finance Company which is an institution involved in providing financial services. Their activities include loans and advances, acquisition of stocks, equities, debt etc., chit funds, and leasing. Examples of these firms include chit funds, pawn shops, cashier’s cheque issuers and cheque crashing locations, payday lending, currency exchanges, and microloan providing firms. NBFCs are registered according to the Companies Act 2013.
An NBFC unlike any other company prefer taking loans from foreign countries because they provide loans at a rate much lesser than Indian lenders. They are also able to invest much more money because of the lesser interest rates.
On the contrary foreign investors are also interested in the Indian market because our country has growing customer base unlike any other country and hence they have more chances of growth.
Regulations by the Foreign Exchange Management Act, 1999 and Foreign Exchange Management {Borrowing and Lending in Foreign Exchange} Regulation, 2000 governs any transaction related to foreign Investment/ loan NBFC in India.
A Non-Banking Financial Company brings Foreign Investment in forms of;
When anyone takes loan from a foreign entity it is called as External Commercial Borrowings {ECB}. One can take ECB in the form of bonds, preference share and debentures. Also a loan taken by a foreign shareholder having up to 25% of the shares is also categorized as ECB.
Businesses permitted by RBI only can take foreign loans after they fulfill all the necessary requirements. However, in case of some specified activities, NBFCs only need to comply with the procedural requirements to take foreign loan. They do not require any prior permission from RBI.
ECB stands for External Commercial Borrowings. As per these policies NBFCs {IFCs-Infrastructure Finance Company} involved in financing of infrastructure sector are allowed to take {ECBs} External Commercial Borrowings from the authorized lenders including international banks under the approval route.
Related Reads: What are External Commercial Borrowing and its regulations?
Under the Section 15 of Foreign Exchange Management Act[1]it is specified that anybody who violates these laws will be liable for the fine which is thrice the amount involved. Furthermore the defaulters are kept under investigation by RBI. Defaulters can only avail foreign loan under approval route. If the violation of these rules continues then the defaulter is liable for a fine of Rs 5000 per day.
Related Reads: FEMA Contravention and Penalties
The third pointer of the Foreign Exchange Management {Borrowing and Lending in Foreign Exchange} Regulation, 2000 defines the rule that prohibits borrowing or lending from foreign exchange. According to the rule no person, residing in India is allowed to borrow or lend from any foreign exchange or any individual residing in India or outside unless RBI permits them.
No, NBFCs cannot accept deposits from any Non Resident Indian except Deposit by Debit to the NRO account of the NRI. Moreover such amount should not be the inward remittance or transfer from NRE/FCNR account. However, existing deposits of the NRI can be renewed.
Yes, any corporate body which is corporated/registered in India can give loan to NRI/IPO Employees in INR if;
The NBFCs who want to take foreign loan needs to submit Form 83 to the authorized dealer bank to get the LRN. Loan Registration Number {LRN} must be certified by a chartered accountant or the company secretary. Then the Authorized Dealer Bank forwards the form to the department of Statistics and Information Managements of RBI. The loan is issued only after the NBFC receive the LRN.
Foreign Direct Investment {FDI} in NBFCs is permitted under the automatic route in specified activities complying with the Minimum Capitalizing Norms. When there is no need for the investor to take approval from the Foreign Promotion Board or the RBI to make any investment, then it is called as Automatic route. Automatic route up to 100% is allowed without taking any permission from the authorized bodies.
Routing is required for all foreign transactions only through entities that are licensed/ authorized by RBI, according to Section 10 of FEMA.
FDI/NRI investments are allowed under automatic route only in the following 18 NBFC activities;
The following were the Minimum Capitalizing Norms under which FDI are permitted in specified activities of NBFC holding minimum foreign capital of;
In the 2017-18 budget these norms were eliminated because almost every regulators now in place have fixed minimum capitalizing norms.
Related Reads: FDI Norms in Loan Company and Compliance under FEMA
NBFCs can take foreign loans. They just need to comply with the procedural requirements. They do not need to take permission for that from RBI. Investments are allowed under automatic route only in the 18 NBFC activities prescribed by the extant FDI policies. Also, NBFCs can take ECB-External Commercial Borrowings under the approval route. The penalty set for the violation of the prescribed rules is thrice the amount involved in the investment.
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