NBFC

Issue of RBI NOC for Setting up of Subsidiary By NBFC

NBFC in India has witnessed huge growth in Indian Market. Considering growth factor and expanding business globally, NBFCs have started looking to set up subsidiary/JVs in abroad.

The Reserve Bank of India (RBI) has paved the way for all NBFC desirous of setting up overseas branch/subsidiary/joint venture/representative office or undertaking investments abroad. RBI has mandated all such NBFC to obtain No Objection Certificate from Department of Non-Banking Supervision from the concerned regional office of the RBI.

Applicable Regulations:

NBFC (opening of Branch/Subsidiary/Joint Venture/Representative office or undertaking Investment abroad by NBFCs) Direction 2011 as amended time to time, (NBFC outbound Investment Direction) outlined the general and specific conditions subject to which the NOC will be issued the DNBS. Directions are applicable to both deposit taking as well as non-deposit taking NBFCs.  Also, in addition to above, the FEMA regulation shall be applicable.

Procedure for setting up of subsidiary/wholly owned subsidiary overseas by NBFC:

NBFC desire to set up Subsidiary or wholly owned subsidiary overseas shall satisfy conditions:

Eligibility Criteria:

• Investment shall be in financial service sectors.
• Direct investment in activities shall not be prohibited under FEMA or shall be under sectoral funds.
• Investment shall be in entities having core activity regulated by a financial sector regulator in the host jurisdiction.
• Overseas investment in single intermediate holding entity shall be permissible, any other overseas investment which involved multi-layered, cross-jurisdictional structures are not permitted.
• The NBFC shall be profit making for the last three years and its performance, in general, should be satisfactory during the period of its existence.
• The level of Net Non-Performing Assets of the NBFC should not be more than 5% of the net advances.

Investment Ceiling:

• Maximum aggregate overseas investment is permissible up to 100% of the Net owned fund of the Company.
• Overseas investment by way of equity or fund based commitment in any single entity including subsidiary is permissible up to 15% of the NBFC’s owned funds.
• Any deposit-taking NBFCs making an investment in subsidiary abroad shall maintain the CRAR post overseas investment as prescribed under Non-Banking Financial (Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007, as amended from time to time.

Post Overseas Investment Conditions:

• Any non-deposit accepting systemically important NBFCs making an investment in subsidiary abroad shall maintain the CRAR post overseas investment as prescribed under Systemically Important Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2015, as amended from time to time;
• Any non-deposit taking NBFCs (other than NBFC-ND-SI) making an investment in subsidiary abroad shall maintain the 10% CRAR post overseas investment.
• NBFC should continue to maintain a required level of NOF after accounting for investment in the proposed subsidiary/investment abroad as prescribed in the explanation to Section 45-IA of the RBI Act, 1934.

Reporting and Compliances:

• The NBFC shall comply with the regulations issued under FEMA, 1999 from time to time.
• The NBFC shall comply with the KYC norms.
• An annual certificate from statutory auditors shall be submitted by the NBFC to the Regional Office of Department of Non-Banking Supervision (DNBS) where it is registered, certifying that it has fully complied with all the conditions stipulated under the Guidelines for overseas investment;
• A quarterly return shall be submitted by the NBFC to the Regional Office of DNBS and also Department of Statistics and Information Management (DSIM).

In addition to above conditions below some are the specific conditions are required to comply with:

If opening a branch in abroad:

As a general policy =, NBFCs are not allowed to open any branch abroad, but if any NBFCs who have already a branch opened in abroad for undertaking financial business shall allow continuing its operation after complying the provisions of revised guidelines as applicable.

If Opening Subsidiary/Joint Ventures in abroad:

• The conditions as mentioned above shall duly comply.
• All the operations of the subsidiary abroad shall be subject to regulatory prescriptions of the host country.
• NOC from the Bank taking overseas regulatory approval.
• The NBFC shall not encompass implicit or explicit guarantee to or on behalf of such subsidiaries.
• No request for a letter of comfort in support of the subsidiary abroad from any institution in India shall be permitted.
• NBFC’s liability in the proposed overseas entity shall be restricted to its either equity or fund based commitment to the subsidiary.
• The subsidiary being established abroad should have significant assets and operation. However, companies undertaking activities such as financial consultancy and advisory services can establish without having significant assets.
• The Subsidiary Company established abroad cannot raise resources for or creating assets in India for the Indian operations.
• The NBFC(parent) shall take periodical reports/audit reports about the business undertaken by the subsidiary abroad and shall make them available to Reserve Bank and inspecting officials of the Bank.
• In case of subsidiary has not undertaken any activity or such reports are not forthcoming, the approvals given for setting up a subsidiary abroad shall be reviewed/ recalled.
• The Subsidiary shall make disclosure on its Balance Sheet to the effect that liability of the parent entity in the proposed overseas entity shall be limited to its either equity or fund based commitment to the subsidiary.

If the opening of representative offices abroad by NBFCs:

The representative office can be set up abroad for the below purpose:

• Liaison work,
• Undertaking market study
• Research

However, such entity shall not undertake any activity which involves an outlay of funds.

• The NBFC (parent) shall take periodical reports about the business undertaken by the representative office abroad.
• As it is not envisaged that such office would be carrying on any activity other than liaison work, no line of credit should be extended.
• If a representative office is not undertaking any activity or above reports are not approaching, the approvals were given to NBFC may be reviewed/ recalled.
• All the operations of the representative office abroad shall be subject to regulatory prescriptions of the host country.

Outbound Investment Regulations under FEMA:

The NBFC has to comply with the above provisions in addition to the provisions of FEMA. i.e. The NBFC has to comply with the provisions of FEMA as well as above guidelines.

In accordance with the provisions of FEMA outbound regulations in following cases of outbound investment RBI approval is required:

• Where the investee entity outside India is engaged in financial services activity; or
• Where the investor entity in India has regulated entity in the financial sector.

Procedure to be followed by NBFCs to make an overseas direct investment in a JV/WOS:

There are two ways of making an investment in abroad i.e Automatic route and Approval route. The Applicant shall file an application in accordance with the provisions of FEMA. In addition, the applicant shall comply with the above provisions. The applicant shall obtain ‘No Objection Certificate’ (NOC) from the Department of Non-Banking Supervision of RBI before making an investment.

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