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NBFC have to comply with the domestic laws to operate in the financial sector. While borrowing foreign loans, an NBFC has to be compliant with the regulations of the Foreign Exchange Management Act (FEMA).
NBFC compliance under FEMA is mandatory for the following purposes:
There are two routes under Foreign Investment- Automatic Route and Approval/ Government Route. Foreign investment in the NBFC sector is permitted under the automatic route. For NBFC compliance under FEMA, the activities are regulated under the automatic route; therefore, no approval is required by the RBI. Investments under the automatic route can be up to 100 per cent without any form of approval from the Government.
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Without obtaining prior permission from the RBI, an NBFC cannot be formed. For the formation of an NBFC, there is a requirement to start a private company which has minimum capital requirements. The formation of the company has to be compliant with the laws related to company law. Similarly, the NBFC also have to be compliant with FEMA laws. NBFC compliance, therefore, is mandatory as per the RBI and FEMA. RBI amended the Foreign Exchange Management (Borrowing and Lending in Foreign Exchange) Regulation, 2000 in 2016 which allowed foreign investors to invest in NBFC.
Minimum capitalisation norms for Foreign Investment in NBFC (Before 2016 amendment)
Before the amendment in 2016, the following minimum capitalization norms were followed for any foreign investment in an NBFC. The following are the norms previously under the regulatory authority:
The Reserve Bank of India mainly regulates NBFC Compliance. NBFCs have to get registered with the RBI. Apart from this The Foreign Exchange Management Act, 1999 and Foreign Exchange Management (Borrowing and Lending in Foreign Exchange) Regulation, 2000 regulate NBFCs.
Also, Read: Types of Foreign Investment in India.
For an NBFC, Foreign investment is permitted under automatic route only in the following 18 prescribed NBFC activities. In the following sectors, Foreign Investment is allowed through the automatic route:
Non-fund based activities
After the Non-Banking Financial Company is registered with Reserve Bank of India, the following process has to be followed:
Read, Also: FEMA/ RBI Compliances Checklist: Foreign Direct Investment.
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