NBFC compliance under FEMA

Varun Hariharan

06 Jan, 2021

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:

• For receiving investment from foreign investors
• To increase the development of NBFC
• Foreign investors put in more money in an NBFC because the significant portion of activities carried out by an NBFC is based on rural development

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. 

Is NBFC Compliance Mandatory under RBI and FEMA?

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:

• USD 0.5 million for foreign capital up to 51% to be brought up front.
• USD $5 million for foreign capital more than 51% and up to 75% to be brought up front.
• Fifty million for foreign capital more than 75% out of which $7.5 million to be brought up front and the balance in 24 months.
• The NBFCs having foreign investment more than 75% and up to 100%, and with a minimum capitalization of $50 million, can set up subsidiaries below them for specific NBFC activities, without any restriction on the number of operating subsidiaries and without bringing additional capital. There is no particular restriction for the number of subsidiaries that are formed under this.
• 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 capitalization norm mentioned above.
• Non- Fund based activities: The US $0.5 million to be brought upfront for all permitted non-fund based NBFCs irrespective of the level of foreign investment. 

Who Regulates NBFC Compliance? 

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.

Eligibility Criteria for NBFC compliance 

• Registering an NBFC/ NBFC Compliance with FEMA
• The NBFC must be permitted for securing foreign investment

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:

• Merchant Banking
• Underwriting
• Portfolio Management Services
• Stock Broking
• Asset Management
• Venture Capital
• Custodian Services
• Factoring
• Leasing & Finance
• Housing Finance
• Credit Card Business
• Micro Credit
• Rural Credit

Non-fund based activities

• Investment Advisory Services
• Financial Consultancy
• Forex Broking
• Credit Rating Agencies
• Money Changing Business

Procedure for NBFC Compliance under FEMA/ Borrowing of Loans by NBFC

After the Non-Banking Financial Company is registered with Reserve Bank of India, the following process has to be followed:

1. NBFC have to be in compliance with the Foreign Exchange Laws as per the FEMA Act 1999.
2. For any form of foreign investment, the concerned form is Form 83
3. To be submitted in duplicate by the borrower to designated Authorised Dealer (AD) for all categories and any amount of external commercial borrowing (ECB).
4. After examining conformity with the extant ECB guidelines, the AD may provide requisite details in Part F of the Form and forward one copy (within seven days from the date of signing loan agreement between borrower and lender) for allotment of Loan Registration Number (LRN) to be submitted in duplicate by the borrower to designated Authorised Dealer (AD) for all categories and any amount of external commercial borrowing (ECB).
5. After examining conformity with the extant ECB guidelines, the AD may provide requisite details in Part F of the Form and forward one copy (within seven days from the date of signing loan agreement between borrower and lender) for allotment of Loan Registration Number.
6. It should be submitted to the following address: The Director Balance of Payments Statistics Division Department of Statistics and Information Management (DSIM) Reserve Bank of India C-8-9 Bandra-Kurla Complex Mumbai – 400 051.
7. After securing the LRN number, a loan can be taken.

Documents Required for NBFC Compliance under FEMA

• KYC Documentation
• Application Form- Form-83
• Bank Statements
• NBFC registration documents

How can Enterslice Help?

• We can help you with the formalities of registering your NBFC business with RBI^[1].
• We monitor compliance and coordinate with RBI regarding your NBFC business.
• Help you with the procedural formalities of Form-83.
• We submit Form-83 on behalf of you to the authorised dealer.
• We assist in securing the Loan Registration Number for Foreign Investment in your NBFC.
• We value your time and money.
• We also offer compliance services for RBI and FEMA.