NBFC

RBI guidelines for the Opening of a subsidiary abroad by NBFC

The Indian market for NBFCs has experienced tremendous expansion. Considering expansion and growing their operations internationally, NBFCs have been looking to establish subsidiaries abroad. For any NBFC interested in opening a foreign branch, subsidiary, joint venture, representative office, or making investments abroad, the Reserve Bank of India (RBI) has opened the path. All of these NBFCs must get a No Objection Certificate from the Department of Non-Banking Supervision at the relevant regional office of the RBI, as mandated by the central bank. It was clearly discussed under the Non-Banking Financial Companies (Opening of Branch/Subsidiary/Joint Venture/ Representative Office or Undertaking Investment Abroad by NBFCs) Directions.

Non-Banking Financial Companies

A Non-Banking Financial Companies is an organization that is registered under the Companies Act, 1956 and the Companies Act, 2013 and engages in the lending, hire-purchase, leasing, insurance, and, in some situations, the receipt of deposits, as well as the acquisition of stocks, shares, and chit funds, among other activities. The Reserve Bank of India and the Ministry of Corporate Affairs jointly oversee the NBFC’s operations.

Prior Approval of RBI in cases of Opening of subsidiary abroad by NBFC

1. No NBFC may establish subsidiaries, joint ventures, representative offices, or investments in foreign companies without first receiving Reserve Bank of India approval in writing. Subject to these instructions, the application from the NBFC seeking No Objection would be taken into consideration.

2. These guidelines are in addition to those that the Foreign Exchange Department has established for the opening of foreign branches and investments in joint ventures and wholly owned subsidiaries.

3. A NBFC (both deposit-taking and non-deposit taking) registered with the RBI may open subsidiaries abroad under the general and specific requirements listed below.

General conditions

• Investment is not allowed in non-financial service sectors.
• Direct investment in FEMA-prohibited activities or sectoral funds is not allowed.
• Only those firms whose principal business is governed by a financial sector regulator in the host jurisdiction will be eligible for investment.
• The total amount of foreign investment should not be greater than the NoF. A single organization, including its step-down subsidiaries, may not have more than 15% of the NBFC’s owned funds invested overseas through equity investments or fund-based commitments.
• Investments made abroad shouldn’t include complex, cross-jurisdictional structures, and a maximum of one intermediary holding corporation should be allowed.
• Post-Investing in a Subsidiary Abroad:-
• Post-investing in a subsidiary abroad, the CRAR of deposit-taking NBFCs should not be less than that required by the Non-Banking Financial (Deposit Accepting or Holding) Companies Prudential Norms(Reserve Bank) Directions, 2007, as revised from time to time.
• Post-investing in a subsidiary abroad, the CRAR of the NBFC-ND-SI should not be less than that required by the Reserve Bank’s 2015 Systemically Important Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms, as modified
• Post-investment in a subsidiary abroad, the CRAR of non-deposit-taking NBFCs (other than NBFC-ND-SI) should not be less than 10% or as adjusted from time to time..
• After taking into consideration investments in the proposed subsidiary and foreign investments, the NBFC should continue to maintain the minimum level of NOF required under Section 45-IA of the RBI Act of 1934.
• The amount of the NBFC’s Net Non-Performing Assets should not exceed 5% of the net advances;
• The NBFC should have been profitable for the previous three years, and its performance during its life should have been good.
• The NBFC must abide by any requirements periodically imposed under FEMA, 1999¹;
• If the NBFC holds public deposits, regulatory compliance and servicing of such deposits must be satisfactory.
• The NBFC must adhere to the KYC requirements;
• Depending on the degree of investments made in the foreign entity, Special Purpose Vehicles established abroad or acquired abroad will be classified as investments or subsidiaries/joint ventures abroad;
• The NBFC must produce an annual certificate from statutory auditors to the (DNBS) Department of Non-Banking Supervision Regional Office where it is registered, attesting that it has completely complied with all of the guidelines set forth in these Guidelines for Overseas Investment;
• The NBFC must submit a quarterly return in the enclosed format to the Department of Statistics and Information Management (DSIM) as well as the Regional Office of DNBS.
• The permission granted must be revoked if the bank learns of any negative aspects. This requirement shall apply to all approvals for investments abroad.

Specific Conditions on NBFCs opening subsidiaries abroad

All of the aforementioned standards must be met in the event that an NBFC opens a subsidiary abroad. The bank will issue the NoC without waiting for clearance from foreign regulators. Additionally, the following requirements are established and will apply to all NBFCs:

• The parent NBFC is not allowed to provide an implicit or explicit guarantee to or on behalf of such subsidiaries in the event of the opening of a subsidiary abroad;
• There shall be no acceptance of any letter of comfort request from any institution in India on behalf of the subsidiary abroad;
• At the very least, the proposed overseas entity’s NBFC obligation must be limited to its stock or fund-based commitment to the subsidiary.
• A shell company, defined as “a company that is incorporated but has no significant assets or operations,” should not be the subsidiary being established abroad. However, companies engaging in activities like financial consultancy and advisory services without significant assets shall not be considered shell companies;
• The subsidiary that the NBFC is establishing abroad should not be used as a means of raising funds for the creation of assets in India for Indian operations;
• The parent NBFC shall receive monthly reports/audit reports about the business conducted by the subsidiary abroad and shall make them available to the Reserve Bank and inspecting authorities of the bank in order to guarantee compliance with the regulations;
• The authorizations granted for the establishment of a foreign subsidiary shall be examined or recalled if the subsidiary has not engaged in any activity or if such reports are not forthcoming;
• The approval of any NBFC to establish an overseas subsidiary shall be contingent upon the subsidiary disclosing in its balance sheet that the parent entity’s liability in the proposed overseas entity shall be limited to its equity or fund-based commitment to the subsidiary; 
• All international operations of the subsidiary shall be subject to the regulatory requirements of the host country.

Conclusion

The Reserve Bank of India has published rules for Non-Banking Financial Companies (NBFCs) that fall under its jurisdiction to operate a subsidiary abroad. The standards and regulatory framework for NBFCs looking to create a subsidiary outside of India are outlined in the Non-Banking Financial Companies (Opening of Branch/Subsidiary/Joint Venture/ Representative Office or Undertaking Investment Abroad by NBFCs) Directions. For the purpose of ensuring compliance with the requirements for establishing a subsidiary abroad, it is crucial for NBFCs to carefully analyse the relevant rules and get clarification from the RBI.

Read Our Article: RBI’s guidelines on Step Down Subsidiary

1. https://fifp.gov.in/Forms/FEMA_1999.pdf