Returns by NBFC having Foreign Direct Investment (FDI)

Swetha Dhinesh

16 May, 2023

Foreign investors showed a large amount of interest in the Indian NBFC sectors over the years following the liberalisation of the Indian economy in 1991. According to the Master Direction- Non-Banking Financial Company Returns (Reserve Bank) Directions, 2016, the Non-Banking Financial Companies (NBFCs) are expected to make different returns to the RBI regarding their acceptance of deposits, compliance with prudential norms and ALM, among other things. The master directives establish the groundwork for safe and RBI-compliant NBFC operational procedures. For the purpose of avoiding penalties from the RBI, NBFC Compliances and Returns must be carefully reviewed. Here we discuss Returns by NBFC having Foreign Direct Investment (FDI).

Brief about NBFC Compliances and Returns

One of the well-known financial institutions, or NBFC, engages in the lending of money as well as the purchase of securities such as stocks, bonds, and other securities issued by any authority or government. NBFCs perform lending activities on a par with banks while not being banks.

Similar to what banks are required to do, Non-Banking Financial Companies must abide by a set of compliances and file returns on a regular basis. The effective operation of any NBFC depends on compliance with RBI requirements. Failure to do so can end up in severe consequences, including financial penalties or even the cancellation of the Certificate of Registration.

The Non-Banking Financial Companies (NBFCs) are obliged to make a series of returns to the Reserve Bank of India regarding their acceptance of deposits, compliance with prudential norms, ALM, etc., in accordance with the Master Direction- NBFC Returns (Reserve Bank) Directions, 2016.

Law Governing the Foreign Loans and Foreign Investments in NBFC

The Reserve Bank of India, acting within the parameters of the RBI Regulation Act of 1934 and its directives, regulates the working and operations of NBFCs. In contrast, all foreign exchange-related provisions are governed by the FEMA Act^[1]. Since 1997, FDI in NBFCs has been permitted up to 100%, subject to the government’s minimum capitalisation requirements.

The rules pertaining to foreign loans are governed by the Foreign Exchange Management Act 1999, Foreign Exchange Management (Borrowing and Lending in Foreign Exchange) Regulation, 2000, and RBI regulations.

Is FDI Allowed In NBFC Sector?

• The investment made by a foreign company into the business of India by having controlling ownership is known as foreign direct investment, or FDI, in the NBFC sector.
• The Foreign Exchange Management Act of 2000 regulates foreign direct investment, which the Reserve Bank of India oversees.
• Either the government route or the FDI automatic route is used to make FDI in the NBFC sector.
• While the Automatic route allows investments to be made without Authority permission, the Government route requires approval from the Reserve Bank.
• Since there has always been regulatory unease about allowing foreign direct investment above the minimum capitalisation limits, foreign direct investment has always been regarded as a challenging process.
• The government’s viewpoint has evolved through time, and for the convenience of business, the Government of India now permits up to 100% foreign direct investment in various areas.
• The automatic method has been made available to 100% of the Non-Banking Finance Sector.     

RBI’s guidance about NBFC returns

1. Every NBFC must set up a reporting system to submit various returns within the allotted time.
2. The return submission shall not be postponed for any reason, such as the conclusion of the audit of the annual accounts.
3. The information found in the company’s books of account should be used in compiling the Return.
4. An authorised officer of the NBFC, who the Board of Directors has officially given this authorisation, must file the returns online.
5. The NBFCs must strictly adhere to the deadline set forth in this instruction for filing returns to the Bank; otherwise, they risk facing penalties as outlined in Chapter V of the RBI Act.
6. It should be highlighted that the Reserve Bank of India would take a harsh stance in the event that the information or specifics provided by an NBFC were proven to be false.

Returns by NBFC having FDI

Certificate on compliance with FDI norms: The NBFCs with Foreign Direct Investment are required to submit a Certificate from their Statutory Auditor on a half-yearly basis to the Regional Office in whose jurisdiction the company’s registered office is located, certifying compliance with the existing norms and conditions of FDI. To document compliance with the required minimum capitalisation standards and that its operations are limited to those permitted by FEMA.

The following extra returns must be submitted in addition to the other returns mentioned under the master direction.

Conclusion

For the Indian economy, allowing 100% FDI in the NBFC sector is an excellent move since it enables the sector to expand on a broader scale and makes it an essential component of economic growth. Foreign Direct Investment has increased the flow of funds into the non-banking finance sector, enabling NBFCs to fund significant projects or cover ongoing operating expenses. Still, there needs to be clarity on all matters related to FDI in India, and the RBI has to ensure the smooth flow of FDI in the Non-Banking Sector.

Read our Article: Risk Management Framework for NBFCs