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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).
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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.
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. 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.
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.
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
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