NBFC

Unlocking the Investment Potential of NBFCs! How the FDI Rules Have Changed Over a Period of Time!

FDI

The Consolidated Foreign Direct Investment (FDI) Policy 2016 was amended by a notification from the Reserve Bank of India[1] dated 09 September 2016 through the Foreign Exchange Management (Transfer or Issue of Security by the Person Resident outside India) (Thirteenth Amendment) Regulations, 2016. It has been fundamental in liberalizing the regime that involves legal issues and also involves the FDI along with the Non-Banking Financial Companies (NBFC). The main aim is to allow a larger FDI inflow, contributing to the growth in investment, incomes, and employment. 100 percent FDI has been approved for sectors such as food products manufacturing, pharmaceuticals, brownfield airport projects, air transport services, animal husbandry, aquaculture, pisciculture, and apiculture.

Before the amendments, 100 percent FDI was allowed under the automatic route only in 18 specific Nonbanking financial companies activities. For the remaining ones, approval of the Government was very mandatory. The new amendments allow full investment in all financial services activities. Government approval is required only in activities not or partly regulated by financial sector regulators. Also, the standard minimum capitalization norms based on the percentage of foreign investment has been removed, thereby promoting investment in financial activities such as investment advisory and financial consultancy services. This move has been especially advantageous for small investors who are looking forward to investing in the financial services and are also expected to streamline the fundamental regulatory frameworks.

However, certain clarifications are awaited regarding ambiguity in the interpretation of a few clauses. It is yet not clear whether the financial services activities have to be regulated or licensed by a financial sector regulator. Some important questions such as that whether a company has been registered or not with the reserve bank of India and is the company performing under the supervision of RBI is to be considered as ‘regulated’ and these questions are not yet answered. Another question is also not clear which involves the issue of whether a financial institution needs to be regulated at the activities or company level. The legal regime governing foreign investment in ‘investment companies’ and ‘core investment companies’ is another convoluted matter. The amendments state that foreign investment into an Indian company, engaged only in the activity of investing in the other Indian Companies, will require prior government approval, regardless of the amount or extent. Whether 100 percent FDI is allowed in investment companies and core investment companies under automatic route is still vague and open to elucidations.

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Having said that, it can be assumed that these initiatives by the Government is likely to trigger positive vibes among the investors and would encourage the inflow of foreign investments into the financial services sector. Although certain clauses are ambiguous and await clarifications, it is a step towards progressiveness which would help in bringing about a marked improvement in the country’s image as a global business destination. Measures that are undertaken by the Central or Union Government have constantly resulted in an increased Foreign Direct Investment inflows at 55.46 billion dollars in the accounting finance year 2015-16. This move is likely to make a big difference to India’s ‘Ease of Doing Business’ rankings given by the World Bank, thereby increasing the amount of FDI flowing into the country. As per the norms of ADB, India can tremendously and constantly progress if it will market its products and companies in a more integrated as well as deregulated manner. It should be more welcoming to foreign direct investments and linked to other parts of Asia and the rest of the world.

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