Foreign Direct Investment: FDI in NBFC
Kandarp Vanita | Updated: Apr 26, 2021 | Category: NBFC
A Non-Banking Financial Company or NBFC is a company registered under the Companies Act and is involved in wide-ranging businesses of financial services including financial institution. The license to manage as NBFC and adhere to its compliances is regulated by the Reserve Bank of India (RBI). These companies take on the business of advances and loans, stocks, acquisition of shares, bonds, debentures, Government or local authority issued securities or other securities that are marketable and of alike nature like insurance business, hire-purchase, leasing, or chit business.
NBFC’s are not exactly the Banks but involved in the business similar to that of banks. Continue reading this blog to know the answer to how can the foreign companies invest in NBFC?
Importance of NBFC in Indian Economy
India is a developing economy and it requires simplified access to any financial services and support. There is long procedural gap between the customer’s requirement and the availability by the financial services offered by the traditional banks. Hence, NBFC’s has a crucial role to support the businesses and the individuals for fulfilling their requirement to get personal loans, shared investments, working capital loans, and other financial requirements.
With the help of the emerging technology, the NBFCs are solving the issue of the procedural gap and the time taken for lending financial supports. NBFC is the necessity of the emerging time and with the help of Fin Tech it is useful for the India economy.
Financials Activities of NBFC’s
The financial activities of NBFC are which are recognized but are not limited to is given below:
FDI in NBFC Sector
The Government of India permits the Foreign Direct Investment (FDI) in the NBFC Sector in India. In simple terms, it is an investment made by a foreign entity into NBFC of India with the purpose to have control over ownership.
The Foreign Exchange Management Act, 2000[1] is the authority to regulate FDI and FDI is governed by the Reserve Bank of India. FDI in NBFC Sector in India can be made through two different routes:
1) Government Route: The Reserve Bank of India gives the approval to FDIs under the government route.
2) Automatic Route: FDI in NBSC through this route needs no approval from the Authority
After India went through the period of liberalization in 1991, there were major changes seen in the Indian economy. One of such change was when there were many foreign investors showing keen interest to invest their money in the Indian market.
The Indian Government has allowed 100% Foreign Direct Investment in the Non- Banking Financial services via an automatic route without having any norms on capitalization and restricted ambit of the activities. Now, as notified by the Government the NBFC’s are qualified to receive 100% FDI under the automatic route governed by financial regulators like SEBI, IRDA, RBI, National Housing Bank or any other regulator.
Thus, FDI norms in India were made easy and FDI in the non-banking sector was permitted only under automatic route preferred in 18 non-banking financial service activities which were subject to compliance with the norms of minimum capitalization. Furthermore, these were divided into activities on the basis of fund-based and non-fund-based.
The particular fund-based activities were:
- Merchant Banking
- Underwriting
- Stock Broking
- Portfolio Management Services
- Asset Management
- Venture Capital
- Custodial Services
- Micro Credit
- Finance, Housing Finance
- Factoring, Leasing
- Credit Card Business
- Rural Credit
Those which do not deal with the cash transactions or creditor are the non-fund-based activities, and they are:
- Forex Broking
- Financial Consultancy
- Investment Advisory Services
- Money Changing Business
- Credit Rating Agencies
NBFC and Foreign Loans
The loan taken
from the foreign institutions is referred to as ‘External Commercial
Borrowings’ (ECB).These loans can be easily obtained from the foreign banks and
the foreign financial institutions. Further, the shareholder can give the ECBs as
well but it is mandatory for such a shareholder to be the resident of India and
should own a minimum 25% of the borrower’s company total share.
The interest rates in India are high in comparison to the rest of world and
thus it is very beneficial for the Indian companies to take loans from other
countries with low interest rates. FDI in NBFC is also very much preferred
because the foreign investors invest more money in comparison to the Indian
resource
The other reason is that the foreign investors are attracted to the Indian companies in different stages of growth and development and for several reasons because India has growing customer base. Thus, FDI in NBFC can see more escalation in an emerging Indian economy in comparison with the western markets which present only limited growth opportunities.
Modes of Bringing FDI in NBFC
The FDI in NBFC can avail investment not only in liquid currency but also in few other ways like shares, exchange of shares, converting loans into shares, exchange of few skill sets etc.
Conclusion
For FDI in NBFC under the automatic route the NBFCs is required to submit the Form 83 to the authorized bank for obtaining the LRN number. The Loan Registration Number must be compulsorily certified by the chartered accountant or company secretary. The investment by foreign investors is an advantage since it has stimulated the Indian economic growth with increase of FDI in NBFC sector.
Read our article:A Comprehensive Analysis on Foreign Investment Criteria for NBFCs