A Comprehensive Analysis on Foreign Investment Criteria for NBFCs

The provisions of foreign exchange are controlled by FEMA, 2000, and the operations of Non-Banking Financial Companies (NBFCs) are regulated by the RBI (Reserve Bank of India) within the context of the RBI Regulation Act, 1934. 100% FDI (Foreign Direct Investment) is allowed in NBFCs subject to the least capitalization norms as issued by the Government. NBFCs and companies make foreign investments by taking FDI, loans, etc. In this blog, we are going to discuss foreign investment criteria for NBFCs.

What is an NBFC?

Before we move into the foreign investment criteria for NBFCs, let us first understand the meaning of NBFC. NBFC stands for Non-Banking Financial Company; it is an organization involved in providing financial support. The NBFCs offers various financial services such as advances or loans, equities, acquisition of shares, stocks, debt, insurance business, chit fund business, etc. buts doesn’t comprise any institution whose primary business consists of industrial activity, agriculture activities, or sale, purchase or construction of fixed property. To operate such financial services, the company needs to obtain NBFC Registration Certificate from the Reserve Bank of India. Non-Banking Financial Companies are registered as per the Companies Act, 2013.

Why is it essential to take Loans or Foreign Investments for NBFCs?

A Non-Banking Financial Company (NBFC), unlike any other company, prefer taking loans or advances from foreign nations because they provide loans at a rate much lowers than Indian lenders. They are also able to invest more money because of a lower rate of interests. On the contrary, foreign investors are also fascinated in the Indian market because India has a growing client base unlike any other country and hence they have more growth opportunities.

NBFC and Foreign Loans – Foreign Investment Criteria for NBFCs

Loans from foreign companies are mentioned as ECB or External Commercial Borrowings. Such loans could be attained from a foreign bank or financial companies. External Commercial Borrowings can also be acquired in the form of debenture, preference shares, and bonds. ECB will also consist of a loan from a foreign shareholder who owns at minimum 25% of the shares of the borrower company.

Only in some particular sectors, the Reserve Bank of India permits External Commercial Borrowings to be acquired after fulfilling essential requirements. There is a requirement of complying with the procedural necessities to obtain foreign loans in an NBFC. While obtaining the loans, no RBI consent is required.

As per such policies, NBFCs (Infrastructure Finance Company) involved in financing the infrastructure sector are permitted to take ECBs from the certified lenders consisting of foreign banks under the consent route.

In Section15 of FEMA, it is specified that anyone who infringes such laws will be responsible for the fine, which is triple the amount involved. Moreover, the defaulters are kept under examination by the Reserve Bank of India. Defaulters can only avail of foreign loans under the approval route. If the violation of such rules continues, then the defaulter is responsible for a fine of Rs. 5000/day.

Interest and Maturity Period

Concerning the ECB, there are some rules & regulations stated in the Foreign Exchange Management Regulation. There are some detailed rules stated concerning the interest amount to be paid and the maturity period. The cost of External Commercial Borrowings consists of the interest charged by the bank, other fees and expenses paid in foreign loans. It should be within the limit, which is calculated with respect to a reference rate called the London Interbank Offered Rate (LIBOR).

• For a loan whose usual maturity period is 3 to 5 years and its rate of interest would be 3.5% over six months the LIBOR;
• For a loan that will be matured after five years, its rate of interest would be plus 5% over the six month LIBOR.

Are Indian Companies Entitled to Grant Loan to NRI/IPO Employees?

Yes, any company which is registered in India can provide loan to IPO or NRI employees in India Rupees if:

• The amount of loan for personal purpose only consisting purchase of housing property in India;
• The lender should make sure that the borrower doesn’t use the loan amount for purposes that are prohibited by the Reserve Bank of India;
• The loan must be issued as per the Staff Welfare Schemer of Housing Loan Scheme and other appropriate circumstances;
• The repayment of the loan must be done in the form of allowance or through the account of the borrower;
• The amount of the loan must be credited to the NRO account of the borrower.

What is the Process to take Foreign Loan?

The Non-Banking Financial Companies who wish to take foreign loan requires to submit Form 83 to the certified dealer bank to obtain the LRN (Loan Registration Number). This number should be certified by a CA or CS. Then the certified dealer bank forwards the form to the Department of Statistics and Information Management of the Reserve Bank of India (RBI). The loan is issued after the NBFC receive the Loan Registration Number.

Foreign Direct Investment Policy for NBFC

In NBFC, foreign investment is allowed under the automatic route accordingly to the FDI Policy. Under such route, before making the suggested investment, there is no necessity of approval of RBI or FIPB (Foreign Investment Promotion Board). Under the route, up to 100% of foreign investment is permitted without the earlier approval of the foreign investment promotion board. Every foreign transaction is needed to be routed only through companies licensed by the Reserve Bank of India^[1]as per Section 10 of FEMA.

NRI or FDI investments are permitted under automatic route only in the 18 NBFC activities as mentioned below:

• Merchant banking;
• Underwriting;
• Portfolio management services;
• Investment advisory services;
• Financial consultancy;
• Stockbroking;
• Asset management;
• Venture capital;
• Custodial services;
• Rural credit;
• Microcredit;
• Money changing business;
• Credit card business;
• Forex broking;
• Housing finance;
• Leasing and finance;
• Credit raising agencies;
• Factoring.

Non-fund based activities:

• Credit Rating Agencies;
• Forex Broking;
• Investment Advisory Services;
• Money Changing Business;
• Financial Consultancy.

In such activities, foreign investment in non-banking sectors is allowed under the automatic route subject to compliance with the least capitalization standards.

After NBFC Registration with the essential capital under the FEMA, succeeding diversification either through the present company or through downstream Non-Banking Financial Companies could be commenced without any extra authorization.

Conclusion

Now NBFCs can take loans from other countries. For that, they need to comply with the procedural necessities. They don’t need to take permission from the Reserve Bank of India. Foreign investments are permitted under automatic route only in the 18 NBFC activities, as we mentioned above in this article. Moreover, the Non-Banking Financial Companies can take ECB under the consent route.

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