NBFC Investment Abroad: Tighter Rules

By: Jay Parikh, Senior Associate, Bharucha & Partners

In a bid to control the financial exposures of Indian NBFC's abroad, the RBI has come out with the Non-Banking Financial Companies (Opening of Branch/Subsidiary/Joint Venture/Representative Office or Undertaking Investment Abroad by NBFCs) Directions, 2011 (Directions) on 14 June 2011.
Though the Directions appear to be a (rather late) formalisation of RBI's draft guidelines of January 2008 for extending NOCs for opening offices or undertaking investment abroad by NBFCs (Draft Guidelines), the Department of Non-Banking Supervision of RBI (DNBS), while extending such NOCs on a case-to-case basis in the past year or so, appear to have been following the Draft Guidelines and most of the conditions specified in the Draft Guidelines are known to be incorporated as standard conditions annexed to such NOCs.
Therefore, while the Directions do not contain much that is new, the formalisation of the Draft Guidelines in the form of the Directions which are detailed and comprehensive is a welcome step.
Essentially, the Directions lay down that:

1. No NBFC shall open subsidiaries, joint ventures, representative office or make any investment in a foreign entity abroad without obtaining DNBS prior approval; and
2. All applications for NOCs for any of the above activities will be considered by DNBS subject to the general and specific directions set out in the Directions.

Some important general directions are that:

1. Overseas investment in non-financial service sectors by NBFCs are not permitted,
2. Aggregate overseas investment of a NBFC should not exceed 100% of net-owned funds (NOF) and investment in a single entity abroad (including step-down subsidiaries) shall not exceed 15% of the NBFCs
   first published: Jun 24, 2011 03:02 pm

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