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NBFC (Opening of Branch/Subsidiary/Joint Venture/Representative Office or Undertaking Investment Abroad by NBFCs) Directions, 2011 issued by the RBI
The Reserve Bank of India (“RBI”) has paved the way for all Non-Banking Financial Companies (“NBFCs”) desirous of setting up overseas branch/
subsidiary/ joint venture/ representative office or undertaking investments
abroad. RBI has issued a Circular that provides that such NBFCs must obtain a no objection certificate (“NOC”) of the Department of Non-Banking Supervision (“DNBS”) from the concerned regional office of the RBI before making such investment. The RBI has now notified the NBFC (Opening of
Branch/Subsidiary/Joint Venture/Representative Office or Undertaking Investment Abroad by NBFCs) Directions, 2011 (“NBFC Outbound Investment Directions”) outlining the general and specific conditions subject to which the NOC
will be issued by the DNBS. These directions will be applicable to both deposit- taking as well as non-deposit taking NBFCs.
The directions would be applicable to establishment of subsidiaries/joint-
ventures/representative office or making investments abroad by a NBFC (whether deposit-taking or non-deposit taking) registered with RBI. We have summarised below the key general and specific conditions prescribed in these directions.
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2 General conditions
Qualifying Criteria
• Investment in non-financial service sectors or activities prohibited under the Foreign Exchange Management Act, 1999 (“FEMA”) or in sectoral funds will not be permitted.
• Investment will be permitted only in entities having their core activity regulated by a financial sector regulator in the host jurisdiction.
• Overseas investment should not involve multi-layered, cross-jurisdictional structures and at the most only a single intermediate holding entity will be permitted.
• The level of net non-performing assets of the NBFC should not be more than 5 percent of the net advances.
• The NBFC should be earning profit for the last three years and its performance in general should be satisfactory during the period of its existence.
Investment Ceiling
• The aggregate overseas investment should not exceed 100 percent of the net- owned funds (“NOF”). The overseas investment in a single entity (including its step down subsidiaries) by way of equity or fund based commitment should not be more than 15 percent of the NBFC's owned funds.
Post-Investment Criteria
• Post investment by a deposit-taking NBFC or systemically important non- deposit taking NBFC (“NBFC-ND-SI”) in subsidiary abroad, the compounded rate of annual return (“CRAR”) of the investing NBFC should be not less than that applicable in terms of RBI’s NBFC Prudential Norms. In case of non- deposit taking NBFCs (other than NBFC-ND-SI), the CRAR post investment in subsidiary abroad should not be less than 10 percent.
• The NBFC should continue to maintain prescribed level of NOF after accounting for investment in the proposed subsidiary/investment abroad.
Reporting
• The NBFC will need to submit to the RBI a certificate from its the statutory auditors annually confirming compliance with the RBI’s Directions and a quarterly return in the prescribed format.
Outbound Investment Regulations under FEMA
Besides the above, it is clarified that the above directions are in addition to those prescribed under FEMA. Under the provisions of FEMA Outbound Regulations1, it has been specified that RBI approval will be required in following cases of
outbound investment:
• Where the investee entity outside India is engaged in financial services activities; or
• Where the investor entity in India is a regulated entity in the financial sector.
1 Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2000
PwC News Alert June 2011
3 The RBI has stated that, any violation of the above directions shall invite penal
action under the provisions of Reserve Bank of India Act, 1934.
Specific conditions
The following specific conditions depending on the nature of overseas presence have been prescribed:
Overseas branch
• As a general policy, NBFCs will not be allowed to open a branch abroad.
However, NBFCs which have already set up branch(es) abroad for undertaking financial business shall be allowed to continue to operate them subject to complying with the revised guidelines, as applicable.
Overseas JV/subsidiary (‘subsidiary’ for ease of reference)
• The parent NBFC shall not be permitted to extend implicit or explicit guarantee to or on behalf of overseas subsidiaries.
• No request for letter of comfort in favour of the subsidiary abroad from any institution in India shall be permitted.
• Investing NBFC’s liability in the proposed overseas entity should be restricted to its either equity or fund based commitment to the subsidiary.
• The subsidiary being established abroad should not be a ‘shell company’, i.e., a company that is incorporated, but has no significant assets or operations.
However, companies undertaking activities such as financial consultancy and
advisory services with no significant assets will not be considered as shell companies.
• The subsidiary being established abroad by the NBFC should not be used as a vehicle for raising resources for creating assets in India for the Indian
operations.
• The parent NBFC should furnish periodical reports/audit reports about the business undertaken by the subsidiary abroad for submission to the RBI as required. If the subsidiary has not undertaken any activity or such reports are not forthcoming, the approvals given for setting up a subsidiary abroad shall be reviewed/recalled by the RBI.
• The subsidiary should make disclosure in its balance sheet to the effect that liability of the parent entity in the proposed overseas entity will be limited to its either equity or fund based commitment to the subsidiary.
Overseas representative offices
• Representative offices can be set up abroad for the purpose of liaison work, undertaking market study and research but not undertaking any activity which involves outlay of funds, provided it is subject to regulation by a regulator in the host country. Since such office would be carrying on any activity other than liaison work, no line of credit should be extended.
• The parent NBFC should obtain periodical reports about the business
undertaken by the representative office abroad. If the representative office has not undertaken any activity or such reports are not forthcoming, the approvals given for the purpose shall be reviewed/recalled by the RBI.
PwC News Alert June 2011
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