Cabinet liberalises FDI norms for non-banking financial companies

• The Union Cabinet approved changes in norms for foreign direct investment (FDI) for non-banking financial companies (NBFCs), enabling inflow of foreign investment via automatic route in “other financial services” regulated by any of the financial sector regulators such as the Reserve Bank of India (RBI, Securities and Exchange Board of India (Sebi) and Pension Fund Regulatory and Development Authority (PFRDA).
• The Budget for 2016-17 had stated that FDI will be allowed beyond the 18 specified NBFC activities under the automatic route for other activities which are regulated by financial sector regulators.
• At present, regulations for NBFCs stipulate that FDI would be allowed on automatic route for only 18 specified NBFC activities including merchant banking, under writing, portfolio management services, financial consultancy and stock broking.
• Minimum capitalisation norms as mandated under FDI policy have been eliminated as most of the regulators have already fixed minimum capitalisation norms. This will induce FDI and spurt economic activities. It will cover whole India and is not limited to any State/Districts.
• Foreign investment can be made through approval route in other financial services, which are not regulated.

About Non-Banking Financial Company (NBFC)

• Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 of India, engaged in the business of loans and advances, purchase of shares / stock / bonds / debentures / securities issued by Government or local authority.
• A non-banking institution is a company which has its principal business of receiving deposits under any scheme or arrangement or any other manner.
• Non-banking financial companies or NBFCs, are financial institutions that provide banking services, but do not hold a banking license. These institutions are not allowed to take deposits from the public. Nonetheless, all operations of these institutions are still covered under banking regulations.

NBFCs registered with RBI are classified as:

a) Asset Finance Company (AFC): An AFC is a company which is a financial institution carrying on as its principal business the financing of physical assets supporting productive/economic activity, such as automobiles, tractors, lathe machines, generator sets, earth moving and material handling equipments, moving on own power and general purpose industrial machines. Principal business for this purpose is defined as aggregate of financing real/physical assets supporting economic activity and income arising therefrom is not less than 60% of its total assets and total income respectively.

b) Investment Company (IC): IC means any company which is a financial institution carrying on as its principal business the acquisition of securities,

c) Loan Company (LC): LC means any company which is a financial institution carrying on as its principal business the providing of finance whether by making loans or advances or otherwise for any activity other than its own but does not include an Asset Finance Company.

d) Infrastructure Finance Company (IFC): IFC is a non-banking finance company a) which deploys at least 75 per cent of its total assets in infrastructure loans, b) has a minimum Net Owned Funds of rupees 300 crore, c) and a CRAR of 15%
 

By: Vishal