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Foreign Investment in Non-Banking Finance Company – Caution to Halt

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Introduction

Pursuant to Foreign Direct Investment Regulation, the Foreign Investment is 100% allowed in Finance Business under automatic route. Country can receive the Foreign Investment in Capital Instrument via two route i.e. Automatic and Government Approval Route. Changes on regulatory front is instrument played by Regulator to avoid the mal practices in the Finance Market.

Read Our Blog: How To Get Foreign Direct Investment

Recently Government made mandatory Government approval to all the Investment from China, though earlier it used to categorize in automatic route. Similarly other various regulatory changes are ongoing day by day, either to protect the interest of stakeholders or interest of nations. 

Another shocking news been given by Reserve Bank of India as their regular operation to manage, monitor and guide the regulated entity, precisely all Non-Banking Finance Company (NBFC) including Housing Finance Company (HFCs) and Assets Reconstruction Companies (ARCs).

Chief General Manager of Department of Non-Banking Financial Company Regulation yesterday issued notification, for the first time officially to guide the Board of Directors, Stakeholders and Professional of its regulated entity either to avoid or limit their investment from abroad on specified countries. The notification is precisely design to combat with money laundering and terrorist financing activities. No country across the globe want to participant on such activities. Hence India being active partner to stop or detain such money laundering and combating with terrorist financing movement, Reserve Bank of India publish the notification to adhere the same by NBFC, HFC and AFCs.

Notification is based purely on the report published by The Financial Action Task Force (FATF), it is global entity accredited across the globe working on identifying, monitoring and guiding the way to member country to avoid the money laundering and terrorist financing activities from its member country. Therefore officially it announce and list the countries into:-

  1. High-risk jurisdiction subject to Call for Action
  2. Jurisdiction under Increased Monitoring

Country which does not fall in the given jurisdiction are termed as FATF compliant jurisdiction and country whose name is under the above two list, and investment from such Country is not treated at par with that from the compliant jurisdiction. FATF compliant jurisdiction are free to make investment on NBFCs, HFCs and ARCs subject to extant of Foreign Direct Investment Regulation of Government of India. 

Read Our Blog: What Are Various Steps for Registering an NBFC in India

Further investors in existing NBFCs, HFCs and ARCs holding their investment prior to classification of source or intermediaries jurisdiction/s as FATF non-compliant, can continue their business and also bring additional investment subject tto regulatory guideline for Foreign Direct Investment Regulation to continue the business in India.

However if any proposed NBFCs, HFCs and ARCs are receiving the investors from or through non-compliant FATF jurisdiction, whether in existing NBFCs or in companies seeking Certificate of Registration (CoR) should not be allowed to directly or indirectly acquire significant influence i.e. 20% or more voting or preferential voting power from such jurisdiction to investee 

The notification is applicable with immediate effect.

Link of Notification is: https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12027&Mode=0

On recent publication of FATF, the following companies are at 

  • High-risk jurisdiction subject to Call for Action: This is jurisdiction denotes the significant deficiencies in their regimes to counter money laundering, terrorist financing and financing of proliferation. It is often called as “Black List”.
  •  Jurisdiction under Increased Monitoring: Countries under this jurisdiction are actively working with the FATF to address the strategic deficiencies in their regime to counter money laundering, terrorist financing and proliferation financing.

To name few countries under this above two jurisdiction are Iran, Democratic People’s Republic of Korea, Syria, Yemen, Pakistan, Myanmar, Sri Lanka, Indonesia, Iceland, Mangolia, Albania, The Bahamas, Cambodia, Mauritius, Uganda, Nepal, Afghanistan, Sudan, Kenya, Turkey, Bangladesh, Thailand, Philippines, Kuwait, Paraguay, Greece, Qatar, Austria, Brazil, Canada, Cyprus and so on. All together the list contain around 91 countries across the globe 

So, this is cautionary article to all those NBFCs, HFCs and ARCs who is planning to raise fund from abroad, beware before proceedings and for all those new applicant who is planning to put an application to Reserve Bank of India for fresh license (CoR) for NBFCs, HFCs and ARCs.

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Author
Vinay Singh
Vinay Thakur is Managing Partner in Corpseed. He focused on payments, digital transformation, and financial technology for over 15 years and holds strong expertise on fintech startups, banking innovation, and investors with a keen understanding of the trends and activities of startups, banks, and investors in the space.