Overview of Overseas investment by NBFC

NBFC has become an integral part of our financial sector in India. Now, NBFC is taking lead in the financial sector to fulfill the financial needs of the people along with banks.

One of the questions that arise in the context of NBFC is whether it can extend its operations abroad also?

The answer is yes, but it has to follow certain compliances for doing the same.

No Objection Certificate for Overseas investment by NBFC

NBFC’s proposing to make overseas investment must, first of all, obtain the “No Objection Certificate” (NOC) from DNBS from the regional office within whose jurisdiction the registered office of the NBFC is situated before making any kind of overseas investment.

Also, the application made for obtaining NOC must state the activities undertaken by the overseas entity.

Further, the NBFC is not allowed to make any direct investment in the overseas entity engaged in activities that are not approved under FEMA.

Opening of Branch/Subsidiary/Joint Venture/ Representative Office abroad by NBFC

An NBFC can open a Branch/Subsidiary/Joint Venture/ Representative Office abroad only with the prior approval of the RBI.

An NBFC cannot open such an office abroad without prior permission of RBI.

General Conditions for permission of RBI.

• NBFC shall not invest abroad in the Non-Financial sector.
• It is not allowed to make any direct investment and activities/Sectors which are prohibited under FEMA.
• In NBFC can invest in those entities abroad whose core activities are regulated by the financial sector regulator in the host country
• The limit for aggregate overseas investment by NBFC is a maximum of 100% of NOF
• A NBFC cannot invest more than 15% of its owned funds in a single entity overseas including its step down subsidiaries, either by way of equity or in fund based commitment.
• multi-layered, cross-jurisdictional structures should not be involved in Overseas investment, only a single immediate holding company is permitted
• Must maintain required NOF even after making o=investment overseas
• The net NPA of NBFC should not be more than 5% of net advances
• Company should be profit-making during the last three years before making overseas investment
• FEMA regulations in place must be complied with by NBFC while making overseas investment
• If NBFC holds any public deposit then it must comply with regulatory compliances as applicable.
• KYC Norms must be complied with by NBFC
• SPVs set up abroad or acquisition abroad shall be treated as investment or subsidiary/joint venture, depending upon the percentage of investment in an overseas entity
• Financial Company shall submit an Annual certificate with the regional office of the RBI regarding compliance with these guidelines
• NBFC shall also submit a quarterly report with the regional office of the RBI and Department of Statistics and Information Management (DSIM) regarding overseas investment
• RBI can withdraw the permission if any adverse features came to the notice of RBI relating to this transaction.

 

Opening of branch office of NBFC – Some specific Conditions

NBFC shall not be allowed to open a branch office abroad. But existing NBFC which has already set up their branches for financial business abroad can carry on operating those branches subject to compliance with the above guidelines.

Opening of a subsidiary abroad of NBFC – Some specific Conditions

NBFC must comply with the above conditions for opening a subsidiary abroad, apart from that the following shall also comply:

• The parent entity shall not provide any guarantee, either implicit or explicit on the overseas subsidiary’s behalf
• NBFC cannot give any letter of comfort on an overseas subsidiary’s behalf
• NBFC liability shall be restricted to equity or fund based commitment in overseas subsidiary
• The overseas subsidiary must not be a shell company.

Note: Subsidiary undertaking financial consultancy and advisory services with no significant assets shall not be considered as shell companies;

• Overseas Subsidiary shall not be used as the vehicle should be used as a model for creating an asset in India for Indian operations
• The parent company must obtain a periodical report/audit report from an overseas subsidiary and submit it to RBI for inspection
• RBI can review/recall approval, in case the overseas subsidiary is not having any operations or not providing a periodical report
• The permission granted for setting up of overseas subsidiary shall be subject to the condition that the subsidiary company shall disclose in its balance sheet that the liability of the parent entity is limited to either equity or fund based commitment.
• The overseas subsidiary operations shall be subject to host country regulations

Opening of Representation office abroad of NBFC – Some specific Conditions

The NBFC can open a representative office abroad for liaison work, undertaking market study and research.

It shall be noted that representative office abroad cannot undertake any activity which involves an outlay of funds.

The representative office shall be subject to regulation by the host country

The parent NBFC shall also obtain periodical reports from such representative office abroad and if not provided the approval may be recalled or reviewed by RBI.

RBI may also recall or review the approval of the representative office is not carrying on any operations abroad.

 

FAQ’s on Overseas investment by NBFC

Q 1 Is there any permission required by NBFC for making the overseas investments?

Ans Yes, NBFC Is required to obtain NOC from RBI before making any overseas investment.

Q 2 is it mandatory for overseas branch/ subsidiary to comply with host country regulations along with compliance of RBI regulation for the Parent company?

Ans. Yes, the overseas entity must comply with the host country laws.

 Q 3 Can RBI recall the permission given for overseas investment/opening of offices abroad?

Ans. Yes, in case the overseas entity does not have any operations or is not providing a periodical report to the parent entity, then RBI may recall or review the approval.

Q 4 Can NBFC make overseas investments in the Non-Financial sector?

Ans No

The blog is posted by CS Akshay Gupta expert of RAJPUT JAIN & ASSOCIATES

CS Akshay Gupta is a diligent and innovative qualified Company Secretary, striving in matters related to Corporate Law. Akshay takes a deep interest in corporate, NBFC and FDI matters and his specialization includes corporate Compliance, FEMA Compliances, and NBFC Registration. As a Company Secretary, Akshay is passionate about matters relating to corporate funding, NBFC, and its compliances.

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