Friday, June 17, 2011

NO Objection certificate is needed for NBFCs to invest in their foreign branch, representative office subsidiary or JV

Please refer to Regulation No. 7 of the Foreign Exchange Management (Transfer or Issue of Any Foreign Security) (Amendment) Regulations, 2004, dated July 07, 2004, in terms of which an Indian party requires prior approval of the concerned regulatory authorities both in India and abroad, to make an investment in an entity outside India engaged in financial services activities. 

Further in terms of para B.5.3 of the Master Circular on Direct Investment in Joint Venture (JV) / Wholly owned subsidiary (WOS) abroad dated July 01, 2009 issued by Foreign Exchange Department, RBI, regulated entities in the financial sector making investments in any activity overseas are required to comply with the above regulation.

2. In this connection please also refer to the circular DNBS (PD).CC. No. 173/03.10.01/2009-10 dated May 03, 2010 titled ‘Overseas Investment by NBFCs- No Objection (NoC) from DNBS, RBI’ issued to all NBFCs wherein it was advised that all NBFCs desirous of making any overseas investment must obtain ‘No Objection’ (NoC) of the Department of Non-Banking Supervision of Reserve Bank before making such investment, from the Regional Office of the Bank in whose jurisdiction the head office of the company is registered.

3. A NoC in this regard will be issued by Reserve Bank to a NBFC, subject to the NBFC fulfilling the conditions enumerated in the Directions issued in this regard by Reserve Bank in exercise of powers under Sections 45JA, 45K and 45L of the RBI Act, 1934 vide Notification No.DNBS(PD)229/CGM(US)/2011 dated June 14, 2011.
the following conditions have been prescribed by RBI in this regard:-

i) Investment in non-financial services sectors shall not be permitted;

ii) Direct investment in activities prohibited under FEMA or in sectoral funds will not be permitted;

iii) Aggregate overseas investment should not exceed 100% of the Net Owned Fund (NoF);

iv) Overseas investment should not involve multi layered, cross jurisdictional structures;

v) The level of NPA of NBFC should not be more than 5% of the net advances; and the NBFC shall comply with the regulation issued FEMA, 1999 from time to time; and shall also comply with the KYC norms.

RBI has also clarified that any permission issued by it in this regard is independent of the approval process of the overseas regulators.

RBI has given permission to 28 companies to open subsidiaries abroad.
REFERENCE -  RBI/2010-11/566 DNBS (PD) CC.No. 222/03.10.001/2010-11

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