Relaxation in Capitalization norms for subsidiaries of Foreign owned NBFCs

A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 and is engaged in the business of loans and advances, acquisition of shares/stock/bonds/debentures/securities issued by Government or local authority or other securities of like marketable nature, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, sale/purchase/construction of immovable property. A non-banking institution which is a company and which has its principal business of receiving deposits under any scheme or arrangement or any other manner, or lending in any manner is also a non-banking financial company (Residuary non-banking company).

Chapter 6 of Consolidated FDI Policy of the Government of India (effective from 10.04.2012) provides about the Sector Specific Conditions on FDI. Para. 6.1 enumerates the prohibited sectors for FDI and 6.2 states the permitted sectors for FDI. In terms of Para. 6.2.24 of the Government Policy, NBFCs are permitted to have 100% FDI under the Automatic Route subject to minimum capitalization norms.

Uptil now, 100% foreign owned NBFCs with a minimum capitalisation of US$ 50 million could set up step down subsidiaries for specific NBFC activities, without any restriction on the number of operating subsidiaries and without bringing in additional capital. In such cases the minimum capitalization condition did not apply.

The Department of Industrial Policy and Promotion has now reviewed their policy in this regard and have decided to permit NBFCs (i) having foreign investment above 75% and below 100% and (ii) with a minimum capitalisation of US$ 50 million, to set up step down subsidiaries for specific NBFC activities, without any restriction on the number of operating subsidiaries and without bringing in additional capital.

This means that the Indian investing company registered as NBFC and having minimum 75% and up to 100% FDI can now set up any number of step down subsidiaries with minimum capitalization of US$ 50 million.     Ref: Press Note No.9 (2012 Series) dated 03.10.2012 of DIPP