THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA Foreign Investments in NBFCs Concerns & Limitations September 3, 2011 Sahil Shah Karan Kalra
Topics Key Regulations Types of NBFCs FDI Regime FII Route Setting-Up vs. Acquisition Capital Requirements Credit Concentration Norms 2
Key Regulations Types of NBFCs FDI Regime FII Route Setting-Up vs. Acquisition Capital Requirements Credit Concentration Norms 3
Key Regulations RBI Act Prudential Norms RBI directions NBFC Exchange control Regulations Companies Act 4
Key Regulations Definition: Non Banking Financial Company has as been defined under Section 45 I (f) of the RBI Act, to mean: (i) A financial institution which is a company; (ii) A non-banking institution which is a company and which has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner, or lending in any manner; (iii) Such other non-banking institution or class of such institutions, as the Bank may, with the previous approval of the Central Government and by notification in the Official Gazette, specify. 5
Key Regulations Registration: Mandatory registration / acquiring the license for carrying out business of an NBFC Eligibility: Minimum Net Owned Fund of INR 2 crore / INR 25 lacs Application before 20 April 1999 Versus Net Worth under SEBI PMS Regulations Valid until surrendered or revoked Activities exempt from registration requirement Housing Finance Companies, Merchant Banking company, Micro Finance Companies (not lending more than INR 50,000), Mutual Benefit Companies, Government Companies, Venture Capital Fund Company, Insurance Companies, Stock Exchange Stock Brokers / sub broker Nidhi Companies and Chit Funds 6
Key Regulations Types of NBFCs FDI Regime FII Route Setting-Up vs. Acquisition Capital Requirements Credit Concentration Norms 7
Types of NBFCs Systemically Important NBFCs Not accepting / holding public deposits Total assets of INR 100 crore and above Capital: Tier II cannot exceed Tier I Credit Concentration Norms Core Investment Companies NBFC in business of acquisition of shares and securities At least 90% of net assets in the form of investment in group companies equity and debt at least 60% should be in equity shares (including <10 year tenure CCPS) No trading in group co. investments except dilution and disinvestment No other financial activity 8
Types of NBFCs Infrastructure Finance Companies 75% of total assets deployed in infrastructure loans Non deposit accepting NoF of INR 300 crore Minimum credit rating A CRAR of 15 percent (with minimum Tier I capital of 10%) ECB route available Liberalized credit concentration norms 9
Routes for Foreign Investments FDI FII FVCI ECB 10
Key Regulations Types of NBFCs FDI Regime FII Route Setting-Up vs. Acquisition Capital Requirements Credit Concentration Norms 11
FDI Regime Restriction in terms of sector Restricted sector Atomic Energy Lottery business Gambling and Betting Retail trading (except single brand retailing) Regulated Sector (few examples) Banking (74%) Telecom services (49%) Insurance (26%) ARCs (49%) Single brand retail (51%) NBFCs Real Estate Restriction in terms of securities Equity shares (including shares with differential rights) Compulsorily Convertible Preference Shares (CCPSs) Compulsorily Convertible Debentures (CCDs) 12
FDI Regime Downstream Investments 50% Test FDI in NBFCs Minimum Capitalization FDI Non Fund based [Investment advisory, financial consultancy, forex broking, money changing and credit rating agencies] Minimum Capitalization US $ 0.5 million irrespective of the FDI Fund based Up to 51%; Above 51% and up to 75% US $ 0.5 million US $ 5 million Beyond 75% and up to 100%. US $ 50 million; US $ 7.5 million - upfront and balance in 24 months 13
FDI Regime Automatic route activities Merchant Banking, Underwriting, Portfolio Management Services, Investment Advisory Services, Financial Consultancy, Stock Broking, Asset Management, Venture Capital, Custodial Services, Factoring, Credit Rating Agencies, Leasing & Finance, Housing Finance, Forex Broking, Credit Card business, Money changing business, Micro credit and Rural credit Investment companies not included Downstream of Investment/ JVs 100% foreign owned NBFCs can set up step down subsidiaries for specific NBFC activities without any capitalisation requirements. Joint Venture operating NBFCs that have up to 75% of foreign investment can also set up subsidiaries for undertaking other NBFC activities subject to fulfilling capitalization requirements. No provision for NBFCs having 75% to 99.99% foreign investment!! 14
Key Regulations Types of NBFCs FDI Regime FII Route Setting-Up vs. Acquisition Capital Requirements Credit Concentration Norms 15
FII Route Equity Investments Only portfolio investments in listed shares Limit of 10% of the issued share capital of the investee Debt Listed NCDs No restriction on the quantum of subscription (up to 100%) Limitations Availability of debt limits Procedure Private placement with appointment of debenture trustee Listing of NCDs on WDM Subscription of NCDs by FII / sub-account using debt allocation limits Non applicability of FDI and ECB restrictions!! 16
Key Regulations Types of NBFCs FDI Regime FII Route Setting-Up vs. Acquisition Capital Requirements Credit Concentration Norms 17
Setting-Up vs. Acquisition Particulars Set-up a new NBFC Buy an existing NBFC by non residents by way of transfer of shares Regulatory approvals NBFC licence required from RBI RBI approval for transfer of shares from resident to non resident Buy an existing NBFC by a resident and future infusion of FDI by non- resident None Disclosures Post facto intimation of FDI to RBI - through form FC - GPR 30- day Public notice to be given for change in control / management Intimation to RBI due diligence by RBI? Post facto intimation of FDI to RBI - through form FC GPR 30- day Public notice to be given for change in control / management Intimation to RBI due diligence by RBI? Post facto intimation of FDI to RBI - through form FC - GPR If fresh FDI leads to further change in control, public notice and intimation to be repeated Time frame 1 1.5 years 6 8 months 2 3 months (approx.) Valuation No restrictions Pricing guidelines floor price as per DCF valuation Commercial Risk NA Successor liability Debt Funds - An alternate route? 18
Key Regulations Types of NBFCs FDI Regime FII Route Setting-Up vs. Acquisition Capital Requirements Credit Concentration Norms 19
NBFC SI Capital Requirements Tier I Tier II Equity + CCPS + Free Reserves + Securities Premium a/c A Revaluation reserves + accumulated losses + deferred revenue expenditure + intangibles B Outstanding loans / advances and investments made in subsidiaries and companies in the same group and investments in other NBFC s In excess of 10% of (A- B) Preference shares other than those compulsorily convertible into equity Revaluation reserves at discounted rate of 55% Subordinated debt General provisions and loss reserves to the extent these are not attributable to actual diminution in value or identifiable potential loss in any specific asset and are available to meet unexpected losses, to the extent of one and one fourth percent of risk weighted asset Hybrid debt capital instrument Tier II capital shall not exceed Tier I capital Where are OCDs and superior debt covered? 20
NBFC SI Credit Concentration Norms Credit Concentration / Investment: (limit subject to owned funds) Single / Group Exposure Limits Lending Investment Both lending and investment Single borrower 15% 15% 25% Single Group of Borrowers 25% 25% 40% Infrastructure Loan / Investment Single borrower Single group of borrowers Add 5% Add 10% Add 5% Add 10% Add 5% Add 10% 21
NBFC SI Credit Concentration Norms Waiver of Credit Concentration limits Pre-requisites for application: No access to public funds Not in the business of issuance of guarantees Public Funds Includes funds raised either directly or indirectly through public deposits, commercial papers, debentures, inter-corporate deposits and bank finance Issues & Concerns: Plain paper application no parameters Definition of public funds Appears that approvals are deal specific 22
Thank You Nishith Desai Associates Legal & Tax Counseling Worldwide 23