MMJC Advisory Private Limited

Regd office:- 1-2 Shilpali CHS,Hanuman Chowk, Near Top Liner,Gokhale Cross Road, Mulund(E), Mumbai 400081
Email id:-makarandjoshi@mmjc.in

Non-Banking Financial Company- Overview Foreign Investment

i
The Reserve Bank of India (hereinafter referred to as RBI) issues Master Circular on Foreign
Investment every year which is valid for one year. The current master circular in force has laid
down certain criteria for Foreign Direct Investment (Hereinafter referred to as FDI) for all sectors
including non-banking finance company (hereinafter referred to as NBFC). All the circulars
and press notes were consolidated by Department of Industrial Policy and Promotion, Ministry of
Commerce and Industry into one policy Consolidated Policy on FDI effective from 1
st
April
2010. We are trying to overview FDI related compliances required by NBFCs.
Types of NBFC which falls under Automatic Route, FDI allowed is 100% with some conditions:-
Sr No Type of NBFC
1 Merchant Banking
2 Underwriting
3 Portfolio Management Services
4 Investment Advisory Services
5 Financial Consultancy
6 Stock Broking
7 Asset Management
8 Venture Capital
9 Custodial Services
10 Factoring
11 Credit Rating Agencies
12 Leasing and Finance
13 Housing Finance
14 Forex broking
15 Credit Card Business
16 Micro Credit
17 Rural Credit

Conditions:-
1. Minimum capitalization norms for Fund Based NBFC:-
US$ 0.5 million upfront for FDI upto 51%
US$ 5 million upfront for FDI upto 75%
US$ 50 million- out of which 7.5 million upfront and balance in 24 months- for FDI
beyond 75% and upto 100%
2. Minimum capitalization norms for non-fund based NBFC:-
US$ 0.5 million
3. Foreign Investors can set up 100% operating subsidiaries by bringing US$ 50 million and
gain following advantages:-
No requirement of disinvestment a minimum 25% of its equity to Indian entities
No restriction on number of operating subsidiaries
No need to bring additional capital


MMJC Advisory Private Limited
Regd office:- 1-2 Shilpali CHS,Hanuman Chowk, Near Top Liner,Gokhale Cross Road, Mulund(E), Mumbai 400081
Email id:-makarandjoshi@mmjc.in


4. Joint Venture operating NBFCs FDI upto 75%
Allowed to set up subsidiaries for undertaking NBFC activities on meeting
minimum capital inflow as stated in Condition No.1and 2.

5. Other compliances as prescribed by RBI
Downstream Investments
We have seen that, above types of NBFCs are required to comply with certain conditions to fall
under automatic route. Now we will see whether downstream investment requires Foreign
Investment Promotion Board (Hereinafter referred to as FIPB) approval.
As per Press Note No. 2 of 2009 issued by RBI,
Foreign Direct Investment:-
o Investment by Non-resident entity into an Indian Company will be counted as
Foreign Investment
Foreign Indirect Investment:-
o Investment by Non-resident entity into an Indian company through an investing
Indian Company will not be considered for calculation of Indirect foreign
Investment if:-
the Indian Company is owned and controlled by resident Indian citizens.
Meaning of owned and controlled:-
Owned means having a more than 50% shareholding and beneficial ownership in the
Indian Company.
Controlled mean- the owners will have the power to appoint majority of board of
directors and legally direct the Boards actions.
It means two conditions are required to be complied with i.e. ownership and control over the
Indian company.
We will take an illustration to explain it:-

"X" Indian Company
invests 26% in "Y"
Indian Company.
Z Invests 49% in "X"
Indian company
Z is a Foreing
Company
Z Foreign Co
X Indian Co- Z
invests 49%
Y Indian Co- A
invests 26%
MMJC Advisory Private Limited
Regd office:- 1-2 Shilpali CHS,Hanuman Chowk, Near Top Liner,Gokhale Cross Road, Mulund(E), Mumbai 400081
Email id:-makarandjoshi@mmjc.in

In the above case, investment made by Z foreign company will be considered as FDI for
investing in X Indian Company. But Investment made by X Indian company in Y Indian
company will not be treated as indirect FDI because of following:-
Investment made by Z Foreign Company is less than 50% of the paid capital of
X Indian company
Hence X Indian company is not controlled and owned by z Foreign
Company as stated above.
If we take the same example, where Z Foreign Company invests 55% in X Indian company.
X Indian Company invests 26% in Y Indian Company. Then, Investment made by X Indian
Company in Y Indian company will be counted as indirect foreign investment. And Y Indian
company will have to comply with the provisions of Foreign Exchange Management Act, 1999
and RBI circulars, press notes etc.
Exception:-
If the Foreign-owned and controlled Indian company undertakes downstream investments in
100% owned subsidiaries, the amount of indirect FDI will be equal to the percentage of foreign
investment in Indian company. Thus when a joint venture company [In India] creates a wholly-
owned subsidiary in India, the foreign stake in the subsidiary company will be considered as
equal to the stake in the holding company [i.e. JV Company].
No FIPB approval for downstream investments:-
ii
A foreign owned or controlled Indian Company that either runs a business or runs a business and
also invests in other companies down the line will not have to seek clearance from FIPB for
making investments in yet another company. Such companies will only need to notify the FIPB,
Department of Industrial Policy and Promotion, Secretariat for Industrial Assistance about their
investment within 30 days of downstream investment.
Exception:-
Following foreign owned or controlled Indian companies requires FIPB clearance for making
investments in companies down the line:-
Investment companies having pure investment activity or objective (holding companies
refer Press Note 9 of 1999)
Companies that neither operate nor invest at the moment but could not undertake
either activity subsequently.
Conclusion:-
FDI under automatic route is allowed for 17 types of NBFCs listed above after satisfying the
conditions laid down prescribed under the Master Circular.
MMJC Advisory Private Limited
Regd office:- 1-2 Shilpali CHS,Hanuman Chowk, Near Top Liner,Gokhale Cross Road, Mulund(E), Mumbai 400081
Email id:-makarandjoshi@mmjc.in

Investment by Non-resident entity into an Indian company through an investing Indian Company
will not be considered for calculation of Indirect foreign Investment if, the Indian Company is
owned and controlled by resident Indian citizens.
Hence, there is huge opportunity to Indian companies to bring in FDI and then undertake
downstream investments without bothering about sectoral limits or restrictions. However, if the
investing Indian Company is foreign owned and controlled, then its entire downstream
investments will be considered as indirect FDI.
No FIPB approval is required for operating companies or companies which runs business and
invests in other companies for making downstream investment.
But FIPB approval is required for making downstream investment if the object of the investing
company having FDI is purely of investment or it neither operate nor invest at the moment but
could not undertake either activity subsequently.
Following chart will help to understand the above discussion clearly:-



i
Master Circular No. 1/2009-10 dated 1 July 2009 on Foreign Investment in India
ii
Press Note No. 4 of 2009
Foreign Indirect Investment
Foreign Direct Investment
Foreign Company
Foreign
Company
Indian Company
having pure
Investment object -
FIPB approval
Downstream
investment
by -
Investment
object
company
Foreign
Owned and
Controlled-
FIPB approval
Downstream
Investment by
Investment
Object
company-
Indian Owned
and
controlled- No
FIPB approval
Indian Company having
other Obejcts- Is
governed by Sectoral
caps table in Master
Circular
Downstream
Investment by
company
having other
objects and
Foreign
Owned &
Controlled- No
FIPB approval
if invest in
operating
companies
Downstream
Investment by
company
having other
object and
Indian Owned
& Controlled -
No FIPB
approval in
any case