Want to Invest in the NBFC sector in India?
In the year 2020-21, 2,728 million US $ were infused into the Finance sector of the Indian economy through Foreign Direct Investment.
The Indian Finance Sector has become a key market, and there is a great deal of interest among foreign companies and foreign nationals in investing in India.
FDI in the NBFC Industry
The Indian government permits foreign Direct Investment (FDI) in the NBFC sector. In simple terms, it is a foreign entity’s investment in an Indian NBFC with the goal of controlling ownership.
The Reserve Bank of India is in charge, overseen by the Foreign Exchange Management Act, 2000. In India, FDI in the NBFC sector might take one of two paths:
- Government Route: Under the government route, FDIs are approved by the Reserve Bank of India.
- Automatic Channel: FDI in NBFC using this route does not require Authority approval.
The Indian economy saw significant changes after 1991 when it underwent a period of liberalization. One such transformation occurred when several international investors expressed a strong desire to invest in the Indian economy.
The Indian government has set up an automatic path for 100% foreign direct investment in non-banking financial services, with no capitalization requirements and a limited scope of activity. NBFCs are now eligible to obtain 100% FDI under the automatic route supervised by monetary authorities such as SEBI, IRDA, RBI, National Housing Bank, or any other regulator, as announced by the government.
Thus, FDI standards in India were simplified, and FDI in the non-banking sector was only permitted via the automatic route in 18 non-banking financial service activities that were subject to minimum capitalization requirements. Furthermore, these were separated into fund-based and non-fund-based activities.
- Credit Card Business
- Custodial Services
- Factoring, Leasing
- Finance, Housing Finance
- Merchant Banking
- Micro Credit
- Portfolio Management Services
- Rural Credit
- Stock Broking
- Venture Capital
Foreign Loans and NBFCs
‘External Commercial Borrowings’ (ECB) are the loans obtained from overseas institutions.
Foreign banks and financial institutions are readily available to provide these loans. Furthermore, a shareholder can provide ECBs, although such a shareholder must be a resident of India and own at least 25% of the borrower’s entire share capital.
Because Indian interest rates are high in relation to the rest of the globe, it is particularly advantageous for Indian enterprises to borrow money from countries with lower interest rates. FDI in NBFC is also highly desired since foreign investors invest significantly more money than Indian investors.
The other reason is that foreign investors are drawn to Indian enterprises at various phases of development and expansion for a variety of reasons, including India’s rising client base. As a result, FDI in NBFCs is likely to increase in an increasing Indian economy instead of Western countries, which offer restricted growth potential.
Modes of FDI inflow into NBFCs
FDI in NBFCs can be invested in various forms, including shares, stock exchanges, loan conversions into shares, and the exchange of a few skill sets, among others.
For FDI in NBFCs via the automated method, NBFCs must submit Form 83 to an authorised bank to get an LRN number. The chartered accountant or company secretary must certify the Loan Registration Number as a legal requirement. Foreign investment is advantageous since it has spurred Indian economic growth by increasing FDI in the NBFC industry.
Invest in the NBFC sector in India !
To raise funds, NBFCs typically borrow from banks or sell business papers to shared assets. They lend the money to small and medium-sized businesses, retail clientele, and others.
Under the automatic method, FDI in the non-banking sector is permitted in certain designated activities, subject to compliance with the minimum capitalization standards.
When it came to Foreign Direct Investments, the Indian government has always taken a cautious stance. In the past, FDI in India was seen as a convoluted process in which money flowed in slowly as the government struggled with regulatory issues and was opposed to authorizing foreign direct investment above the minimal capitalization requirements.
These three institutions regulate foreign loans made in India through FDI in the non-banking finance industry-
- Foreign Exchange Management (Borrowing and Lending in Foreign Exchange) Regulation, 2000
- Foreign Exchange Management Act, 1999
- Regulations passed by RBI
What is External commercial borrowings?
External commercial borrowings are India’s most major FDI (ECB). These are loans obtained by qualifying Indian resident entities from non-resident lenders, which are restricted to authorized and non-permitted end-uses, minimum maturities, and maximum all-in-cost ceilings.