$50m capitalisation for NBFCs with 74% foreign stake

Kevin James in New Delhi

The finance ministry has set a minimum capitalisation of $50 million for non-banking financial companies which have more than 74 per cent foreign equity, for foreign direct investment proposals , according to a new guideline framed by the finance ministry.

Similarly, for non-banking financial companies' (NBFC) which have a foreign equity between 51 and 74 per cent, the minimum capitalisation required is $5 million.

There is, however, no stipulation on minimum capitalisation for foreign direct investment (FDI) projects in NBFCs which have below 51 per cent foreign equity, according to the ministry guideline.

The finance ministry has, however, not yet made public the new guideline for FDI proposals in NBFCs. According to official sources, the ministry is still waiting for the outcome of the ongoing negotiations under the World Trade Organisation, which may require some changes to be accommodated in the proposed guidelines.

However, the Foreign Investment Promotion Board has already started following this guideline for approving FDI proposals in this sector. The board has already approved some major FDI proposals such GE Capital and UBS Securities, Switzerland, for setting up NBFCs.

Following the finance ministry's decision on the new norms for FDI in the NBFC sector, the Bank of America has approached the Foreign Investment Promotion Board for converting its non-banking financial institution arm in India into a wholly-owned subsidiary. According to its proposals, the bank wants to increase its equity stake in its NBFC from the existing 75 per cent to 100 per cent.

The bank has also conveyed to the FIPB has it is ready to bring in $50 million, the minimum capitalisation for foreign players in the NBFC sector, for investing the same in its Indian arm. The NBFC arm of Bank of America, which has got the approval for setting up as a joint venture some time back, is yet to become operational. It proposes operate in securities and related activities.

According to the sources, the higher capitalisation requirement for wholly-owned ventures and joint ventures in the non-banking financial sector which have very high levels of foreign equity is to make sure that only big players from overseas enter this sector.

The recent RBI decision of free interest rates by NBFCs registered with the central bank has given an impetus to foreign investors to enter this area. While the FIPB has already approved several FDI proposals for setting up firms for non-banking financial activities, the board is understood be receiving many more FDI applications for entering this area.

The finance ministry has also opposed the move to include FDI projects in the financial sector services in the list of industries for automatic approval of foreign direct investment proposals up to 51 per cent.

The Reserve Bank of India is also against inclusion of this sector under Annexure III of the Industrial Act, 1991, apparently to control the proliferation of foreign companies in this sector.