CS Professional Programme
SUBJECT – DUE DILIGENCE AND CORPORATE COMPLIANCE MANAGEMENT
The Non-Banking Financial Companies (Opening of Branch/Subsidiary/Joint Venture/ Representative Office or Undertaking Investment Abroad by NBFCs) Directions, 20112
Prior Approval of RBI in cases of Opening of branch/subsidiary/joint venture/representative office or undertaking investment abroad by NBFCs
General and specific conditions prescribed:
General conditions
a. Investment in non-financial service sectors shall not be permitted.
b. Direct investment in activities prohibited under FEMA or in sectoral funds will not be permitted.
c. Investments will be permitted only in those entities having their core activity regulated by a financial sector regulator in the host jurisdiction.
d. The aggregate overseas investment should not exceed 100% of the Net owned Funds. The overseas investment in a single entity, including its step down subsidiaries, by way of equity or fund based commitment shall not be more than 15% of the NBFC's owned funds.
e. Overseas investment should not involve multi layered, cross jurisdictional structures and at most only a single intermediate holding entity shall be permitted.
f.(i) The Capital to Risk- Assets Ratio (CRAR) of the deposit taking NBFCs, post investment in subsidiary abroad, should be not less than that applicable to deposit taking NBFCs in terms of Non-Banking Financial (Deposit Accepting or Holding) Companies Prudential Norms(Reserve Bank) Directions, 2007, as amended from time to time;
(ii) The CRAR of the non-deposit taking, systemically important non-banking financial companies (NBFC-ND-SI), post investment in subsidiary abroad, should be not less than that applicable to them in terms of Non-Banking Financial (Non- Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007, as amended from time to time;
(iii) The CRAR of the non-deposit taking NBFCs (other than NBFC-ND-SI), post investment in subsidiary abroad, should not be less than 10%, or as modified from time to time;
g. The NBFC should continue to maintain required level of NOF after accounting for investment in the proposed subsidiary/investment abroad as prescribed in the explanation to Section 45-IA of the RBI Act, 1934.
2 Compiled by Lakshmi Arun Education Officer, The ICSI
h. The level of Net Non-Performing Assets of the NBFC should not be more than 5% of the net advances;
i. The NBFC should be earning profit for the last three years and its performance in general should be satisfactory during the period of its existence.
j. The NBFC shall comply with the regulations issued under FEMA, 1999 from time to time;
k. Regulatory compliance and servicing of public deposits, if held by the NBFC, should be satisfactory
l. The NBFC shall comply with the KYC norms;
m. SPVs set up abroad or acquisition abroad shall be treated as investment or subsidiary/joint venture abroad, depending upon percentage of investment in overseas entity;
n. An annual certificate from statutory auditors shall be submitted by the NBFC to the Regional Office of Department of Non-Banking Supervision (DNBS) where it is registered, certifying that it has fully complied with all the conditions stipulated under these Guidelines for overseas investment;
o. A quarterly return shall be submitted by the NBFC to the Regional Office of DNBS and also Department of Statistics and Information Management (DSIM)
p. If any adverse features come to the notice of the Bank, the permission granted shall be withdrawn. All approvals for investment abroad shall be subject to this condition.
Specific conditions.
(A) Opening of Branch
As a general policy, NBFCs shall not be allowed to open a branch abroad. However Non-banking financial companies which have already set up branch(es) abroad for undertaking financial business shall be allowed to continue to operate them subject to complying with the revised guidelines, as applicable.
(B) Opening of subsidiary abroad by NBFCs
In case of opening of a subsidiary abroad by the NBFCs, all the conditions as stipulated above shall be applicable. The NoC to be issued by the Bank is independent of the overseas regulators’ approval process. In addition, the following stipulations are made, which shall be applicable to all NBFCs:
a. In case of opening of subsidiary abroad, the parent NBFC shall not be permitted to extend implicit or explicit guarantee to or on behalf of such subsidiaries;
b. No request for letter of comfort in favour of the subsidiary abroad from any institution in India shall be permitted;
c. It shall be ensured that NBFC’s liability in the proposed overseas entity is restricted to its either equity or fund based commitment to the subsidiary;
d. The subsidiary being established abroad should not be a shell company i.e "a company that is incorporated, but has no significant assets or operations." However companies undertaking activities such as financial consultancy and advisory services with no significant assets shall not be considered as shell companies;
e. The subsidiary being established abroad by the NBFC should not be used as a vehicle for raising resources for creating assets in India for the Indian operations;
f. In order to ensure compliance of the provisions, the parent NBFC shall obtain periodical reports/audit reports about the business undertaken by the subsidiary abroad and shall make them available to Reserve Bank and inspecting officials of the Bank;
g. If the subsidiary has not undertaken any activity or such reports are not forthcoming, the approvals given for setting up a subsidiary abroad shall be reviewed/ recalled;
h. The permission granted to any NBFC for setting up of overseas subsidiary shall be subject to condition that the subsidiary shall make disclosure in its Balance Sheet to the effect that liability of the parent entity in the proposed overseas entity shall be limited to its either equity or fund based commitment to the subsidiary;
i. All the operations of the subsidiary abroad shall be subject to regulatory prescripttions of the host country.
(C) Joint Ventures abroad
Investments abroad, other than in subsidiaries also shall be governed by same guidelines as those applicable to subsidiaries.
(D) Opening of representative offices abroad by NBFCs
The representative office can be set up abroad for the purpose of liaison work, undertaking market study and research but not undertaking any activity which involves outlay of funds, provided it is subject to regulation by a regulator in the host country. As it is not envisaged that such office would be carrying on any activity other than liaison work, no line of credit should be extended.
The parent NBFC shall obtain periodical reports about the business undertaken by the representative office abroad. If the representative office has not undertaken any activity or such reports are not forthcoming, the approvals given for the purpose shall be reviewed/ recalled.
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