Opening of a Branch / Subsidiary / JV / Representative Office Abroad

The instructions in the following paragraphs are in addition to those prescribed by Foreign Exchange Department (FED) of the Reserve Bank for overseas investment:

46.1 Prior approval of the Reserve Bank shall be obtained in cases of opening of branch/subsidiary/joint venture/representative office or undertaking investment abroad by NBFCs. No NBFC shall open subsidiaries/joint ventures/representative office abroad or shall make investment in any foreign entities without obtaining prior approval in writing from the Reserve Bank. The application from the NBFC seeking No Objection would be considered subject to general and specific conditions prescribed in the paragraphs 46.2 and 46.3 respectively.

46.2 General conditions

(i) Investment in non-financial service sectors shall not be permitted;

(ii) Direct investment in activities prohibited under FEMA or in sectoral funds shall not be permitted;

(iii) Investments shall be permitted only in those entities having their core activity regulated by a financial sector regulator in the host jurisdiction;

(iv) The aggregate overseas investment shall not exceed 100 percent of the NOF. The overseas investment in a single entity, including its stepdown subsidiaries, by way of equity or fund-based commitment shall not be more than 15 percent of the NBFC’s owned funds;

(v) Overseas investment shall not involve multi layered, cross jurisdictional structures and at most only a single intermediate holding entity shall be permitted;

(vi) The CRAR/leverage of the NBFCs post investment in subsidiary abroad shall be not less than the regulatory prescriptions; (vii) The NBFC shall 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;

(viii) The level of Net Non-Performing Assets of the NBFC shall not be more than 5 percent of the net advances;

(ix) The NBFC shall be earning profit for the last three years and its performance in general shall be satisfactory during the period of its existence;

(x) The NBFC shall comply with the regulations issued under FEMA,1999 from time to time; (xi) Regulatory compliance and servicing of public deposits, if held by the NBFC, shall be satisfactory;

(xii) The NBFC shall comply with the KYC norms;

(xiii) 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;

(xiv) An annual certificate from statutory auditors shall be submitted by the NBFC to the Regional Office of Department of Supervision of the Reserve Bank where it is registered, certifying that it has fully complied with all the conditions stipulated under these directions for overseas investment;

(xv) If any adverse features come to the notice of the Reserve Bank, the permission granted shall be withdrawn. All approvals for investment abroad shall be subject to this condition.

46.3 Specific conditions

46.3.1 Opening of Branch abroad

As a general policy, NBFCs shall not be allowed to open a branch abroad. However, NBFCs which have already set up branch(es) abroad for undertaking financial business shall be allowed to continue to operate them subject to complying with these directions, as applicable.

46.3.2 Opening of subsidiary abroad

In case of opening of a subsidiary abroad by the NBFC, all the conditions as stipulated above shall be applicable. The NoC to be issued by the Reserve Bank is independent of the overseas regulators’ approval process. In addition, the following stipulations are made, which shall be applicable to all NBFCs:

(i) 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;

(ii) No request for letter of comfort in favour of the subsidiary abroad from any institution in India shall be permitted;

(iii) It shall be ensured that NBFCs liability in the proposed overseas entity is restricted to its either equity or fund-based commitment to the subsidiary;

(iv) The subsidiary being established abroad shall 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;

(v) The subsidiary being established abroad by the NBFC shall not be used as a vehicle for raising resources for creating assets in India for the Indian operations;

(vi) 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 the Reserve Bank and inspecting officials of the Reserve Bank;

(vii) 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;

(viii) 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;

(ix) All the operations of the subsidiary abroad shall be subject to regulatory prescriptions of the host country.

46.3.3 Joint Ventures abroad

Investments abroad, other than in subsidiaries shall also be governed by same guidelines as those applicable to subsidiaries.

46.3.4 Opening of representative offices abroad

(i) 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 shall be extended.

(ii) 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.

47. Expansion of activities of NBFCs through automatic route

NBFCs with Foreign Direct Investment (FDI) under the automatic route shall be permitted to undertake only those activities which are permissible under the automatic route. Diversification into any other activity shall require the prior approval of FIPB. A company which has entered into an area permitted under the FDI policy (such as software) and seeks to diversify into NBFC sector subsequently would also have to ensure compliance with the minimum capitalization norms and other regulations as applicable.