Reserve Bank of India (RBI) vide its notification No. DNBS (PD) 229/CGM (US)/2011 dated June 14, 2011 has notified directions for opening of branch/ subsidiary/ JV/ RO which are termed as Non-Banking Financial Companies (Opening of Branch/ Subsidiary/ Joint Venture/ Representative Office or Undertaking Investment Abroad by NBFCs) Directions, 2011. These directions are in addition to those prescribed by Foreign Exchange Department for opening of branches abroad or for investments in Joint Venture/Wholly Owned Subsidiary.
Even earlier as per circular DNBS (PD).CC. No.173/03.10.01 /2009-10 dated May 09, 2010, No Objection (NoC) of the Department of Non-Banking Supervision (DNBS) is required before making such investment but the conditions subject to which No Objection will be issued are prescribed now through this notification. Opening branch office/s by an NBFC is forbidden through this notification.
A snap shot of the general and specific conditions as laid down in the notification are specified hereunder: –
- Investment in non-financial service sector, activities prohibited under FEMA or in sectoral funds shall not be permitted.
- While the aggregate overseas investment should not exceed 100% of the Net owned fund (NoF), the investment in a single entity (including its step down subsidiaries), should not exceed 15% of Net owned funds of NBFC.
- The overseas investment should be in a single intermediate holding entity.
- The prudential norms relating to Capital to Risk-weighted Assets Ratio (CRAR) and the requirement related to minimum Net Owned Funds should be complied with.
- Net Non-Performing Assets of the NBFC should not be more than 5% of the net advances.
- NBFC should be earning profits for the last 3 years.
- NBFC shall comply with KYC norms and its regulatory compliance should be satisfactory.
- An annual certificate from statutory auditors shall be submitted by NBFC to the Regional Office of DNBS where it is registered, certifying that it has complied with all the conditions stipulated under these guidelines for overseas investment.
- A quarterly return in the format prescribed shall be submitted with the DNBS and DSIM (Department of Statistics and Information Technology).
- For Opening of Brach
- NBFC shall not be allowed to open a branch abroad, however existing branches undertaking financial business shall be allowed to continue to operate subject to compliance with the these guidelines.
- For Opening of Subsidiaries/ Joint Ventures/ Other investments abroad
- The parent NBFC shall not be permitted to extend guarantee to or on behalf of such subsidiaries.
- No request for letter of comfort in favor of the subsidiary from any Indian Institution is permitted.
- NBFCs liability is restricted to either equity or fund based commitment to the subsidiary.
- The subsidiary shall not be a shell company and should not be used as a vehicle for raising resources for creating assets in India.
- The parent NBFC shall obtain periodical reports/ audit reports about the subsidiary.
- For Opening of Representative Offices abroad
- It can be opened for liaison work, undertaking market study and research but not for undertaking any activity that involves outlay of funds.