The government will consider changes in rules to allow 100% foreign owned and well capitalised non-banking finance companies (NBFCs) to set up subsidiaries, removing the curbs introduced by the foreign direct investment guidelines issued last year. The Reserve Bank of India will work out the details of the changes, a government official told.

Wholly owned foreign NBFCs that brought in $50 million as capital were allowed to set up any number of subsidiaries for specific activities without bringing in additional capital.

The FDI guidelines issued last year (press note 4 of 2009) took away this right, mandating that Indian companies that receive downstream investments from foreign companies have to comply with relevant sectoral conditions including minimum capitalisation. The net effect was that 100% foreign-owned NBFCs that had already brought in $50 million of capital had to capitalise their downstream NBFC subsidiaries all over again.

A change in rules will come as a relief to several such companies, some of them owned by large foreign banks and institutions. The change in norm had put pressure on foreign finance companies to bring in additional capital at each level as most foreign-owned NBFCs float different subsidiaries to carry out different activities such as merchant banking, stock broking, venture capital, forex, financial consultancy and housing finance.

Moreover, the legal provisions require them to have separate entities for different activities. For example, an NBFC cannot carry out portfolio management services and housing finance activity under the same legal structure.

“Requirement to bring $50 million at every level and in every downstream 100% subsidiary would be unreasonable and out of sync with business reality,” said Akash Gupt, executive director at consulting firm PwC.

The issue had figured at a recent meeting between the officials of the finance ministry, RBI and the department of industrial policy and promotion, the nodal government body on FDI. The relaxtion is unlikely to face any oppostion as the officials present at the meeting agreed that the intent of the policy was not to deny NBFCs this flexibility. The central bank will come out with fresh formulation for the NBFCs to correct the anomalous situation, the government official, who did not wish to be identified, said.

“The objective of PN 4 is merely to clarify guideline for downstream investment by foreign-owned or controlled Indian companies. These cannot supercede the sectoral policy on FDI already in force,” Mr Gupt said.

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