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29 May 2023

India to regulate NBFCs

By VM Sathish

Strict guidelines are to be introduced to regulate Indian non-banking financial companies (NBFC) that operate abroad. NBFCs are licensed by the Reserve Bank of India (RBI) and provide a range of financial services – but they cannot accept deposits that are repayable instantly or issue cheques.

The RBI’s new rules are likely to prohibit the use of overseas branches and subsidiaries as shell companies. NBFCs will not be allowed to engage in unauthorised financial transactions abroad, and those that fail to submit regular business activity reports could have their licences withdrawn.

The new rules are likely to force the Indian NBFCs that have already set up offices and branches abroad through covert means to clean up their balance sheet and some shell companies, which are floated abroad for accounting gimmicks and money laundering, may be closed down. Indian NBFCs abroad, which are currently doing unauthorised financial services, may find it difficult to continue the same.

NBFCs act as an alternative to banks and are an integral part of India’s financial sector. Until recently the business has been confined to the domestic market. “NBFCs that have set up offices abroad to undertake financial activities will be allowed to continue to operate, subject to their complying with the revised guidelines,” an RBI official said in a letter notifying companies of the planned changes.

“The NBFC should continue to maintain the required level of net owned fund after accounting for investment in the proposed subsidiary or investment abroad. Only NBFCs that have made a profit for the past three years and show a satisfactory level of performance can open overseas branches. Companies should comply with foreign exchange regulations.

“The regulatory compliance and servicing of public deposits held by the NBFC should be satisfactory. The NBFC must comply with know-your-customer norms to prevent money-laundering activities.”

The draft guidelines say a parent NBFC should not extend any implicit or explicit guarantee to or on behalf of overseas subsidiaries. An NBFC will not be allowed to extend credit to an overseas subsidiary and all the operations of the subsidiary abroad will be subject to the regulatory controls of the host country.

NBFCs in Dubai

Many Indian NBFCs such as Kotak Mahindra, Motilal Oswal, ICICI, Barjeel Geojit, Karvy Consultants, ShareKhan and AnandRathi are present in the UAE. Some are classified as merchant banks.

Recently Bajaj Capital, a leading Indian NBFC, has announced plans to open its first overseas office in Dubai by the end of the year.

Avikar Hemani, who runs AnandRathi (AR) Middle East, said: “AR is a leading full-service securities firm providing the entire range of financial services in India.

“In the UAE we are a joint venture and are not operating as an NBFC. Overall business in Dubai is good – our focus is on non-resident Indian (NRI) customers. I am not aware of new RBI guidelines.”

Kotak Mahindra Group – formerly one of India’s leading NBFCs that has diversified into banking, stock broking and asset management – has an office at the Dubai International Financial Centre (DIFC).

An official said: “Our presence in the UAE is not as an NBFC but as a representative office of Kotak Mahindra International and Kotak Mahindra UK.

“The UK division was the first Indian institution licensed by the Dubai Financial Services Authority to conduct operations at DIFC.”