The banking regulator, Reserve Bank of India, has asked non banking finance companies (NBFC) to obtain its prior approval for setting up subsidiaries, joint ventures and representative offices abroad. | |
| RBI has said that an application from a NBFC seeking no objection from the central bank would be considered if the capital adequacy ratio of the NBFC is over 15 per cent post-investment in subsidiary abroad in case of deposit taking NBFCs and 10 per cent in case of all non-deposit taking NBFCs. |
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| According to RBI policy, NBFCs are not allowed to set up offices abroad and if they have already opened any office abroad they would have to comply with the proposed RBI guidelines. |
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| The NBFC will have to ensure that the net non-performing assets will not be more than 5 per cent of the net advances, plus it should be earning profit for the last three years and performance in general should be satisfactory. |
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| Additionally, the NBFC will also have to be FEMA compliant and it should fulfil the Know Your Customer guidelines. |
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| The NoC to be issued by the RBI would be independent of the overseas regulators' approval process. |
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| In case of opening of subsidiary abroad, the parent NBFC should not extend any implicit or explicit guarantee to or on behalf of such subsidiaries, RBI said in a notification. |
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| NBFCs have also been directed not to extend any credit to the overseas subsidiary. All the operations of the subsidiary abroad would be subjected to regulatory prescriptions of the host country. |
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| The parent NBFC will have to ensure that NBFC's liability in the proposed overseas entity undertaking financial or non-financial business is restricted to its equity commitment to the subsidiary. |
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| RBI has emphasised that at no point of time, request for line of credit or letter of comfort in favour of the subsidiary abroad from any institution in India would be permitted. |
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| The RBI guidelines further state that, "The subsidiary being established abroad should not be a shell company which means it should not be a company that is incorporated, but has no significant assets or operations. |
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| 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 operation. |
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| In order to ensure compliance of the provisions, the parent NBFC must obtain periodical reports about the business undertaken by the subsidiary abroad. |
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| If the subsidiary has not undertaken any activity or such reports are not forthcoming, the approvals given for setting up a subsidiary abroad would be reviewed.'' |
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