Small finance banks: New AIF norms a relief

Licensed entities' task of raising their domestic equity holding eased by loosened definition of domestic vehicle

As the proposed Small Finance Banks (SFBs) scout for domestic equity to meet their regulatory requirement, a recent Reserve Bank of India (RBI) circular on alternative investment funds (AIF) could be a game changer.

This November 16 notification, say experts, effectively means as long as such a fund is sponsored or managed by an Indian resident, irrespective of the percentage of foreign corpus, it will be considered a domestic vehicle.

An AIF is an investment vehicle which pools funds for investing in entities like real estate, PE or hedge funds.

According to the RBI norms on SFBs, issued last November, the initial promoter stake should not be less than 40%, locked for five years, with domestic shareholding of at least 51%.At present, almost all the proposed SFBs have 70-90% foreign shareholding. They have 18 months more to raise their domestic capital to required level.

"We would like to increase our investments in the proposed SFBs. If an AIF, as long as its fund manager and sponsor are domestic entities, will be considered a domestic vehicle, we would definitely like to explore that option," said Vishal Mehta, co-founder and partner, Lok Capital, backed by the US-based non-profit Rockefeller Foundation.

This private equity (PE) investor holds stake in four of the 10 proposed SFBs -- Ujjivan, Equitas, Utkarsh and Suryoday, with its total investment in the four being close to $25 million (Rs 16.6 crore). It could be investing another $10-12 mn (Rs 6.6-8 crore) in the proposed SFBs.

The RBI notification said, "Downstream investment by an investment vehicle shall be regarded as foreign investment if neither the sponsor nor the manager nor the investment manager is Indian 'owned and controlled' as defined in Regulation 14 of the principal regulations...The extent of foreign investment in the corpus of the investment vehicle will not be a factor to determine as to whether downstream investment of the investment vehicle concerned is foreign investment or not."

At present, a majority of foreign funding in the proposed SFBs are from PE and and venture capital (VC) funds, which would like to stay invested. However, due to the RBI regulations on foreign holdings, they might have to pare stake, despite unfavourable valuations.

"In our company, the share of domestic shareholding is pretty high, around 62%. However, for those companies looking to raise domestic equity, AIF could be a good option,'' said K Paul Thomas, chairman and managing director, ESAF Microfinance, which has got a banking licence.

While the bigger institutions would have to go for an initial public offering (IPO) of equity, the smaller ones will have to raise domestic equity through private placements. At least two micro finance institutions, Ujjivan and Equitas, have prepared IPO plans.