Overseas players speed up consolidation in NBFCs

Overseas players have set their eyes on the non-banking finance companies(NBFCs) to enter the Indian market even as the Reserve Bank of India (RBI) has restricted the entry of foreign players in the banking space till April 2008.

The latest to take this route is private equity firm Newbridge Capital which recently announced investment of $100 million in the used-truck financing business in India by picking up 49 per cent stake in Shriram Holdings (Madras) Pvt Ltd. Prior to this, another Chennai-based NBFC, Cholamandalam Investment & Finance Company, sold 37.5 per cent stake to the Singapore-based DBS at Rs 228 crore.

Early this year, Shriram Investments Ltd, Shriram Transport Finance Company Ltd and Shriram Overseas Finance Ltd offered 20.6 per cent each to a Mauritius-based private equity fund for about Rs 100 crore through a preferential issue.

Analysts said more such deals would be struck leading to consolidation in the industry. In fact, this the second phase of consolidation in the NBFC sector after the domestic players witnessed a spate of mergers and amalgamations. Ashok Leyland Finance was merged with IndusInd Bank to increase the bank's retail assets.

Tata Finance, the NBFC arm of the Tata Group, has been merged with Tata Motors while Sundaram Finance has merged itself with Lakshmi General Motors to increase its asset base. Shriram group plans to merge two of its companies, Shriram Transport Finance and Shriram Investments, by the end of this year.

Restrained by the regulator from buying out stakes in local banks and spreading their branch network, foreign banks are using the NBFC route to build their asset books. Both Standard Chartered and Citibank are using their NBFC arms to strengthen their presence in India. DBS is expected to use its NBFC vehicle for the same purpose.

Unlike commercial banks, the foreign direct investment (FDI) norms are liberal in the NBFC sector. An NBFC can be even 100 per cent owned by an overseas player provided it is ready to bring in $50 million out of which $7.5 million needs to be brought upfront and the balance in 24 months.

For FDI up to 51 per cent, $0.5 million needs to be brought in upfront and for FDI above 51 per cent and up to 75 per cent, foreign players need to bring in $5 million upfront.

Sundaram Finance Managing Director T Srinivasaraghvan said increasing FDI flow was felt in all financial services sector even though it was more pronounced for the NBFCs. "Overseas players are taking a keen interest in picking up stakes in NBFCs," added R Thyagarajan, chairman of the Shriram group.

Shriram Holdings is the holding company of the Shriram group, the largest player in second hand truck financing business with an asset book of Rs 6,000 crore.