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RBI's stand on FDI from Mauritius to slow down PE inflows in NBFCs

Some $1-1.5 billion annual inflows in NBFC space likely to be impacted with RBI move

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Indian Venture Capital and Private Equity Association (IVCA) has already written to the RBI at behalf of its members who had faced this issue during the course of their investments |Photo | Bloomberg

The Reserve Bank of Ind­ia’s recent stand that financial firms can­not be set up with foreign direct investment (FDI) from Mau­ritius or other jurisdictions that do not meet benchmarks laid down by the Financial Action Task Force (FATF) is exp­ected to slow private equity (PE) investments in non-banking financial companies (NBFCs).

“PE Investments in the fin­ancial sector will see a slowdown until funds adopt new jurisdictions that offer similar tax benefits as Mau­ritius or until Mauritius meets the FATF standards,” said Aarthi Sivanandh, partner at J Sagar Asso­ci­ates.

RBI regulated fin­ancial entities will ha­ve to contend with bo­th its note restricting Chi­nese investments and the adoption of FA­TF standards through which it will approve investments, Siva­nandh said. Annual inflows of about $1-1.5 billion into NBFCs would be impacted due to this, industry estimates said.

“There are so many entrepreneurs who are dependent on this, who will be shattered with a last-minute change in policy,” said Renuka Ramnath, chief executive and managing director at Multiples Asset Management. Indian Private Equity and Venture Capital Association (IVCA) has sent RBI a letter on this issue. “Given the timing with Covid-19 and the lockdo­wn, the NBFC sector was especially in need of capital,” said Siddarth Pai, co-chair, regulatory affairs committee at IV­CA and founding partner at 3one4 Capital. “Because of this issue, many NBFC licences ha­ve been held up and NBFCs are not able to raise new funds,” he added.


Pai said existing investments will be unaffected as they are designed to be grandfathered in. He added that such an arrangement has been in vogue since Mauritius was placed on the FATF grey list earlier this year. Both Securities and Exchange Board of India (Sebi) and RBI issued circulars on this. While Sebi allowed funds domiciled in Mauritius to invest in Indian markets, RBI took a guarded stance, Pai said. “So, all new investments into RBI-regulated entities (particularly NBFCs) will face this additional test. This would seem to be regardless of whether the investor is an existing or a new investor in the NBFC,” he said. However, credit operations of larger PE firms such as Blackstone, Brook­field Asset Manage­ment, KKR India Financial Services will not be affected as they do not route investments through Mauritius, said a senior analyst.

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When contacted, a Black­stone spokesperson denied any impact of RBI stand on its credit operations. A KKR India Financial Services spokesperson also said it would not impact the firm. An official from a PE fund said there was no indication by the RBI that it was intent on governing investments retrospectively. The official said existing investors in the financial space will wait out their exit timelines. The foreign investment facilitation portal that approves investments in sectors that require government nod needs security clearance from the Union home mi­nistry. This might not be forth­coming now, as the FATF added Mauritius to its grey listed in February for not meeting its standards for compliance with anti-money laundering rules.

The official said that the RBI’s move was expected as India is a member of FATF. “There is uncertainty since the RBI position has not been issued as a directive or a circular, so participants are guided by Para 55 of the RBI Master KYC directions that do not preclude “regulated entities from having legitimate trade and business transactions with the countries and jurisdictions mentioned in the FATF statement,” said Sivanandh.

However, RBI still has the power to apply these directions in the manner it deems fit to counter money-laundering and terror financing, he said.

In May, IVCA had written to the RBI seeking clarity on its licensing policy for NBFCs. The RBI has replied saying that finance companies cannot be set up with FDI from jurisdictions that do not meet FATF benchmarks.