Financial services should include those activities that are regulated by a financial sector regulator
The extant FDI guidelines allow 100% foreign direct investment under automatic route in a non-banking financial company (NBFC) engaged in any of the 18 prescribed activities under the FDI Policy, subject to certain minimum capitalisation norms.
The said 18 activities include merchant banking, stock broking, housing finance, portfolio management services, leasing and finance etc. Whilst at first read the 18 prescribed NBFC sectors appear to be broad enough to cover the length and breadth of financial services activity in the country. However, upon deeper scrutiny one could find that the policy provisions as they stand today have left much to be desired.
At the outset it is important to note that under the current FDI regime, the term NBFC has not been defined.
Therefore, in order to gauge the definition of a NBFC, one has to refer to the Reserve Bank of India Act, 1934. As per the Act, a non-banking financial company (RBI-NBFC) means a non-banking company which carries out, amongst other things, the business of providing finance through loans or advances, investment into securities, insurance business etc. Additionally, RBI has put in place a robust regulatory structure to regulate the activities of RBI-NBFCs.
However, in the FDI regime the activities sought to be covered within the purview of NBFCs do not align with what is being sought to be covered under the Act in relation to RBI-NBFCs. To make matters more complicated, the FDI guidelines have, till now, entailed a prior government approval in case of ‘other financial services’ which are not specifically provided for in the FDI guidelines. This leads one to ask a question as what exactly amounts to financial services or other financial services as the case may be under the FDI guidelines, as the term financial services is also not specifically defined?
The current FDI guidelines clearly state that in relation to any sectors/activities which are not specifically provided for in the FDI policy, FDI is permitted up to 100% under the automatic route subject to relevant sectoral laws/conditions being complied with. Therefore, this policy ambiguity has created a lot of confusion in the industry as to what amounts to financial services—and, therefore, what amounts to NBFC activity—and whether or not such activities should be construed as other financial services not provided specifically and therefore requiring a prior government approval, or should they be simply construed as mere services in the financial sector space.
Looking back since 1997, one may note that the Indian financial services sector has expanded rapidly and has played a vital role in the growth of the Indian economy. Moreover, the nature of financial services itself has evolved dramatically over the past 20 years and now includes a host of activities that may have not been imagined at the time of drafting of the policy guidelines. Also, the list of 18 permitted NBFC activities has remained unchanged since 1999, thereby creating a need for more activities that can be brought within the ambit of permitted FDI sectors.
As per newspaper reports the Union cabinet has approved sweeping changes to the FDI guidelines permitting foreign investment in other financial services under the automatic route, provided they are regulated by any financial sector regulator (such as Sebi, PFRDA, RBI) or the government. This appears to be a step in the right direction and may prove to be very significant in attracting more FDI into the country in the financial services/NBFC sector. However, as has been reported, for the entities engaged in other financial services that are not regulated by any of the regulators, such entities will need prior approval from the Foreign Investment Promotion Board (FIPB) for receiving foreign investment.
This brings us back to the question of what really amounts to financial services. It would be prudent for the government to come out with a clear definition of what amounts to financial services under the FDI guidelines. In order to render complete clarity on the policy, the term financial services/other financial services should include only those activities that are regulated by a financial sector regulator. Therefore, any activity that does not come within the ambit of or require approval of a financial sector regulator should not require any prior FIPB approval for receiving foreign investment. This would be in-line with the existing financial sector regulations of Sebi, RBI, PFRDA, IRDA etc. that have clearly identified the activities that come within their regulatory purview.
It would be interesting to see the exact text of the government notification on this and then conclude as to what extent liberalisation has actually taken place and the impact it may have in attracting foreign investment. As the past experience shows, one cannot stop but ask the question as to whether we are missing the wood from the trees.
(With contribution from CV Srikant, associate, J Sagar Associates)
The author is partner, J Sagar Associates, Advocates and Solicitors
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