The Hindu Business Line : `Indian holdings' in foreign NBFCs to be denied sops

In a partial turnaround of the existing policy framework, the Government has decided to single out NBFCs promoted by foreign companies and deny them the benefits of treating shares held by their employees' welfare trusts as Indian shareholding.

Though technically the holdings of such welfare trusts will continue to qualify as Indian shareholding because the trust will be an Indian entity registered under the Societies Act, this will not be treated as Indian shareholding for the purpose of satisfying the minimum capitalisation norm of $50 million prescribed for 100 per cent foreign-owned NBFCs, according to Government sources.

Instead, this will be considered as investments made by the parent company only because the foreign company will continue to hold 100 per cent management control in the NBFC. Though employee welfare trusts are treated as Indian shareholding in other sectors such as information technology, for the NBFC sector this provision could be potentially misused by the foreign company to bypass the minimum capitalisation norm of $50 million prescribed for 100 per cent foreign owned NBFCs, which is already visible as some NBFCs have approached the Government with such a proposal, the officials said.

The Department of Economic Affairs, in a recent letter to the Department of Industrial Policy and Promotion (DIPP), has clarified that though permissible under the existing broad policy framework for employees trusts' holding in subsidiaries of foreign companies, the NBFC sector should be singled out.

The DIPP, however, is of the opinion that the minimum investment norms for FDI in NBFCs no longer serves the purpose it was meant for and should be deleted since all NBFC proposals now have to satisfy the regulatory norms and be put under the automatic approval route instead of the Foreign Investment Promotion Board route. However, the DEA has overruled the DIPP's explanation and stated that the minimum capitalisation norms had been introduced as a conscious policy to attract more FDI into the financial services sector and treating employees' trusts holding as Indian shareholding will enable the company to operate with a paid-up equity base of $5 million instead of $50 million, the officials said.

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