Government Sets Foreign Capital Requirements For Unregulated Financial Entities

The government today set foreign capital requirement limits for financial services entities which are not regulated by any financial regulator.

The minimum foreign direct investment for fund-based activities falling under “other financial services” and those that aren’t regulated will be $20 million, the finance ministry said in a statement. The minimum FDI capital for non-fund based unregulated financial services providers stands at $2 million, the statement added.

Fund-based activities include:

• Merchant Banking
• Underwriting
• Portfolio Management Services
• Stock Broking, Asset Management
• Venture Capital
• Custodian Services
• Factoring, Leasing and Finance
• Housing Finance
• Credit Card Business
• Micro Credit and Rural Credit

Non-fund based activities include:

• Investment advisory services
• Financial consultancy
• Forex broking
• Money changing business
• Credit rating agencies

According to the Foreign Direct Investment Policy, 2017, foreign investment of up to 100 percent is allowed under the government approval route for financial services activities which are not regulated, or partially regulated. This is subject to minimum capitalisation requirements, the policy said without specifying the requirements.

With the new notification, companies in these categories may be required to infuse more capital than required earlier, Dev Raj Singh, executive director - tax and regulatory services at EY India, told BloombergQuint. For example, investment advisory services provided to non-residents, and are not registered with SEBI, would need to bring $2 million as capital as compared to $0.5 million in the 2016 FDI policy, Singh explained.

In the 2016 FDI policy, the minimum foreign capital requirement for non-fund based activities was $0.5 million which had be infused upfront. For fund-based activities, the minimum foreign capital requirement was $0.5 million, and 51 percent of this $0.5 million was to be brought upfront. To acquire more that 51 percent stake, the minimum foreign capital requirement was $5 million, of which 75 percent had to be infused at once. A more than 75 percent stake could only be acquired via a joint venture with a minimum capital requirement of $50 million, of which $7.5 million will have to be infused upfront.

The circular issued by the finance ministry, the new requirements would be applicable for activities which are partially regulated or have doubts regarding regulatory oversight. This would include portfolio management services, which manage accounts of some offshore entities, but are not currently regulated, said Bhavin Shah, financial services tax leader at PwC India.

Shah said that the minimum capitalisation of $2 million in unregulated Investment Advisory Services will impact all foreign private equity funds which have set up Indian investment advisory arms.

Besides, the RBI/government should clarify whether entities already set up under the old regulations with $0.5 million capitalisation are grandfathered or not, Shah told BloombergQuint.

That will also apply to foreign-owned managers of Indian alternative investment funds, which are not directly registered with SEBI, where the capital requirement will now be $20 million, Shah added.