The Reserve Bank of India's recent stand that finance companies cannot be set up with foreign direct investment (FDI) from Mauritius or other domains that do not meet the benchmarks laid down by Financial Action Task Force (FATF), is expected to slowdown private equity investments in the NBFC sector.
“Private equity Investments in the financial sector will see a slow down until funds slowly adopt new jurisdictions that offer similar tax benefits as Mauritius, or until Mauritius meets FATF standards for increased monitoring," said Aarthi Sivanandh, partner, J Sagar Associates.
RBI-regulated financial entities will have to contend with both, press note 3 and RBI's adoption of the FATF lens through which it will approve investments, Sivanandh said.
Some $1-1.5 billion annual inflows in NBFC space would be impacted with the RBI move, Renuka Ramnath, chief executive and managing director at Multiples Asset Management told a television channel today.
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. ”Given the timing with Covid-19 and the lockdown, the NBFC sector was especially in need of capital and hence this was actioned by the body,” he said.
Siddarth Pai, co-chair, regulatory affairs committee at IVCA and founding partner at 3one4 Capital, said, "Because of this issue, many NBFC licences have been held up and companies in this space are not able to raise new funds.”
Pai said that existing investments will not be affected as they are designed to be grandfathered in.
He added, this has been in vogue ever since Mauritius was placed on the FATF Grey List earlier this year. Both Sebi and RBI had issued circulars on the same. While Sebi allowed funds domiciled in Mauritius to invest in the Indian stock markets, RBI has taken a more guarded stance, he said. “So since then, all new investments into RBI-regulated entities (particularly NBFCs) have been facing this additional test. This would seem to be regardless of whether the investor is an existing or a new one in the NBFC,” he said.
However, credit operations of larger private equity firms such as Blackstone, Brookfield Asset Management, and KKR & co won't be affected as most of them do not route investments from Mauritius, said a senior analyst who didn't want to be named.
When contacted, a Blackstone spokesperson denied any impact of RBI stand on its credit operations .
An official from a PE fund said, there is no indication by the RBI that it is their intent to govern investments retrospectively. It is only that the new approvals have not been forthcoming for investments in the financial sector. The requirement is not only on NBFCs but will cover all financial sector participants that are regulated by RBI including ARCs, Insurance and pension sectors.
He added, existing investors in the financial space will wait out their exit timelines in current as further investments and new investments from Mauritius based poling vehicles may be faced with a blockade. The foreign investment facilitation portal that grants approvals for investments in sectors that require government approval, needs a security clearance from the Home Ministry before they consider approvals. This may now not be forthcoming given that FATF in Feb 2020 has grey listed Mauritius for not meeting its standards for compliance with anti-money laundering and laws to counter terrorist financing.
“India being a FATF member, RBI’s actions are a natural consequence.There is a current mood of uncertainty since the RBI position has not been issued as a directive or a circular at this point, 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”, Sivanandh added.
However, the regulator still has the power to apply these directions in the manner it thinks fit to counter money-laundering and terrorist financing, he said.
Dear Reader,
Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.
We, however, have a request.
As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.
Support quality journalism and subscribe to Business Standard.
Digital Editor
RECOMMENDED FOR YOU