FDI in Financial Services Companies

Sharda Balaji
Sharda Balaji, Founder
Posted on Mon, 12 December 2016

Fintech companies which are not necessarily NBFC have some points to keep in mind while raising investment as FDI.


Non-Banking Financial Company (NBFC) is defined in the Reserve Bank of India Act, 1934 as follows:

  1. a financial institution which is a company;
  2. a non-banking institution which is a company and which has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner, or lending in any manner;
  3. such other non-banking institution or class of such institutions, as the Bank may, with the previous approval of the Central Government and by notification in the Official Gazette, specify;

Business Activities of an NBFC:

NBFC is a company engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business. A Company carrying on as its principal business the business of receiving deposits under any scheme or arrangement in one lump sum or in instalments by way of contributions or in any other manner, is also a NBFC.

Financial Activity as Principal Business:

When a Company’s financial assets constitute more than 50 per cent of the total assets and income from financial assets constitute more than 50 per cent of the gross income. Hence the Reserve Bank of India (hereinafter referred to as “RBI”) will register and regulate only companies predominantly engaged in financial activities.

Foreign Direct Investment (Hereinafter referred to as FDI) in NBFCS:

NBFCs are governed under the policies and guidelines as issued from time to time by the Reserve Bank of India. FDI in NBFCs has been allowed up to 100% since 1997 subject to the minimum capitalization norms as issued by the Government. FDI in NBFC was permitted under the automatic route in only eighteen identified sub-sectors which were listed out in the RBI Master Circular on FDI(release by RBI/DIPP in the month of July every year). Further, any foreign investment in entities falling within these sub-sectors also attracted minimum capitalisation norms, as follows: Foreign investment in NBFC were allowed under the automatic route in only the following activities:

Merchant Banking Venture Capital Credit Card Business
Under Writing Custodian Services Money Changing Business
Portfolio Management Services Factoring Micro Credit
Investment Advisory Services Credit Rating Agencies Rural Credit
Financial Consultancy Leasing & Finance Stock Broking
Asset Management Housing Finance Forex Broking

The applicable minimum capitalisation norms are as follows: -

  1. USD 500,000 for foreign capital up to 51%;
  2. USD 5,000,000 for foreign capital more than 51% and up to 75%; and
  3. USD 50,000,000 for foreign capital more than 75%.

Non-Fund Based Activities and their Capitalisation Requirement:

The FDI regulations while dealing with NBFC related activities also lists certain activities are Non-fund based activities and had subjected them to a minimum capitalisation requirement, the same is as follows: Activities:

  1. Investment Advisory Services
  2. Financial Consultancy
  3. Forex Broking Money Changing Business
  4. Credit Rating Agencies

Minimum capitalisation: USD 5,00,000 to be brought in upfront for all permitted non-fund based NBFCs irrespective of the level of foreign investment.


All Fintech companies which were engaged directly or indirectly in the above mentioned activities were required to meet the minimum capitalisation norms.

Recent Developments:

The Reserve Bank of India (RBI) on 9 September 2016 released a notification[1] amending the Foreign Exchange Management (Transfer and Issue of Securities to Persons Resident Outside India) Regulations, 2000 (TISPRO), as a measure to further relax foreign investments in the 'non-banking financial services' sector. Regulated Financial Service Activities – Other Financial Service: According to the notification investments are permitted up to 100% under the automatic route for all financial service activities which are regulated by financial sector regulators, including, the Reserve bank of India (RBI), the Securities and Exchange Board of India (SEBI), the Insurance Regulatory and Development Authority (IRDA), the Pension Fund Regulatory and Development Authority (PRDA), the National Housing Bank or any other financial sector regulator (Financial Sector Regulator) as may be notified by the Government of India. Therefore, Other Financial Services activities shall be subject to norms specified by the concerned regulatory/government agency. Other Financial Activities: In the following cases, foreign investment up to 100% will be allowed under the government approval route subject to conditions including minimum capitalization requirement, as may be decided by the government:

  • All financial services activities which are not regulated by any financial sector regulator
  • Where only a part of the financial service activity is regulated
  • Where there is doubt regarding the regulatory oversight

Impact: As a result of the above mentioned amendment 100 % FDI under automatic route is allowed in all financial service related activities with immediate effect and companies involved in investments and fund management activities, would no longer be required to bring in the minimum capitalisation as prescribed under the Consolidated FDI Policy Since the respective regulators like SEBI, IRDA have not come up with the necessary capitalisation norms the present norms under FDI master continues to be in force. The proposed change is likely to increase the foreign direct investments in all those companies engaged in financial activities boost the economy.   Authors: Vadiraja P S, Associate and Pooja Vasanth Kumar, Senior Associate [1] Press Note No. 6 (2016 Series)

Contact us for a Solution

Contact us for more information about our services and how we can help


As per the rules of the Bar Council of India, we are not permitted to advertise or solicit work. By accessing and browsing through this website, all users agree and acknowledge that the content of this website is for informational purposes only and that there has been no form of solicitation, advertisement or inducement by NovoJuris Legal or its members, in any form. No information provided on this website should be construed as legal advice and NovoJuris Legal shall not be liable for consequences of any action taken by relying on the information provided on this website.