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K. R. Srivats

Rangarajan Panel may suggest lower foreign equity threshold for NBFCs

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New Delhi Jan. 28 The Government-appointed committee on financial inclusion is likely to make a case for reduction in the minimum threshold amount of foreign equity investment by a foreign entity in non-banking finance companies (NBFCs) engaged in microfinance.

Sources said that the committee, which is chaired by Dr C. Rangarajan, Chairman of the Economic Advisory Council to the Prime Minister, might recommend a minimum foreign equity of $50,000 for such NBFCs.

Currently, the foreign investment promotion board (FIPB) guidelines stipulate that foreign equity in NBFCs engaged in microfinance should be at least $5,00,000 from a foreign entity.

The committee is in favour of creation of a separate category of NBFCs for providing microfinance to rural, semi-urban and urban poor.

New Bill

A number of micro-finance institutions (MFIs) are also in the process of attracting foreign equity capital to build base for expansion. The Government is likely to come up with a Bill in the forthcoming Budget session for the development and regulation of the sector.

Meanwhile, the Rangarajan Committee plans to seek rationalisation of tax laws to promote financial inclusion. It is likely to make a case for explicitly recognising microfinance as "charitable activity" so as to benefit non-profit MFIs.

Besides suggesting weighted tax deduction for expenses incurred in the setting up of branches in specified States with low financial inclusion, the committee may also recommend that capital gains on equity investments in micro finance NBFCs be tax-exempt.

It is also likely to suggest that MF-NBFCs be allowed to treat `provision for bad debts', as deductible expense for tax purposes, as in the case of banks.

More Stories on : NBFCs | Outlook | Rural Development

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