The Reserve Bank of India’s stance that financial firms can not be set up with funds from Mauritius or other non-FATF-compliant jurisdictions is likely to bring more transparency and accountability into funding in the sector, according to players. But experts have also said the government must clarify on foreign direct investments from Mauritius into the sector.

Industry watchers point out that the last few months have seen a surge in investments from China, which is routed from countries such as Mauritius and Cayman Islands.

“The RBI’s stance comes with good intentions as a lot of investments into Indian fintechs and China are routed through Mauritius. It is in line with FATF norms, and is an attempt to create transparency on the source of funding,” noted an NBFC chief, who did not wish to be named.

The RBI’s position is understood to be that finance companies can not be set up with foreign direct investments routed through Mauritius or other jurisdictions that are not compliant with the Financial Action Task Force (FATF).

Divergent views

Nischal Arora, Partner, Regulatory, Nangia Andersen India, noted that at present,two significant Indian regulators – the RBI and SEBI – hold divergent views on whether registrations should be granted to entities routing investments through Mauritius.

“Funding options such as External Commercial Borrowings (ECB) continue to be available to such regulated entities with majority Mauritius shareholding,” he said.

Further, since there is no change in FDI Policy per se, there will be no requirement to seek prior DPIIT approval. “Fresh applications for NBFC registration, change in shareholding beyond 26 per cent where investor is based out of Mauritius, change in control with control being acquired by investor from Mauritius - all three will get impacted as these require prior RBI approval" he said.

At present, 100 per cent FDI is allowed under the automatic route in companies operating in the regulated financial services sector, including NBFCs, except where investment is from a country that shares land border with India.

“Clarity is required as there is nothing in black and white. FDI is allowed by the Ministry of Finance. SEBI is also registering such investments for Category -I licence, but the RBI is not giving approval, so it is creating a lot of confusion. Clarity is required, given that there is overlap in the directions from different agencies of the government,” said Atul Pandey, Partner, Khaitan & Co.

Impact funding

However, experts have warned that the move will also impact funding into the sector. Indian Private Equity and Venture Capital Association (IVCA) had also written to the RBI on the issue.

Srinath Sridharan, an independent markets commentator, noted that India as an important participant in the FATF, will have to abide by its norms. “Those looking to raise equity investments will have to look at jurisdictions which have free access,” he said, adding that for finance sector, while the investments being stalled could hurt genuine companies until Mauritius abides by FATF rules, it is also important to note that finance companies (lending) by their business model use leverage and have impact on public monies.

“Added to the current issue of stressed companies or assets, the other concerns could be that certain investors or promoters could be using this route to buy-more-into-their-own-companies at cheaper valuation,” he noted.

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