The Reserve Bank of India (“RBI”) with a view to combat money laundering vide its notification issued on February 12, 2021 (“Notification”), declared that new investors from or through non-complaint Financial Action Task Force (“FATF”) jurisdictions cannot, directly or indirectly acquire ‘significant influence’ in India-based non-banking financial companies (“NBFCs”). This means fresh investors (directly or indirectly) from such jurisdictions in aggregate should hold less than 20 per cent of the voting power (including potential voting power) of the NBFC. The Notification will be applicable on new investments in existing NBFCs as well as companies seeking Certification of Registration (COR) from RBI.

The Notification can be viewed @ https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12027&Mode=0

What is FATF?

FATF is an inter-governmental organization which combats money laundering and terrorism financing, which periodically identifies jurisdictions having weak measures to combat money laundering and terrorism financing under two headers: (i) high-risk jurisdictions subject to a Call for Action comprising of Iran and Democratic People’s Republic of Korea; and (ii) jurisdictions under Increased Monitoring, presently comprising of identified nations including Mauritius, Jamaica, Cambodia, Ghana and Myanmar. Under the Notification, countries featuring in both these categories have been classified as non-compliant FATF countries. 

Was the declaration made by RBI vide its Notification an expected move?

The NBFC sector has seen RBI’s special focus since the end of the year 2020, wherein RBI has undertaken significant measures in relation to NBFCs such as:

  1. Statement on Developmental and Regulatory Policies issued on December 4, 2020: RBI, vide this statement @ https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=50748sets out the need for regulation and supervision over NBFCs. The statement addresses (i) the need to formulate guidelines on dividend distribution by NBFCs; (ii) review of the regulatory framework of NBFCs in line with the changing risk profiles of NBFCs by undertaking a scale based regulatory approach linked to the systematic risk contribution of NBFCs; and (iii) strengthening the audit infrastructure of NBFCs, along with harmonization of guidelines on appointment of statutory auditors for commercial banks, urban cooperative banks and NBFCs.
  2. Discussion Paper on Revised Regulatory Framework for NBFCs published on January 22, 2021: RBI has proposed to split the classification of NBFCs in 4 (four) categories in a pyramid structure, where the regulatory regime and intervention for NBFCs will be stricter and more rigid as one goes up the classification pyramid. The also addresses the methodology for identification of NBFCs, structure and regulatory framework for NBFCs at different layers.

Does the Notification have a retrospective effect?

The Notification is applicable only for new investors from non-compliant FATF jurisdictions. Any prior investment does not appear to fall under the purview of the Notification. Investors in existing NBFCs holding their investments prior to the classification of the source or intermediate jurisdictions as FATF non-compliant, may continue with the investments or bring in additional investments as per extant regulations so as to support continuity of business in India.

Conclusion

This Notification will significantly impact prospective investments in NBFCs from funds registered in Mauritius and other non-compliant FATF jurisdictions. Funds or companies registered in Mauritius or other non-compliant FATF jurisdictions proposing to invest in Indian NBFCs will now have to revise their investment strategies in order to comply with the permissible threshold as stipulated in the Notification.

Authors:

Nusrat Hassan, Co-Managing Partner

Yosham Vardhan, Associate Partner

Abhinav Anand, Associate

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