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Lost in Layers: lower threshold for subsidiaries under ODI norms raises concern

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Vinita Nair, Senior Partner | Vinod Kothari & Company | corplaw@vinodkothari.com

It is quite common for entities to have subsidiaries in India and outside India in order to undertake business activities. The norms for incorporating a subsidiary in India is mainly governed by provisions of Companies Act, 2013 (‘CA, 2013’) and also the FDI norms for investment in the non-debt instruments, where the investment is being made by a person resident outside India. Similarly, the norms for incorporating a subsidiary outside India is mainly governed by provisions of CA, 2013 and also ODI norms for investment in the non-debt instruments. Additionally, there is a concept of restriction on layers of subsidiaries, prescribed under CA, 2013 and also under the new regime, which has raised cause of concern as well as confusion among India Inc., which is intended to be addressed by the author in this article. 

RBI, effective from August 22, 2022 notified norms on Overseas Investment (‘OI’) in the form of OI Rules, OI Regulations and OI Directions. Read our article on the overview of the OI norms here. Our presentation can be accessed here.

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Revised ODI Norms: A step towards greater clarity & liberalization?

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FCS Vinita Nair | Senior Partner, Vinod Kothari & Company | corplaw@vinodkothari.com

Investments by Indian entities outside India is a very common phenomenon and several companies have presence outside India by virtue of forming a Joint Venture (‘JV’) and Wholly Owned Subsidiaries (‘WOS’). While the intent is to permit investment overseas, however, with reasonable fetters to ensure that money is not siphoned outside India. Hence, the prescribed limits along with approval and reporting requirements.

With the enforcement of amendment proposed in Finance Act, 2015 in October, 2019[1] powers vested with Central Government (CG) and Reserve Bank of India (RBI) with respect to permissible Capital Account Transaction were revisited. Power to frame rules relating to Non-Debt instruments (‘NDI’) were vested with CG and to frame regulations relating to debt instruments were vested with RBI. The scope of NDI inter alia covers all investment in equity instruments in incorporated entities: public, private, listed and unlisted; acquisition, sale or dealing directly in immoveable property.

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The Law of Co-lending

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Financial Services Division | finserv@vinodkothari.com

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Our write-ups on related topics may be viewed here –

FAQs on Large Exposures Framework (‘LEF’) for NBFCs under Scale Based Regulatory Framework

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Financial Services Division | (finserv@vinodkothari.com)

1. Applicability –

1.1. What is the intent behind the LEF?

Response: Regulation and control of “large exposures” is a part of financial sector regulations globally to control concentration of exposures (thus, risks) to a few individuals/entities/groups. The Basel Committee of Banking Standards has been having recommendatory pieces on this topic since 1991, if not earlier.  The Basel standard subsequently became a part of the Basel capital adequacy framework. 

There is a large exposures framework in case of banks as well. 

The intent behind the large exposure framework, which essentially limits the exposures to a single entity or group or group of economically interdependent entities is to strengthen the capital regulations. Capital regulations prescribe minimum capital in case of financial entities. The adequacy of capital is obviously connected with the risks on the asset side – hence, if the assets represent exposure in a single borrower or economically connected group of borrowers, a credit event with respect to such borrower may deplete the adequacy of capital very quickly.  Hence, regulators limit the exposure to a single entity or a group.

There might be other forms of credit concentrations – for example, sectoral or geographical concentrations – these are not captured by the Framework.

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Differential Standard Asset Provisioning for NBFC-UL

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-RBI issues new guidelines on provisioning for standard assets

-Kumari Kirti | finserv@vinodkothari.com

The function of NBFCs as a supplemental route of credit intermediation alongside banks and its contribution to supporting real economic activity are well known. Within the financial sector, the NBFCs have grown significantly in terms of scale, complexity, and interconnectedness over time. Many companies have expanded to the point where they are systemically significant, necessitating the alignment of the regulatory framework for NBFCs in light of their shifting risk profile.

To address the same, RBI vide its circular dated October 22, 2021[1] has introduced Scale Based Regulation (SBR) for all NBFCs and has classified NBFCs in four layers- Base, Middle, Upper and Top layer.

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The Credit Card Business for NBFCs

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RBI Directions on Credit Cards and Co-branded Credit Cards issued by NBFCs

With the objective to provide general and conduct regulations relating to credit, debit and co-branded cards to banks and NBFCs, RBI, on April 21, 2022, has issued the Reserve Bank of India (Credit Card and Debit Card – Issuance and Conduct) Directions, 2022[1] (‘Directions’), to be applicable with effect from 1st July, 2022.

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Like banks, NBFC-UL to maintain CET-1 capital

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Manner of computation of CET-1  for NBFCs prescribed by RBI

– Qasim Saif | finserv@vinodkothari.com

Addressing risk faced by NBFCs and enhancing their capacity to absorb such risk has been a key point of consideration under the Scale Based Regulations (SBR) for NBFCs. SBR also intends to curb regulatory arbitrage available to very large NBFCs whose size of operations are more or less in line with that of banks.

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Factors’ Registration Regulations: Going back to Square-one?

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– Megha Mittal

mittal@vinodkothari.com

On 14th January, 2022, the Reserve Bank of India (‘RBI’) notified the Registration of Factors (Reserve Bank) Regulations, 2022[1] (‘Registration Regulations’) laying down the manner of granting Certificate of Registration (‘CoR’) to companies which propose to do factoring business. Applicable with immediate effect, this may essentially seem like an undoing of the Factoring Regulation (Amendment) Act, 2021. One of the several objectives of the said Amendment was to allay a doubt, arising from the existing language of the Factoring Act, that entities either had to be principally into factoring business, or not do factoring at all. The RBI’s Regulations almost lead to the very result – either an entity has a Certificate of Registration (COR) as a factor, or it does not do factoring at all.

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Inter-lender balance transfer of loans: understanding the nuances

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-Kanakprabha Jethani (kanak@vinodkothari.com)

A crucial feature of the financial sector industry is that the services provided by financial institutions, including the interest rates charged, are not identical and hence, the customer has a choice to approach the lender whose offerings suit the needs of the customer. The choice is influenced by various factors including the ease of onboarding process, information sought, interest and charges levied, customer redressal mechanism etc. In the lending industry, given the options available with the borrower, it has been a common practice to move to new lenders when they provide more favourable terms. Read more →

Changes in ECB and Trade Credits Policy due to LIBOR Transition

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– Team Finserv (finserv@vinodkothari.com)

Relevant links:

  1. RBI Circular dated December 8, 2021 – https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12204&Mode=0
  2. Master Direction – ECB, Trade Credits and Structured Obligations – https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=11510
  3. Roadmap for LIBOR Transition – https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12128&Mode=0

Our write-ups on financial interests – https://vinodkothari.com/category/financial-services/