How NBFCs can take foreign loans or foreign investments

June 12, 2017

In this article, Sucharita Ghosh discusses How NBFC can take foreign loans or foreign investments?


Over the years after the liberalization of the Indian economy in 1991, India witnessed a significant interest of foreign investors in the Indian NBFC sectors. In 2015-16, foreign direct investment in India grew by 29 percent year on year to USD 40 billion.

Before discussing the guidelines for taking foreign loans by NBFC, we need to get a brief idea about NBFC.


A Non-Banking Financial Company (NBFC) is a company engaged in the business of loans and advances, acquisition of shares, stock, bonds hire-purchase, insurance business or chit business but does not include any institution whose principal business includes agriculture, industrial activity or the sale, purchase or construction of immovable property.

Example: Bajaj Finance, LIC housing Finance, Indiabulls, Aditya Birla Finance etc are the most popular non-banking financial companies in India.


Though bank and non-banking financial companies both are financial institutions and both performs similar kind of functions but there seems to be some basic differences between the two.


In India, the interest rates are high in comparison to the rest of the world. Thus taking loans from other countries which have lower interest rates are very beneficial for an Indian company. An NBFC also prefer foreign investment over Indian investment because foreign investors may be able to invest much more money compared to an Indian resource.

On the other hand foreign investors are also attracted to Indian companies in various stages of growth for various reasons like this country has growing customer base and foreign capital can witness more growth in an emerging economy like India as compared to saturated western markets which offer limited growth opportunities.


All the provisions regarding foreign exchange in and are regulated by the FEMA,2000 and the working and operations of NBFCs are regulated by the Reserve Bank of India within the framework of the RBI Regulation Act 1934 and the directions issued by it.FDI in NBFCs has been allowed up to 100% since 1997 subject to the minimum capitalization norms as issued by the Government.

The Foreign Exchange Management Act,1999 and Foreign Exchange Management (Borrowing and Lending in Foreign Exchange) Regulation,2000 and the RBI regulations governs the provisions relating to foreign loans.


Loans from foreign institutions are called external commercial borrowings or ECB. The foreign loans could be taken from foreign banks or foreign financial institutions.

One can also take ECB in the form of bonds, preference shares and debenture. A loan from a foreign shareholder who owns at least 25% of the shares of the borrower company will also come under the ambit of ECB.

However, not every sector of business can avail foreign loans. The RBI allows ECBs to be obtained only some specific sectors after fulfilling all the necessary requirements. To obtain foreign loans in a Non-banking financial company it only requires to comply with the procedural requirements. There is no need of approval of RBI while availing the loans.


A non banking financial company can bring their foreign investment not only in liquid currency but also in some other ways like exchange of shares, conversion of loans to share, exchange of some skill sets etc.


In Foreign Exchange Management Regulation there are certain rules and restriction mentioned about the external commercial borrowing. There is specific rules one need to follow about the maturity period and the amount of interest to be paid.

The cost of an ECB includes the interest charged by the bank, other fees and expenses paid in foreign loans. It must be within the limit which is measured with respect to a reference rate called the LIBOR or London Interbank Offered Rate.

For a loan whose average maturity period is 3-5 years, its interest would be 3.5% over six months the LIBOR and for the loan which will be matured after more than 5 years its interest ceiling would be plus 5% over the six month LIBOR.


 For taking the foreign loans under the automatic route the NBFCs are required to submit Form 83 to the Authorized Dealer bank to obtain the LRN number. The LRN number or Loan Registration Number must be certified by a company secretary or chartered accountant.

Then the AD bank must forward a copy of the form 83 to the department of statistics and Information Management of RBI. The loan can be only be taken after the allotment of the LRN number.


When a non-banking financial company is unable to repay its loans, it can convert some or all of its debts into equity after taking the consent of the lender. Provided that, when a company wants to convert the loan into equity it must ensure that the shares are issued under the FEMA pricing guidelines.


According to the section 15 of the Foreign Exchange Management Act, if anyone contravenes the provisions of the ECB regulation he will get punishment up to thrice of the amount involved. Moreover, the corporate entities who violated the ECB policy are under investigation by RBI can only avail foreign loans under the approval route. When the violation is a continuous one in nature, an additional penalty of INR 5000 will be payable per day.

When the violation is unintended, it can be rectified by compounding with RBI, which may help in getting much lower penalty.

Extant FDI Policy for NBFC

As per the extant FDI policy, foreign investment in NBFC sector is permitted under the automatic route. An automatic route is one where no Foreign Investment Promotion Board or RBI approval is needed before making the proposed investment. In automatic route up to 100% foreign investment is permitted without the approval of foreign investment promotion board.

Under section 10 of FEMA all foreign transactions are required to routed only through entities licensed by the RBI.

Till very recently  As per the extant FDI policy, foreign investment was permitted under automatic route only in the following 18 prescribed non-banking financial service activities. These are

Non-fund based activities

Foreign investment in non-banking sectors are permitted under the automatic route in these specified activities subject to compliance with the minimum capitalization norms. Once an NBFC is established with the requisite capital under the Foreign Exchange Management Regulation, subsequent diversification either through the existing company or through downstream NBFCs could be undertaken without any further authorization.

These investments were  subject to the following minimum capitalization norms:

But it is subject to certain conditions. It would not be permissible for such a company to set up any subsidiary for any other activity, nor it can be participate in any equity of an NBFC holding company.

All of the above capitalization norms also apply to each downstream subsidiary engaging in NBFC activities, except where its parent entity already has more than 75% foreign investment.

Further, if the activity being carried out was ‘non-fund based’ then irrespective of the level of foreign investment, capitalization was capped at USD 500,000.


The government has bought various guidelines and changes for investment in the NBFC Sector.

On 10th August 2016, the Government of India, in order to boost up the economic activities in financial sectors, has approved some changes pertaining to the FDI requirements in the Non Banking Financial Companies.

The Reserve Bank of India on 9 September 2016 released a notification amending the Foreign Exchange Management (Transfer and Issue of Securities to Persons Resident Outside India) Regulations, 2000, as a measure to make the foreign investments in the ‘non-banking financial services’ sector easier. This Notification operationalizes the policy which was announced on 10 August 2016. The two key relaxations which have been introduced by this Notification are:

These recent changes of doing away with the minimum capitalization norms is a boon since it will spur economic growth by increasing FDI in the NBFC sector. Increasing FDI  will be beneficial for the business due to the relatively easier and faster sanction of loans with favorable interest rates. This is certainly a welcome move, and is expected to provide a much-needed boost to this sector.

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