What changed
RBI issued a master circular consolidating and reinforcing existing rules on NBFC overseas investments. It explicitly warns against investments made without regulatory clearance, citing FEMA violations. New specific conditions cap aggregate overseas investment at 100% of net owned funds and single entity exposure at 15% of owned funds, and restrict investments to financial sector entities only.
What it means for you
NBFCs must now strictly follow a two-step clearance: first from RBI's Department of Non-Banking Supervision, then from Foreign Exchange Department. The caps on investment relative to net owned funds limit risk concentration. The ban on non-financial sector investments and multi-layered structures reduces regulatory arbitrage and aligns with global norms.
What you must do
- Ensure all overseas investment proposals include a clear statement of intended activities and obtain NoC from the regional office before any commitment.
- Verify that the target entity's core activity is regulated by a financial sector regulator in the host jurisdiction.
- Monitor aggregate overseas investment to not exceed 100% of net owned funds and single entity exposure to not exceed 15% of owned funds.
- Avoid multi-layered or cross-jurisdictional structures; only one intermediate holding entity is permitted.
- Review existing overseas investments for compliance and rectify any past violations to avoid FEMA penalties.
Who it affects
All deposit-taking and non-deposit-taking NBFCs registered with RBI, NBFCs planning or having overseas subsidiaries, joint ventures, or representative offices, Compliance and legal teams of NBFCs
What is the penalty for making overseas investment without RBI's NoC?
Any investment made without regulatory clearance is a violation of FEMA 2004 and attracts penal provisions as per the circular.
Can an NBFC invest in a foreign entity that is not in financial services?
No. Investment in non-financial service sectors is not permitted. The foreign entity must have its core activity regulated by a financial sector regulator in the host jurisdiction.
Is there a limit on how much an NBFC can invest overseas?
Yes. Aggregate overseas investment cannot exceed 100% of the NBFC's net owned funds. Investment in a single entity (including step-down subsidiaries) cannot exceed 15% of owned funds.