Financial services firms hit by minimum capitalization

By Shinoj Koshy, L&L Partners
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A press release from the Ministry of Finance dated 16 April has modified the 2017 foreign direct investment (FDI) policy by reintroducing the concept of minimum capitalization norms for the financial services sector. The FDI policy sets out the rules in respect of FDI in regulated and unregulated financial services. Regulated financial services are those regulated by a financial services regulator and unregulated financial services are those that are not regulated by any financial sector regulator, or where only part of their activity is regulated or where there is doubt regarding the regulatory oversight of such services.

Shinoj KoshyPartnerL&L Partners
Shinoj Koshy
Partner
L&L Partners

Up to 100% FDI is permitted in regulated financial services under the automatic route and is not subject to minimum capitalization norms. In unregulated financial services, FDI is allowed up to 100% with prior government approval and is subject to conditions including minimum capitalization norms.

The rationale for the distinction seems to be that if a financial service is under the regulatory oversight of a sector-specific regulator, the government does not need to have a “look-in” at the entity providing the service before it receives FDI.

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Shinoj Koshy is a partner at L&L Partners. The views expressed are personal and intended for general information purposes. They are not a substitute for legal advice.

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