RBI restricts investments in NBFC from FATF non-compliant countries

By Anshuman Mozumdar and Anirudh Gotety, L&L Partners

The Reserve Bank of India (RBI) issued a notification on 12 February 2021 further restricting investments in non-banking financial companies (NBFC) from jurisdictions, which are on the Financial Action Task Force’s (FATF) black list (high risk jurisdictions) or grey list (jurisdictions under increased monitoring). As of February 2021, 21 countries featured in these lists. Mauritius is a noteworthy entry, since investments from Mauritius have been a significant contributor to foreign investments into India.

Anshuman Mozumdar
L&L Partners

Foreign investments in NBFCs from these countries are treated differently, because such countries have weak measures to combat money laundering and terrorist financing. This makes it more difficult to trace the ultimate beneficial owners of investors based in these countries.

The notification is the latest in a series of similar measures taken by the RBI, especially after the inclusion of Mauritius in the FATF’s grey list in February 2020. The RBI has in recent years sought additional information from Mauritius-based investors while processing applications to take control of NBFCs by such investors. Recently, the RBI was reported to have refused NBFC licences to entities promoted by Mauritius based investors.

The notification prevents investors from FATF non-compliant countries from directly or indirectly acquiring significant influence (as defined under accounting standards) in greenfield or brownfield NBFCs, on an aggregate basis. This includes holding potential or existing voting power of 20% or more. Existing foreign investments from jurisdictions, which were FATF compliant at the time of investment, but subsequently became non-compliant, have been grandfathered. However, further investments by such investors can be made in compliance with extant regulations to support continuity of business of the NBFC.

These are some key observations on the notification. The notification refers to accounting standards while defining significant influence. However the remaining parts of the notification suggest that significant influence amounts to having 20% or more voting power in the NBFC. According to the Indian Accounting Standard 28, voting power is only one measure of significant influence. Other factors include board seats, or participation in policy decisions. It is therefore possible for an investor to have significant influence in an NBFC without holding 20% or more of voting power. It is unclear what “extant regulations” mean in the context of further investments by existing investors. One interpretation is that existing investors from FATF non-compliant countries who hold significant influence in NBFCs can make no further investments in them unless they invest through investing entities that have no direct or indirect links to FATF non-compliant jurisdictions.

Anirudh Gotety, Associate, L&L Partners
Anirudh Gotety
L&L Partners

The scope of continuity of business is undefined. Meeting the obligations of the NBFC towards its creditors, including refinancing of existing loans, should be within the ambit of such definition. However, it is not clear if other corporate purposes or inorganic growth fall within the definition. The notification is silent on the treatment of existing investors from FATF non-compliant jurisdictions who do not have significant influence in the NBFC, for example investors holding 10% voting power in aggregate without any management rights.

Since the notification permits new investments from FATF non-compliant countries provided such investors in aggregate do not hold significant influence in the NBFC, additional investments from such existing investors may be allowed subject to the aforesaid criteria.

The notification does not specifically address secondary transactions, that is the sale of shares in an NBFC to an investor based in a FATF non-compliant jurisdiction. However, given the intent of the notification, such transactions are likely to be within its ambit.

The notification creates stumbling blocks for Mauritius based investors and for the NBFCs looking to raise funds from them. However, Mauritius has reportedly fulfilled 53 out of the 58 recommendations of the FATF ahead of schedule, in order to exit the grey list. Its reassessment by the FATF has been stalled by the pandemic, but such concerns may perhaps be short lived.

Anshuman Mozumdar is a partner and Anirudh Gotety is an associate at L&L Partners


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