RBI’s Proposal to Restrict Private Equity Firms from Controlling Multiple NBFCs: Implications Ahead
The Reserve Bank of India (RBI) is contemplating a ban on private equity firms from holding controlling stakes in more than one non-banking financial company (NBFC). The proposed regulations aim to differentiate between controlling stakes and smaller financial investments, allowing holdings of 15% or less to face fewer regulatory checks. This initiative arises from concerns that financial difficulties at a global private equity firm could adversely affect multiple NBFCs in which it has significant investments.
Definition of Controlling Stake
Currently, a 25% stake in a listed company is deemed a controlling stake. However, an investor may also be considered to have control with a smaller shareholding if they can appoint most of the company’s directors or influence its management. Under the new proposal, investments of 15% or less will be classified as financial investments and will encounter fewer regulatory hurdles. The RBI plans to finalize a draft of these proposed rules after gathering public feedback, with a formal issuance expected early next year.
Increased Foreign Investment in NBFCs
Foreign investors are increasingly interested in Indian banks and NBFCs, driven by strong credit demand and low loan delinquencies. Private equity investments in India’s financial sector reached approximately $5.4 billion last year, marking a 6% increase from 2024 and a 17% rise from 2023, according to Grant Thornton data. An additional $3.6 billion has flowed into the sector from January to September this year. The RBI has previously intervened to prevent investors from holding controlling stakes in multiple NBFCs, as seen in the case of Bain Capital, which was required to divest its stake in Tyger Capital to acquire a significant share in Manappuram Finance.
Industry Requests for Ownership Flexibility
The Indian Venture and Alternate Capital Association has approached the RBI to seek permission for different entities within the same group to hold stakes exceeding 20% in multiple NBFCs. Siddarth M Pai, co-chair of the association’s regulatory affairs committee, noted that many private equity firms and venture capital funds are eager to invest in fintech and financial services through various funds. However, existing ownership limits pose challenges. Recently, the sector witnessed two significant private equity transactions: Blackstone’s agreement to purchase a 16% stake in IIFL Finance for $535 million and Temasek’s planned investment of around $265 million in Godrej Capital.
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