Friday, 4 November 2016

India: FDI policy liberalized for financial services

On 9 September 2016, the Indian government took another step in opening up foreign direct investment (FDI) possibilities by liberalizing the FDI policy applicable to the financial services sector. Liberalization policies for this sector initially were announced by the Finance Minister in the budget in February 2016, but the government now has further eased the restrictions.

The new FDI policy, which applies as from 9 September 2016, eliminates the previous list of 18 financial service activities in which up to 100% foreign investment was permitted under the “automatic route” (i.e. where government approval is not required). FDI now is permitted under the automatic route for any financial services activities (other than those for which special rules exist), provided the activities fall under the supervision of a financial services regulator in India (e.g. the Securities and Exchange Board of India (SEBI), Reserve Bank of India, Pension Fund Regulatory and Development Authority, etc.). Foreign investment in financial services activities that are unregulated in India (or where only part of the activities are regulated, or where there is doubt regarding the regulatory oversight) must be approved by the government.

The revised FDI policy also has replaced the minimum capitalization requirements with the minimum capitalization standards prescribed by the relevant regulator.

Key impacts:

  • Foreign investors may invest in many more financial services activities under the automatic route (e.g. commodity broking).
  • Foreign investors likely will benefit from the relaxation in the minimum capitalization standards (e.g. the SEBI prescribes a minimum capitalization of INR 3 million (approximately USD 45,000) for foreign investment in stock-broking activities, as compared to the minimum USD 50 million prescribed under the previous FDI policy).
  • Investment advisory services now may require approval from the government if the activity is not regulated by a financial services regulator in India. 
Source: Deloitte