The RBI Restricts Investment in NBFCS from F.A.T.F. Non-Compliant Jurisdictions

The Reserve Bank of India, vide its circular number RBI/2020-2021/97 dated February 12, 2021, imposed restrictions on investments from the investors based in the Financial Action Task Force (FATF) non-compliant jurisdictions. The new restriction contravenes the Foreign Direct Investment Policy which governed the investments into Non-Banking Financial Companies and allowed a sectoral capping of investments at 100%, with no exceptions based on the investor’s jurisdiction.

The Financial Action Task Force

The Financial Action task force (F. A. T. C.) is a global watchdog organisation that aims at curbing money laundering and terrorist financing. Formed in the year 1989 by the G7, the Financial Action Task Force today is an intergovernmental organisation with 39 members and affiliations from Asia/Pacific Group on Money Laundering (APG), Caribbean Financial Action Task Force (CFATF), The Council of Europe Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (MONEYVAL), Financial Action Task Force on Money Laundering in South America (GAFISUD) and the Middle East and North Africa Financial Action Task Force (MENAFATF). The F. A. T. F. has developed the F. A. T. F. Standards, or F. A. T. F. Recommendations, which ensure a co-ordinated international response to prevent organised crimes, corruption and terrorism. It helps authorities to go after the money of criminals dealing in illegal drugs, human trafficking and other heinous crimes.  The F. A. T. F. has also been working to stop funding for weapons of mass destruction.

The F. A. T. C. enlists countries with significant strategic deficiencies in their regimes to counter money laundering, terrorist financing, and financing of proliferation as High-Risk Jurisdictions or “blacklist”. This list currently includes two countries, Iran and the Democratic People's Republic of Korea (North Korea).

Also, “Jurisdictions under increased monitoring” are the countries/ jurisdictions with strategic deficiencies in their regimes to counter terrorist financing, money laundering, and proliferation financing but actively working with the F. A. T. F. to address the same. This list, also called the “grey list” includes Albania, Barbados, Botswana, Burkina Faso, Cambodia, Cayman Islands, Ghana, Jamaica, Mauritius, Morocco, Myanmar, Nicaragua, Pakistan, Panama, Senegal, Syria, Uganda, Yemen and Zimbabwe.

The aforementioned lists serve as a handbook to the multiple financial and banking entities across the globe, warning them of the increased risks in transactions with the listed countries/jurisdictions.

Background

As a measure to abide by the guidelines laid down by F. A. T. C., The Reserve Bank of India started closely monitoring and scrutinising investment applications received from Mauritius and rejected all those with the slightest connection with the nation, starting from the month of May 2020. This was because Mauritius was included in F. A. T. C.’s “Grey List” in February 2020 owing to the country’s inability to curb money laundering and inefficiency in investigating into the same.

The move by the Reserve bank of India created a cloud of ambiguity surrounding the inflow of Foreign Direct Investments to the Non-Banking Financial Company (NBFC) sector as it did not provide a set guideline or rules that would be followed for investments with connection to countries/ jurisdictions labelled F. A. T. F. Non-Compliant Jurisdictions, which includes:

1. High-Risk Jurisdictions subject to a Call for Action, and
2. Jurisdictions under Increased Monitoring

The Circular

On the 12th of February 2021, the Reserve bank of India released a circular providing the guidelines that imposed restrictions on investments from F. A. T. F. non-compliant jurisdictions. The circular differentiates the investment on the basis of pre-existing investors and new investors and lay down different rules for both the classes and the restrictions imposed vide the circular apply only to the new investors

The circular cites that new investors from F. A. T. F. non-compliant jurisdictions in both, existing NBFCs and/or in companies seeking Certification of Registration (COR), would not be allowed to directly or indirectly acquire ‘significant influence’ in the investee, which, by accounting standards, translates to an aggregate of not more than 20% of the total voting rights of the investee. Here, the ‘voting rights’ also include ‘potential voting rights’, which means holding of any instrument that can be convertible into equity, other instruments with contingent voting rights, contractual arrangements, etc. that grant voting rights to investors (including any contingent voting rights) in the future. Whereas, the existing investors of existing NBFCs having made their investments prior to the classification on the basis of the source or intermediate jurisdictions as F. A. T. F. non-compliant jurisdiction may continue holding the investments so made or even bring in any additional investments in accordance with the extant regulations, to support the continuity of the business in India.

The clause allowing existing investors to bring in additional investment seems to be in contradiction to the objective of the circular, as the existing investors are allowed to make additional investments up to the sectoral limit, which is 100% in this case. Thus, the development of a new mechanism to scrutinise the whole process, or amendment to the circular for eliminating the differentiating factor for investments from or through the same country is needed to add clarity to the whole process.

1. https://rbidocs.rbi.org.in/rdocs/notification/PDFs/NBFCS8FEB3B6C99654335837E941464F7ACB9.PDF
2. https://www.fatf-gafi.org/about/
3. https://www.fatf-gafi.org/publications/high-risk-and-other-monitored-jurisdictions/documents/call-for-action-february-2020.html
4. https://www.fatf-gafi.org/publications/high-risk-and-other-monitored-jurisdictions/documents/increased-monitoring-february-2021.html
5. https://en.wikipedia.org/wiki/Financial_Action_Task_Force