MNCs can now set up fully-owned NBFCs

The government had earlier permitted 100 per cent foreign equity in the NBFC provided that such a company acts as the holding company with a minimum capital of $50 million. Specific activities were required to be carried out by a subsidiary with a minimum 25 per cent domestic equity.

Of the 25 per cent equity, 10 per cent was to be brought upfront and the remaining 15 per cent over a period of two years by the domestic partner. The foreign investors, however, were finding it difficult to get domestic partners to start the NBFC operations. According to the official announcement, the guidelines were beeing relaxed in view of the difficulties being faced by companies in locating credible Indian partners.

With the relaxation in the guidelines, the foreign company investing in the NBFC sector will not have to scout for domestic partner to start operations.The other provisions of the NBFC guidelines announced by the government (March 1997, October 1998, June 1999 and November 1999) earlier will continue to remain in force, said the official press note.

It may be recalled that the Reserve Bank of India (RBI) has recently allowed non-banking finance companies to maintain up to five per cent of their liquid assets in the form of term deposits with scheduled commercial banks. The NBFCs were earlier required to keep 15 per cent SLR. The RBI also stipulated that any NBFC looking to change its name to take advantage of the stock market sentiments–particularly in the info-tech sector — will have to seek the central bank’s approval before applying to the registrar of companies.

The apex bank reiterated that the NBFCs having net-owned funds (NOF) below Rs 25 lakh may not be granted general exemption and their applications for certificates of registration may not be considered. The RBI deadline for NBFCs to shore up their NoF to Rs 25 lakh expired on January 9, 2000. However, NBFCs not holding public deposits are no longer required to submit liquid asset return.

The RBI has also recently introduced certain regulations over opening and closing of branches with an obligation of the auditors to report non-compliance of these directions to the Reserve Bank.

Meanwhile, the Bombay Stock Exchange has come out against the idea of multinational corporations (MNCs) setting up 100 per cent subsidiaries in India. The ostensible reason is that retail investors, or rather Indian investors, do not get a piece of the action in them in terms of picking up stake in these ventures.

According to BSE officials, the exchange president, Anand Rathi had raised this issue with the finance ministry at a meeting earlier this year. The stock exchange has suggested that the Indian ventures of foreign companies should reserve a portion of their equity – somewhere between the range of 20 to 30 per cent – for retail investors.

This would provide greater depth to the Indian market, they feel, while investors would have a wider choice of equities to invest in. Right now, there are a number of such wholly-owned subsidiaries in India – for instance, Pepsico Holdings, Coca Cola India, Dabhol Power Corporation (a venture by US power giant Enron Corporation) and BAT Industries (of Rothman’s fame) which are among the prominent few. There are some other companies which are planning to enter the country through 100 per cent subsidiaries such as French tyre maker Michelin.

Considering the brand equities which these companies have, as well as their inherent strength, stocks of these companies, if listed, would get good valuations, feel market watchers.

Though the primary market is buzzing with activity again, reminiscent of the old days after the securities scandal, interest is being generated in only a particular type of stock – so that anything suffixed with a `tech’ or a `com’ is sure to attract investors in droves, irrespective of the actual record of the company. A very recent example is that of Shonkya Technologies, whose application forms were selling between Rs 50 to Rs 100 each.

It is felt that while the Indian arms of the foreign companies are profiting from their activities here, investors in the country are denied the opportunity of partaking in their fortunes. The entry of new stocks could breathe some sort of fresh life into the markets where the market-weary are tired of churning and slogging the same old stocks.