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Foreign NBFCs allowed to go in for IPOs

Mar 28, 2000

The finance ministry has relaxed the guidelines for foreign NBFCs (non-banking finance companies). As per the new guidelines, the foreign NBFCs who are operating now have been given three years to bring in their domestic partners. Hence this gives the foreign company three years to decide on a domestic partner. Earlier the foreign NBFCs were facing a problem as they were unable to find domestic partners.Domestic partner now need not be an NBFC. The criteria of having a domestic partner can be met by offering 25% of share capital to the public by way of an initial public offering. The rules have been changed as foreign NBFCs found it difficult to bring in domestic partners who could invest US$ 1.25 m ( 25% stake of the US$ 5 m capital). Also the change in these rules which required domestic partners to bring in their investment of 25% in two tranches was not successful in helping the foreign NBFCs to get a domestic partner.

The softening of these rules is mainly driven by the changes in the business environment. The logic for the earlier rules was that Indian companies can gain from transfer of technology from these foreign NBFCs. Also the earlier rules were made to protect the domestic industry. However over the last few years even Indian companies have become well versed with most of the technologies needed in this business and do not see any advantage in tying up with foreign NBFCs.

The change in rules might adversely impact some foreign NBFCs who are reluctant to issue shares to domestic investors, for others this change in rules is attractive as the conditions for doing business in India becomes easier.

The fall out of the changes in rules could be increased competition from foreign companies. While this is bad news for domestic NBFCs the Indian consumers stand to benefit from more sophisticated and cheaper products.

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