RBI’s take on Overseas Direct Investment stumps startups

RBI's updated Frequently Asked Questions on Overseas Direct Investment prohibits Indian companies from owning a stake in offshore entities with even a minority stake in the Indian market. The Bank's latest stance to impact lending startups.

According to Reserve Bank of India’s FAQs on ODI (Overseas Direct Investment) as on 19th September, Indian firms cannot acquire or invest in foreign enterprises which already hold any direct or indirect investment in an Indian entity. ET stated that this would be applicable even if an Indian firm purchases an insignificant stake in an offshore company which holds even a minority stake in another Indian company.  

Even though the measures aimed at minimizing round-tripping of funds and restraining inflow of inexpensive debt raised abroad in the form of FDI (Foreign Direct Investment), the rule might affect genuine ODIs.

The central bank said,

“Indian companies can approach the Reserve Bank for prior approval through their Authorised Dealer Banks which will be considered on a case to case basis, depending on the merits of the case.” 

Locus42’s Gautam Ghosh tweeted that such regulations would be a disaster in the making for startups. 


Regulations impacting lending startups

The need for proper rules, regulations, and guidelines has increased with the rapid technology growth and the onset of multiple technology startups. Such demand for rules has resulted in the Indian government, releasing the new directives and guidelines aggressively.

Earlier, RBI had asked banks and NBFCs to stop sharing a consumer’s credit history with non-regulated entities. The Reserve bank of India’s order would be impacting the digital lending startups that rely on their bank and NFBC (non-banking financial companies) partners to get access to consumer data through credit bureaus.

Last month, RBI issued a circular that permitted processing of e-mandate on credit and debit cards for recurring transactions or merchant payments with a cap of Rs 2,000 September onwards. Furthermore, RBI had also released guidelines on fintech regulatory sandbox that states that no legal waivers would be given to the sandbox firms and they would also be held responsible for any consumer losses that might be incurred during the time of testing. 

The Bank has also made it mandatory for companies to have insurance cover and a minimum net worth of Rs 25 lakh, among other requirements, to be accepted for testing under the RS (Regulatory Sandbox). Interestingly enough, RBI has excluded the companies related to cryptocurrency or crypto assets from the RS.

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