RBI takes global cues for curbs on FDI in fin sector

MUMBAI: The RBI is not in favour of allowing the automatic route for FDI into the financial services sector.

The broad principle underlying this stance is that given the stated goal of financial stability and the impact of a collapse of any large entity on the financial sector, it will not be desirable to allow automatic entry for overseas inves-tors.

Given the stringent restrictions on FDI in commercial banks, some overseas investors have chosen the NBFC route to get a toe-hold in the financial services space. Today, a strong case is being made against the unbridled opening up of the domestic financial sector because of the fragility of the sector and the difficulties in making a clear-cut distinction between a current account and capital account. Globally also, many regulators are tightening norms for entry into the financial sector, citing stability concerns and quality of capital flows.

The regulator wants the govern-ment to take a relook at this policy and also other aspects of the FDI policy to ensure consistency, gov-ernment officials said. It has even sought policy clarification on for-eign investments in all exchanges.

However, neither commodity exchanges not categorised as financial services nor stock exchanges figure in the list of sectors that require the government’s prior permission for FDI. This list is part of the Press Note 4 issued by the government.

In all likelihood, it could be an after-thought by the regulator which now feels that exchanges, just like agriculture, are sensitive sectors and have been mistakenly omitted from the list. A clause in the Press Note categorically says that FDI is automatic in all sectors not included in the list. In fact, the bigger issue is not including agriculture in the list.

Both the commodity exchanges, MCX and NCDEX, have attracted foreign investment, while BSE has hired investment banks to bring in foreign investors. The automatic route for FDI is also open for transfer of shares from residents to non-residents in financial services, subject to the sectoral policy on overseas investment. This was spelt out by the department of industrial policy and promotion in Press Note 4. However, this also appears to be a bone of contention between the government and the regulator.

On the automatic route, the issue is more serious when it comes to a buyout of a local unit by a foreign investor. If the regulator has a problem during the ex post-facto approval, it becomes all the more difficult to unwind such a transaction. It is in the context of all these issues that the regulator wants the government to revisit the policy especially outlined in Press Note 4 and provide clarity.