The Reserve Bank of India is reportedly planning new rules that could stop private equity firms from controlling more than one non-banking financial company in India.
According to a Reuters report published on November 12, citing sources familiar with the matter, the proposed restrictions are aimed at reducing risks in the financial sector and preventing problems at one lender from affecting another lender controlled by the same investor.
What could change for private equity firms?
Under the proposed framework, a private equity firm may not be allowed to exercise control over multiple NBFCs at the same time.
However, this would not mean a complete ban on private equity investments in lending companies. PE firms could still hold minority stakes in multiple NBFCs, depending on the ownership structure and the rights attached to those investments.
The key issue would be whether an investor has control over the lender, rather than simply owning its shares.
How would RBI determine control?
According to Reuters, a shareholding of 25 per cent in a listed lender could be considered an indication of control.
However, even an investor with a smaller stake could be treated as having control if it has significant influence over management decisions or the right to appoint directors.
Smaller investments, including stakes of 15 per cent or less, could face lighter scrutiny, the report said.
Why is RBI considering these restrictions?
The proposed changes are aimed at addressing risks arising when a single private equity investor controls several lending businesses.
If one of these companies faces financial difficulties, its problems could potentially affect other lenders under the same investor’s control.
The proposed framework would seek to limit such risks by restricting common control over multiple NBFCs.
According to Reuters, draft rules could be released early next year for consultation.
The proposed restrictions have not yet been formally introduced, and their final scope will depend on the regulatory framework issued by the RBI.
If implemented, the changes could affect private equity firms planning to acquire controlling stakes in Indian NBFCs.
Namit Singh Sengar is a Chief Copy Editor with over seven years of experience in delivering content across diverse domains. Specialising in business news across personal finance, real estate, IPOs and markets, Namit brings an editorial eye and a deep understanding of complex subjects to his work. His educational foundation includes Post Graduate Diploma in Journalism from the Indian Institute of Mass Communication (IIMC), Delhi, which has equipped him with the skills to craft compelling and accurate narratives. His interest also keeps him follow topics such as economy, politics and stand-up comedy.
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