Bank of Mauritius raises NBFC impasse with RBI

The Bank of Mauritius, the African country's apex bank, has approached the RBI to resolve the impasse surrounding the recent rejection of applications for foreign direct investment in non-banking financial companies routed through the island nation, said people in the know. The governors of the two banks discussed the issue over the phone.

The Bank of Mauritius, the African country’s apex bank, has approached the Reserve Bank of India (RBI) to resolve the impasse surrounding the recent rejection of applications for foreign direct investment in non-banking financial companies (NBFCS) routed through the island nation, said people in the know.

The governors of the two banks discussed the issue over the phone. Separately, the Bank of Mauritius has written to its Indian counterpart, explaining the mechanism by which investments are greenlighted via the country, and highlighted the importance of Mauritius as an investment hub.

This follows domestic representations made to the regulator on the issue.

The RBI is of the view that it cannot carry out satisfactory due diligence for granting registration because the funding is from a jurisdiction that has been identified by the Financial Action Task Force (FATF) as having weak measures to combat money laundering and terror financing.

In February, Mauritius was put on the ‘grey list’ by the FATF, an inter-governmental body for setting the anti-money laundering (AML) standards. Last month, the European Commission, the executive branch of the European Union, included Mauritius in its revised list of high-risk countries with strategic deficiencies in their antimoney laundering and counter-terror financing frameworks.

"The NBFC licensing process has usually been a time-consuming one, as the RBI is known to scrutinise applications carefully. The present understanding is that the intent of the RBI is to assess whether the ultimate beneficial owners in an NBFC are regulated or listed in their parent country of origin. In cases where the ultimate ownership is held by an institutional investor, such as a PE or VC fund, this condition may not be practical to meet," said Vatsal Gaur, associate partner, HSA Advocates.

"Authorised dealer banks are now furnishing additional details on existing and new investments in their applications to the regulator. This may include, among other things, details of economic and voting rights or any other right that will give the investor a say in the affairs of the investee company," said a person familiar with the matter.

An email sent to the Bank of Mauritius and the RBI did not get a response.

The hold-up and rejection of applications come at a time when the NBFC sector is grappling with a liquidity crunch, and is scouting for additional funds. NBFCS need foreign equity and debt investment, in addition to domestic capital, and a significant amount of funding to the sector comes from PE/VC funds domiciled in Mauritius, said market watchers. Foreign PE funds are sensing an opportunity at this juncture to acquire portfolios and assets at reasonable valuations. Some are even bullish on the long-term prospects of select names in the sector.

A recent Moody's report said that it did not expect the latest government measures to reduce risk aversion among banks and capital markets toward non-banking financial institutions, and their access to funding would remain limited. "While the RBI seems to be comfortable allowing investors from Mauritius to fund Indian entities through the ECB, equity investment from the same set of investors is now not permitted," observed a note sent to the regulator by Indian Private Equity and Venture Capital Association (IVCA).