Reserve Bank making new rule to prevent control in non-bank lenders

According to a Business Standard report, the country's central bank, the Reserve Bank of India, is working on a proposal that will prevent private equity firms from holding a controlling stake in more than one non-bank lender. Two persons with knowledge of the scheme provided this information. Officials are concerned that if financial distress arises in a global private equity firm or its affiliates, it could have a negative impact on multiple non-bank lending companies invested in by that firm. However, authorities are optimistic about promoting small financial investments which will face less scrutiny, the persons added, declining to be named as the discussions were private.

Under Indian law, control is defined as a large stake, which is 25 percent in the case of listed companies. However, ownership can be lower and still be considered a controlling stake if the investor has the right to appoint a majority of directors or control the firm's management or policy decisions. According to the report, a holding of 15 percent or less will be considered a financial investment and will be subject to lower scrutiny. One person said that the draft of the rules will be finalized after public consultation and may be officially released early next year. When inquired about the matter by Reuters, the Reserve Bank of India offered no comment.

Foreign investors have shown immense interest in Indian banks and non-bank lenders due to robust demand for credit in the economy and low levels of loan defaults. According to Grant Thornton data, India's financial sector saw private equity investments of approximately $5.4 billion last year, which is 6 percent higher than 2024 and 17 percent higher than 2023 levels. Another $3.6 billion has come in until the end of September this year. The Reserve Bank has previously also taken steps to prevent control investments in multiple non-bank lenders.

The acquisition of a 41.7 percent stake in Manappuram Finance by American private equity firm Bain Capital last year was approved on the condition that it would sell its 93 percent ownership in another non-bank lender, Tiger Capital, which was formerly Adani Capital. This principle has also applied to non-private equity firms. Japan's Mizuho Financial Group has majority stakes in two non-bank lenders, Mizuho Capsev and Credit Saison India, and has stated plans to acquire KKR-backed financial services firm Avendus. The central bank has asked Mizuho to submit a comprehensive plan to merge or consolidate its existing Indian financial companies, media reports have stated.

The Indian Venture and Alternate Capital Association has lobbied before the RBI, seeking permission for various entities within a group to acquire more than a 20 percent stake in multiple non-banking financial companies. Siddarth M Pai, co-chair of the association's regulatory affairs committee and founder of venture capital firm 3one4 Capital, stated that many private equity firms and venture capital funds want to include fintech and financial services in their various funds, but face difficulties due to ownership limits. This week saw two major private equity deals in non-bank lenders. Blackstone has agreed to buy a 16 percent stake in IIFL Finance for $535 million, while Singapore's Temasek will invest about $265 million in Godrej Capital.