Investment arms of rich Indians categorised as deemed NBFC’ even if they have not borrowed a penny

The Economic Times | 1st May, 2021

Several Indian high net-worth Indians are looking to restructure their investment arms in a way to ensure they do not fall under the definition of the non-banking financial company so as to address legal and tax inefficiencies, including reasons attributable to succession planning.

A series of notifications from the Reserve Bank of India (RBI) has started categorising core investment companies (CICS) as NBFCs, including investment companies or investment arms even when they have not borrowed a single penny or are not into lending, experts said. The investment companies technically fall under the definition of ‘deemed NBFC- and will hence be regulated by RBI.

Most HNIS use investment vehicles to invest their personal wealth in an array of investments. Many hold equities in some of their listed companies through investment arms. “Some investment companies set up by ultra-rich HNIs for investments in listed and unlisted space fall under the definition of ‘deemed NBFCs and are regulated by the RBI.” said Rajesh Narain Gupta, managing partner at law firm SNG & Partners. “Most of these companies neither borrow a single penny nor lend money to third parties.”

Several corporate and individuals have undertaken massive restructuring exercises to avoid being regulated by the central bank. As per the RBI data, there are 64 companies registered as CIC, including companies owned by Tatas, Aditya Birla, Sunil Mittal and Sajjan Jindal. Mails sent to Tata group, Aditya Birla group, Bharti Airtel and JSW on Thursday did not elicit any response as of press time Friday. Apart from these 64 companies, most promoters and investors who have not registered their investment arms with the RBI will also be impacted.

RBI has put certain conditions for considering any company as an NBFC even If it’s not into lending. These include if a company holds 90% of its assets in the form of equity shares and its asset size is more than Rs 100 crore. “Many HNIS had invested through companies and the net worth of these companies had skyrocketed in the last one year, resulting in them falling under a de facto definition of NBFC,” said Uday Ved, partner at tax advisory firm KNAV. “These companies will now have to be restructured in a way that they do not fall under the technical definition of a deemed NBFC, but in all practical purposes these companies are not NBFCs.”

The fear is that if RBI was to regulate these investment arms, then this could lead to legal complications. In most cases, promoters want to make sure that either they restructure the investment arms as non-companies or add additional layering so that it doesn’t technically become a CIC. Many investors who have not registered their companies with the RBI are not aware that their investment arms are now technically NBFCs, legal experts said.

While the impact is on large investors, the spurt in the stock markets in the last one year also means that several investors have seen their investment arms cross the Rs 100-crore mark, experts said.