RBI plans to ban private equity firms from holding controlling stakes in multiple NBFCs

RBI plans to tighten rules for PE firms holding stakes in multiple NBFCs

NEW DELHI: The Reserve Bank of India (RBI) is considering banning private equity firms from holding controlling stakes in more than one non-banking financial company (NBFC).The proposed rules will also distinguish between controlling stakes and smaller financial investments, allowing holdings of 15% or less to attract fewer regulatory checks, sources told Reuters.The move follows the central bank's concerns that financial stress at a global private equity firm or its affiliates could spread across several NBFCs in which it has significant investments.However, the RBI also wants to encourage smaller financial investments that would be subject to less scrutiny, the people said, requesting anonymity as the discussions are private.

What is controlling stake

Currently, a 25% stake in a listed company is considered a controlling stake.

However, an investor can also be considered to have control with a smaller shareholding if it can appoint most of the company's directors or influence its management or policy decisions.Investments of 15% or less will be treated as financial investments and face fewer regulatory checks, one of the people said.The RBI will finalise a draft of the proposed rules after seeking public feedback. The rules could be formally issued early next year, the person added.

Foreign investors step up investments in NBFCs

Foreign investors have been showing growing interest in Indian banks and NBFCs, supported by strong demand for credit and low loan delinquencies.Private equity investments in India's financial sector reached around $5.4 billion last year, up 6% from 2024 and 17% from 2023, according to Grant Thornton data. A further $3.6 billion flowed into the sector between January and the end of September this year.The RBI has previously taken steps to prevent investors from holding controlling stakes in multiple NBFCs.Last year, the central bank approved US private equity firm Bain Capital's acquisition of a 41.7% stake in Manappuram Finance on the condition that it sell its 93% holding in another NBFC, Tyger Capital, formerly known as Adani Capital.The same approach has also applied to investors outside the private equity industry.Japan's Mizuho Financial Group holds majority stakes in two NBFCs, Mizuho Capsave and Credit Saison India.

It has also announced plans to acquire KKR-backed financial services firm Avendus.The apex bank has asked Mizuho to submit a detailed plan to integrate or consolidate its existing non-bank financial businesses in India. Mizuho Securities did not immediately respond to Reuters' request for comment.

Industry seeks greater flexibility in ownership rules

The Indian Venture and Alternate Capital Association has approached the RBI, seeking permission for different entities within the same group to hold stakes of more than 20% in multiple NBFCs.Siddarth M Pai, co-chair of the association's regulatory affairs committee and founder of venture capital firm 3one4 Capital, said many private equity firms and venture capital funds wanted to invest in fintech and financial services businesses through their different funds. However, ownership limits were making it difficult for them to do so.The sector has also seen two major private equity deals this week. Blackstone agreed to buy a 16% stake in IIFL Finance for $535 million, while Singapore's Temasek will invest around $265 million in Godrej Capital.