Ministry’s move mystifies financial services sector

India’s financial services sector has attracted significant interest, both from lawmakers and foreign investors. Liberalization of the sector can be traced back to the early 1990s.

Before October 2016, foreign direct investment (FDI) in the services sector under the automatic route (100% FDI permitted without government approval) was restricted to a list of 18 specific activities, and was also subject to compliance with minimum capitalization norms. This dampened the growth of FDI.

A press note issued by the government on 25 October 2016 (PN 6) opened up all financial services activities regulated by financial regulators in India for 100% FDI under the automatic route, without any minimum capitalization requirements. The rationale was that if an activity was already regulated by the norms of a financial regulator such as the Reserve Bank of India (RBI) or the Securities and Exchange Board of India (SEBI), additional regulations regarding FDI were not needed.

PN 6 further provided that FDI up to 100% would be allowed for financial services activities which were not regulated by a financial regulator, but under the government approval route and subject to minimum capitalization norms where set by the government. These requirements caused little concern as almost all financial service activity in India is regulated by a financial regulator.

SNG & Partners has offices in Delhi, Mumbai, Singapore and Doha. Devyani Dhawan is a principal associate and Mohit Yadav is an associate.