RBI has issued a Notification[1] that clarifies its stance on investments in Non-Banking Financial Companies (NBFCs)[2] from jurisdictions identified by Financial Action Task Force (“FATF”) as being non-compliant[3].

The Notification directly impacts several India focused investment funds that have been set up in Mauritius (which currently features in FATF’s ‘grey list’[4]). The clarifications issued under the Notification are also relevant for Indian Alternative Investment Funds (AIFs) that have Mauritius based feeders.


Prior to the Notification, RBI had been declining applications of prospective NBFCs or change in control situations of existing NBFCs that involved funding from investors domiciled in FATF non-compliant jurisdictions. In October 2020, RBI had conveyed a general lack of confidence in the disclosure on ultimate beneficial owners (UBOs) in such situations.

Several funds (including feeder vehicles to domestic AIFs) have been set up in Mauritius that are focused on financial services industry. The stance taken by RBI impacted such structures since February 21, 2020 when FATF had issued “Jurisdictions under Increased Monitoring”, a publication that mentions Mauritius in the ‘grey list’.

However, despite being featured in the ‘grey list’, the Department of Economic Affairs (DEA) at the Ministry of Finance has upgraded[5] Mauritius to Category I Foreign Portfolio Investor (FPI) jurisdiction, putting Mauritius at par with those set up in FATF member jurisdictions.

Whereas in the case of NBFCs it seems that RBI had taken a different approach owing to their critical role in the Indian financial services space (as opposed to the FPI regime that facilitates passive portfolio investments).


Under the Notification, RBI has conditionally allowed investments from or through FATF non-compliant jurisdictions, whether in existing NBFCs or in companies seeking Certification of Registration (COR). The condition is that investors from such jurisdictions should not directly or indirectly acquire ‘significant influence’ in the NBFC. The RBI has mentioned in the Notification that for the definition of the ‘significant influence’[6], the applicable accounting standards should be referred.


Fresh investments – Investors from or through FATF non-compliant jurisdictions shall necessarily have to adhere to the 20% cap, in terms of voting power, of such NBFCs. Voting power is clarified to also include ‘potential voting power’ arising from instruments that are convertible into equity, instruments with contingent voting rights, contractual arrangements, etc., that grant investors voting rights. In such cases, it should be ensured that new investments from FATF non-compliant jurisdictions are less than both (x) 20% of the existing voting powers and (y) 20% of existing and potential voting powers assuming those potential voting rights have materialised.

Existing investments – Further, the RBI has also clarified that those existing investors from FATF non-compliant jurisdictions may continue with their investments or bring in additional investments in the concerned NBFCs.

Way Forward

In addition to clarifying the stance for Mauritius based investment funds (and investors from other FATF non-compliant jurisdictions), reference to ‘significant influence’ and ‘voting power’ (as opposed to beneficial ownership) in the Notification provides clarity for India based Alternative Investment Funds (AIFs) that may have contributors, including those set up in Mauritius. In an AIF format, the governing regulations require that the investment manager (India based) undertake the primary responsibility for management and governance of the AIF including the fund investments. Further, if the AIF is set up as a trust, the contributors / investors only hold beneficial interest in the trust assets (entitling them to income distributions) whereas the trustee is both the legal and beneficial owner of such trust property.

Authored by Richie Sancheti, Partner and Vidya Phanse, Associate.

  1. RBI/2020-2021/97 DOR.CO.LIC.CC No.119/03.10.001/2020-21 (accessible at: https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=12027&Mode=0)
  2. (including Housing Finance Companies (HFCs) and Asset Reconstruction Companies (ARCs).
  3. This includes those jurisdictions that have weak measures to combat money laundering and terrorist financing and are listed in the following publications: (x) High-Risk Jurisdictions subject to a Call for Action; and (y) Jurisdictions under Increased Monitoring. https://www.fatf-gafi.org/publications/high-risk-and-other-monitored-jurisdictions/?hf=10&b=0&s=desc(fatf_releasedate).
  4. Accessible at: http://www.fatf-gafi.org/publications/high-risk-and-other-monitored-jurisdictions/documents/increased-monitoring-october-2020.html.
  5. Order dated April 13, 2020 issued by Department of Economic Affairs (DEA), Ministry of Finance, Government of India.
  6. As per the Indian Accounting Standard (Ind AS) 28 on “Investments in Associates”, the existence of significant influence by an investor is usually evident in one or more of the following ways:
    1. If an investor holds, directly or indirectly (through subsidiaries), 20% or more of the voting power of the investee, it is presumed that the investor has significant influence, including through instruments convertible to equity;
    2. representation on the board of directors or equivalent governing body of the investee;
    3. participation in policy-making processes, including participation in decisions about dividends or other distributions (i.e., participation in the financial and operating policy decisions of the investee);
    4. material transactions between the investor and the investee;
    5. interchange of managerial personnel; or
    6. provision of essential technical information.

This material and the information contained herein prepared by Algo Legal is intended to provide general information on a subject or subjects and is not an exhaustive treatment of such subject(s). Algo Legal is not, by means of this material, rendering professional advice or services. The information is not intended to be relied upon as the sole basis for any decision. Algo Legal shall not be responsible for any loss whatsoever sustained by any person who relies on this material.