India’s central bank is developing new rules that could prevent private equity firms from exercising control over multiple non-bank lenders, a move aimed at limiting financial risks while tightening oversight of foreign investments in the country’s expanding lending industry.
The proposed framework by the Reserve Bank of India (RBI) would restrict an investor from controlling more than one non-banking financial company, commonly known as an NBFC.
The regulator is considering a broader definition of control that goes beyond the size of an investor’s shareholding to include the ability to influence management decisions or appoint members of a company’s board.
Under the proposal, ownership of at least 25 per cent in a listed lender could qualify as control. Investors holding smaller stakes could also fall within the definition if they have significant influence over board appointments or management.
By contrast, investments of 15 per cent or less would generally be treated as financial investments rather than controlling interests and would face lighter regulatory scrutiny.
The distinction is important for private equity firms because it could determine whether they can maintain substantial investments across several lending companies or must restructure their holdings to comply with the new framework.
The draft rules are expected to undergo public consultation before the central bank finalises them. The RBI could issue the framework early next year, although the proposed timetable remains subject to regulatory decisions.
Why the RBI wants tighter ownership controls
The central bank’s concern centres on the possibility that financial difficulties affecting one lender could spread to other institutions controlled by the same investor.
When an investment firm controls several lending businesses, financial stress, funding difficulties or management problems in one company could create risks for other institutions within the investor’s portfolio.
The concern is particularly relevant in the non-bank lending sector, where companies provide credit to individuals and businesses through specialised financial services.
NBFCs operate in areas including vehicle finance, housing loans, gold-backed lending and credit for small businesses. They complement traditional banks by serving customers and market segments that may have different financing requirements.
However, their growing importance also makes effective regulation necessary to protect the wider financial system.
The RBI’s proposed approach would give the regulator greater oversight of ownership structures and reduce the possibility of one investment group accumulating controlling positions across multiple lenders.
It would also make it more difficult for investors to avoid ownership restrictions simply by distributing investments among different funds or affiliated entities.
Bain Capital’s experience highlights the regulatory challenge
The issue has already emerged in a major investment involving Bain Capital and Indian lender Manappuram Finance.
Bain had sought to acquire a controlling position in Manappuram while already holding a controlling interest in another non-bank lender, Tyger Capital.
The arrangement attracted regulatory scrutiny because of concerns about the same investment group exercising control over multiple lending institutions.
In February, Manappuram disclosed that the RBI had approved Bain-linked entities to acquire up to 41.66 per cent of its equity and convertible instruments. The approval included conditions requiring an action plan to address the ownership of multiple non-bank lenders within the same category.
The episode illustrates the practical difficulties that can arise when private equity firms invest in competing or overlapping financial businesses.
The proposed new framework could establish clearer rules for determining when an investment amounts to control and how such restrictions should apply across related investment funds.
Foreign investment faces a changing regulatory environment
The proposed restrictions come as international investors increase their exposure to India’s financial services industry.
Private equity investment in India’s financial sector reached $5.4 billion last year, while another $3.6 billion entered the sector through September this year.
Recent transactions demonstrate the continued interest in the country’s lending market.
Blackstone has announced plans to invest approximately 50 billion rupees, equivalent to about $535 million, for an approximately 16 per cent stake in IIFL Finance.
The investment is part of a wider capital-raising exercise intended to strengthen the lender’s balance sheet and support expansion in secured lending and small-business credit.
Temasek has also invested in India’s financial services industry through its involvement with Godrej Capital.
These transactions demonstrate the importance of foreign capital to the growth plans of Indian lenders. However, the RBI’s proposed definition of control means that the size of an investment alone may not determine its regulatory treatment. Board representation and management influence could also become important considerations.
Investors seek flexibility
Industry groups have called for greater flexibility to allow related investment funds to participate in multiple lending businesses.
Private equity firms often operate through separate funds with different investment strategies, management teams and financial objectives. They may therefore argue that investments made through separate structures should not automatically be treated as a single controlling interest.
The RBI’s challenge will be to distinguish genuinely independent financial investments from arrangements that give an investor effective control over multiple lenders.
A framework that is too restrictive could complicate investment decisions and discourage some investors. However, rules that fail to identify common control could leave gaps in the regulator’s ability to monitor risks across the financial system.
The public consultation process will provide an opportunity for investors and industry participants to raise concerns about the proposed thresholds and ownership requirements.
For now, the proposal signals a more closely supervised investment environment for India’s non-bank lending industry.
The final rules will determine how much flexibility private equity firms retain, how existing investments are treated and whether investors will need to restructure some of their holdings.
The central issue is whether India can maintain strong foreign investment in its lending sector while preventing ownership structures that could create wider financial vulnerabilities.
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