RBI blocks NBFC plans of startups
Indian startups will have to wait longer to own their non-banking financial company (NBFC) licence since the Reserve Bank of India (RBI) has returned the applications of several of them, some of which are top-funded. These include Sequoia-backed BharatPe, Google Capital-backed CarDekho, and digital banking startup Jupiter, backed by Sequoia and Matrix Partners, three sources aware of the matter said.

The move follows recent geopolitical developments that have spurred tighter scrutiny of Chinese capital coming into local startups via tax havens like Mauritius, where most venture capital (VC) and private equity (PE) funds are registered. Second, money coming from funds registered in Mauritius, which is on the Financial Action Task Force (FATF) grey list, is being seen as capital from a jurisdiction with weaker norms to counter money laundering. This has resulted in the RBI returning these applications, the sources added.

India has been making multiple moves to boycott Chinese influence in the Indian economy since the Ladakh border conflict that started in May. According to sources aware of the regulator’s thinking, the scrutiny of these applications has also increased owing to the involvement of limited partners, or LPs — who invest in VC funds — with origins in China.

Most of these startups who applied for a licence and have raised VC funding will have to wait longer, at least for the rest of the year because of the current situation, before there is a change in the RBI’s stance, people aware of the matter said. “Mauritius being in the grey list was a concern for the RBI. But recent political issues have made it more sensitive. The regulator has not rejected these applications, but has indicated the applicants have to wait longer before a review,” a person aware of the matter said.

In May, the Indian Private Equity and Venture Capital Association (IVCA) had written to the RBI, raising the concern. “We are being told to wait for at least a quarter or more before they take another look,” a senior executive of one of the affected applicants said.

This would delay the monetising plans of the lending operations of startups through their own NBFCs as that will have a lower cost of capital, among other advantages, than partnering with others. In fact, owing to the pandemic, demand for credit among consumers and small businesses is higher, sources added.

When contacted, BharatPe co-founder Ashneer Grover and Jupiter founder Jitendra Gupta declined to comment. The RBI said it has nothing to comment on the matter, while an email sent to CarDekho did not elicit any response.

The NBFC sector has been reeling since the payment default of Infrastructure Leasing and Financial Services (IL&FS). Since the virus outbreak, the government and the RBI have been trying to ease the liquidity shortage for this sector.

“Access of capital to small businesses is critical in current times to ensure business recovery and they (startups) are hoping they get to have their own play leveraging technology with regulatory clearance,” one of the people mentioned earlier added.

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