MUMBAI, Nov 12: The Reserve Bank of India (RBI) is preparing a new regulatory framework that could prevent private equity firms from exercising controlling ownership in more than one non-banking financial company (NBFC), as the central bank seeks to strengthen financial stability and minimise risks arising from interconnected investments.
According to people familiar with the discussions, the proposed regulations are intended to prevent financial difficulties at a large investment firm or its affiliated entities from spreading across multiple lending institutions under its control.
The move comes amid increasing interest from international private equity investors in India’s financial services industry, particularly in non-bank lending businesses that have benefited from rising credit demand and expanding retail financing opportunities.
Under the proposed framework, private equity firms could face restrictions on holding controlling stakes in multiple NBFCs. However, smaller financial investments would receive comparatively lighter regulatory scrutiny, allowing investors to maintain exposure to the sector without exercising management control.
The RBI is reportedly considering a distinction between financial investment and controlling ownership. Under the existing legal framework, a 25 per cent shareholding in a listed company is generally treated as an indicator of control. However, an investor may also be considered to exercise control through a smaller ownership position if it possesses the authority to appoint a majority of directors or influence management and policy decisions.
According to people familiar with the proposal, investments of 15 per cent or less could be treated as financial holdings and subjected to less stringent scrutiny.
The draft regulations are expected to be finalised following a public consultation process and could be formally issued early next year. The central bank has not publicly commented on the reported proposals.
The proposed restrictions reflect the RBI’s growing attention to ownership structures within the non-banking financial sector.
NBFCs play an important role in India’s financial system by providing loans to individuals, small businesses, commercial enterprises and borrowers who may not always have easy access to traditional banking services.
Their activities cover several segments, including vehicle financing, gold loans, housing finance, microfinance, consumer credit and loans to small and medium-sized enterprises.
Over the past decade, private equity firms have become increasingly active in this industry, providing capital, management expertise and access to international financial networks.
Foreign investors have been attracted by India’s expanding credit market, rising household consumption and relatively strong demand for financial products.
According to Grant Thornton data cited in the report, private equity investments in India’s financial sector reached approximately USD 5.4 billion last year, representing a 6 per cent increase compared with 2024 and a 17 per cent rise over 2023.
An additional USD 3.6 billion entered the sector between January and September this year, highlighting the continued interest of international investors.
However, the RBI appears concerned that concentrated ownership across multiple lenders could create risks if a common investor experiences financial difficulties.
A major private equity group facing liquidity pressure, valuation losses or difficulties in raising fresh capital could potentially influence the financial position of several NBFCs simultaneously.
Such circumstances could create uncertainty regarding capital support, management decisions and the ability of individual lenders to continue their operations without disruption.
The proposed framework is therefore aimed at ensuring that financial institutions remain sufficiently independent and adequately capitalised, even when their investors encounter difficulties.
The central bank has previously taken steps to restrict common controlling ownership in non-bank lending companies.
One prominent example involved US-based Bain Capital, which acquired a 41.7 per cent stake in Manappuram Finance last year. The approval was granted on the condition that Bain Capital divest its 93 per cent ownership in another NBFC, Tyger Capital, formerly known as Adani Capital.
The condition demonstrated the RBI’s preference for preventing a single investor from exercising substantial control over multiple lending institutions.
A similar regulatory concern has emerged in the case of Japan’s Mizuho Financial Group, which holds majority stakes in two Indian non-bank lenders, Mizuho Capsave and Credit Saison India.
Mizuho has also expressed interest in acquiring KKR-backed financial services company Avendus. Reports have indicated that the RBI asked the Japanese financial group to submit a comprehensive plan for integrating or consolidating its existing Indian non-bank finance businesses.
The latest proposal could establish a more consistent framework for evaluating such ownership structures across the financial sector.
However, the proposed restrictions have also raised questions among private equity and venture capital investors, particularly those operating multiple investment funds.
The Indian Venture and Alternate Capital Association has reportedly approached the RBI seeking greater flexibility for different entities within an investment group to acquire stakes exceeding 20 per cent in multiple NBFCs.
Industry representatives argue that separate investment funds can have different investors, financial objectives and governance arrangements, even when they belong to the same larger investment organisation.
They believe that treating all related funds as a single controlling entity could unnecessarily restrict capital availability and reduce investment opportunities.
Siddarth M Pai, co-chair of the association’s regulatory affairs committee and founder of venture capital firm 3one4 Capital, has highlighted the difficulties faced by investment firms seeking to participate in fintech and financial services businesses through different funds.
The debate reflects the challenge of balancing financial stability with the need to attract international capital.
Private equity investments can provide NBFCs with additional resources to expand their lending operations, strengthen capital adequacy and develop new financial products.
For smaller financial institutions, external investment can also support technological upgrades, digital lending platforms and improvements in risk-management systems.
However, the RBI must ensure that ownership arrangements do not create excessive concentration of financial risks.
The issue has gained importance as major global investment firms continue to enter India’s lending market.
Blackstone recently agreed to purchase a 16 per cent stake in IIFL Finance for approximately USD 535 million. The investment is expected to strengthen the company’s capital position and support its expansion plans.
Singapore-based Temasek has also agreed to invest approximately USD 265 million in Godrej Capital, highlighting the growing international appetite for Indian non-bank lenders.
These transactions demonstrate that the sector continues to attract substantial foreign capital despite increasing regulatory scrutiny.
The proposed framework could influence how such transactions are structured in the future, particularly when investors operate several financial businesses through affiliated entities.
For investors, the distinction between controlling ownership and minority financial participation will become especially important.
Private equity firms may increasingly prefer smaller stakes that provide financial exposure without granting extensive management or board-level authority.
Such arrangements could help maintain investment flows while allowing the RBI to exercise greater control over institutions where ownership concentration creates systemic concerns.
The regulatory changes may also encourage NBFCs to diversify their shareholder base rather than depending heavily on a single controlling investor.
A broader ownership structure could reduce dependence on individual investment groups and improve the resilience of lending businesses during periods of financial uncertainty.
Nevertheless, the final impact will depend on the precise definitions of control, the treatment of affiliated investment funds and the transitional arrangements introduced by the central bank.
The RBI will also need to consider how the proposed rules interact with existing regulations governing ownership changes, corporate governance and capital adequacy.
Industry participants are expected to examine the draft carefully once it is released for public consultation.
The consultation process will provide an opportunity for investors, lenders and financial industry associations to raise concerns and suggest modifications.
Ultimately, the central bank’s objective appears to be creating a regulatory environment in which foreign investment can continue to support India’s financial sector without exposing multiple lending institutions to the same ownership-related risks.
The outcome could have significant implications for the future structure of India’s NBFC industry, particularly as international investment firms seek opportunities in one of the country’s fastest-growing financial segments.