The department of economic affairs (DEA) has directed US-based banking and financial services firm Associated First Capital Corp (AFCC) to bring in another $17.5 million with immediate effect into its Indian arm in order to be able to meet the minimum capitalisation norm (of $50 million) for 100 per cent foreign owned NBFCs.
Associated First Cap, which has already invested $32.5 million in India, had urged the government to allow it time till December 2002, instead of the existing stipulated deadline of December 2001, to bring in the balance $17.5 million for meeting the capitalisation norm.
This, it said, was a fallout of its impending merger with Citigroup Inc, following which infusion of more funds into Indian subsidiaries of the Associated First Cap "may not be commercially practicable."
On completion of the impending merger which was announced earlier this year, the proposed new entity will have two holding firms -- Citicorp Finance India Ltd and Associated India Holding Company Ltd -- and three downstream operating ventures -- Citicorp Maruti Finance, a 74:26 JV with Maruti Udyog; Citi Financial Retail Services India Ltd another 74:26 JV with SAK Industries; and Associated India Financial Services Ltd, a wholly-owned AFCC arm.
Subject to approval from the shareholders of AFCC, Citigroup Inc will become the ultimate controller of the Associated India Holding and Associates India Financial Services Ltd (the operating NBFC).
In view of the developing scenario, the company informed the government that it did not find it commercially viable to infuse more funds into its holding firm, Associated India Holding, as the entity will no longer be operative in its existing form.
AFCC, therefore, proposed to transfer the equity of AIHCL in the existing Indian downstream venture Associated India Financial Services and urged the government to do away with an existing divestment clause which required the downstream venture to offload 25 per cent holding to resident shareholders through a public offer.
According to sources, the DEA supported the proposal of the company to continue as a wholly-owned subsidiary in light of the revised guidelines for FDI in the NBFC sector which permit 100 per cent holding subject to a minimum capitalisation of $50 million. It recommended that the disinvestment clause be done away with but the company be asked to bring in the balance $17.5 million forthwith to achieve a capitalisation of $50 million to qualify for 100 per cent foreign ownership.
The government had brought about amendments to the NBFC capitalisation and disinvestment norms following specific requests from companies such as Associated First Cap. The same company was the first to be allowed to set up a wholly-owned subsidiary with a minimum capitalisation of $50 million and convert its downstream operating venture into wholly-owned, with the condition that it will divest 25 per cent equity to resident shareholders through a public offer within three years.
The previous guidelines required the foreign company to set up a 100 per cent holding subsidiary with a minimum capitalisation of $50 million, and downstream ventures capitalised at minimum $5 million having a resident shareholder with minimum 25 per cent shareholding right from inception.
Associates India Financial Services was originally set up as a joint venture with MGF Ltd holding 22 per cent resident shareholding and Tushar K. Chopra, an individual, holding another 3 per cent. The balance was held by Associated First Capital.
