To, 29th September, 2015

Shri N. S. Vishwanathan
Executive Director,
Reserve Bank of India
Central Office Building
17th Floor, Shahid Bhagat Singh Road
Mumbai-400 001.

Dear Sir,

Re: - Request for Clarification to Permit Domestic Venture Capital Funds (DVCF’s) to

Invest in Small Finance Banks (SFB’s)

IVCA wishes to congratulate RBI for giving in principle approval for Small Finance Banks (SFBs). The majority of the parties who have been given these approvals are Micro Finance Institutions (MFIs) – in order to cater to the underserved and unserved section of society.

As part of the guidelines, RBI has provided several parameters including capital requirements. One of the condition is that 51% of the share capital is to be owned by domestic shareholders and the promoter’s initial contribution shall at least be 40 per cent.

Currently the paid up capital of most of the MFIs are held by foreign funds whose shareholding percentages range from 70 to 90%. To satisfy RBI’s domestic shareholding criteria, this shareholding has to be brought down to less than 50% to enable these MFIs to operate as SFBs.

All the MFIs need to raise their equity substantially, including Tier 2 capital, to be commercially viable.

To maintain the domestic shareholding @ 51%, and also to invest in infrastructure, these MFIs have to raise domestic equity from promoters, HNIs and other alternative investment vehicles like Domestic Venture Capital Funds (DVCF’s).

However, currently DVCFs are not permitted to invest in Non-Banking Finance Companies (NBFCs) as per existing SEBI (VCF) Regulations.

The new concept of NBFC-MFI & SFBs was brought in as active players for financial inclusion only in 2011 and 2013 respectively.

SEBI (VCF) Regulations, which were enacted in 1996, to regulate investment by a DVCF, therefore did not envisage the possible situation of conversion of NBFCs to MFIs & SFB’s, which was not in existence then.

The existing DVCFs are governed by erstwhile SEBI (VCF) Regulations which were permitted to raise their corpus before 21.5.2012. They should be given an opportunity to play a role in the financial inclusion program, the thrust area of the Government – by participating in the equity of these SFBs.

As per RBI guidelines these SFBs are not permitted to set up subsidiaries to undertake non-banking financial activities which indirectly implies that these SFBs are not considered as core NBFCs.

Hence, we request a clarification from RBI to the effect that these SFBs are not NBFCs. This will facilitate investment by DVCFs in their shareholding and help provide the required capital from domestic sources.

In addition, in order to harmonize the regulatory framework, we would highly appreciate RBI could please take up this matter up with SEBI, so that it too can issue a clarification permitting investment by DVCF’s in SFBs.

Thank you very much.

Kind regards,

Arvind Mathur

President, IVCA

09818934615

cc: Aakriti Bamniyal, AVP, IVCA,097 1111 0011

cc: Yogesh Arora, IVCA,09540084999, 011 4173 0003