UAE’s exit from FATF Grey list to boost FPI flows, investment into Indian NBFCs

GS Paper III

News Excerpt:

The United Arab Emirates (UAE) exit from the grey list, nearly two years after its inclusion by the Financial Action Task Force (FATF), will ease the road for the country’s investors seeking to acquire significant influence in Indian NBFCs.

Background of UAE’s grey list

  • UAE was placed under closer scrutiny in 2022, when the FATF highlighted the risk of money laundering and terrorist financing involving banks, precious metals and stones as well as property.
  • The European Union lists the UAE as a high-risk country for money laundering and terrorist financing, alongside more than two dozen other states such as South Africa, North Korea and Afghanistan.
  • The bloc's financial markets watchdog European Securities and Markets Authority (ESMA) in 2023 barred European banks and others from clearing trades with the Dubai Commodities Clearing Corporation.
  • Measures taken by the UAE to get off the grey list include increasing financial investigations and prosecutions, boosting international cooperation, and aligning virtual asset regulation with international standards.

Financial Action Task Force (FATF)

  • The Financial Action Task Force (FATF) was established in 1989 and is based in Paris.
  • It is the global money laundering and terrorist financing watchdog. The inter-governmental body sets international standards that aim to prevent these illegal activities and the harm they cause to society.
  • As a policy-making body, the FATF works to generate the necessary political will to bring about national legislative and regulatory reforms in these areas.
  • The 39-member body sets international standards to ensure national authorities can effectively go after illicit funds linked to drugs trafficking, the illicit arms trade, cyber fraud and other serious crimes.
  • When the FATF places a jurisdiction under increased monitoring, it means the country has committed to resolve swiftly the identified strategic deficiencies within agreed timeframes and is subject to increased monitoring. This list is often externally referred to as the “grey list”.

RBI circular on NBFCs from FATF non-compliant jurisdictions

  • An RBI circular in 2021, had stated that investments in NBFCs from FATF non-compliant jurisdictions would not be treated at par with that from compliant jurisdictions.
  • New investors from or through non-compliant FATF jurisdictions, whether in existing NBFCs or in companies seeking Certification of Registration, were barred from acquiring ‘significant influence’ in the investee company, either directly or indirectly.
  • Fresh investors were disallowed from having voting power exceeding the 20% threshold.

Non-Banking Financial Company (NBFC)

  • A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property. 
  • A non-banking institution which is a company and has the principal business of receiving deposits under any scheme or arrangement in one lump sum or in installments by way of contributions or in any other manner, is also a non-banking financial company (Residuary non-banking company).

Significance of UAE’s exit from grey list for India

  • Potential for Larger FPI Flows: India has seen an increase in investment from the UAE in the recent past, including private equity and sovereign wealth funds.  The country’s removal from the grey list will only help bolster such investment, especially into regulated sectors such as NBFCs.
  • Ease of investment: India-based Private Equity and Venture Capital funds that want to invest in portfolio companies located in the UAE can now do so with fewer obstacles.
    • This could potentially lead to an increase in cross -border investments and collaborations between the two countries.
  • Ease KYC requirements:  According to the experts, the exit may ease KYC requirements for FPIs from the region, boost inflows and catapult UAE to the list of top 10 regions for FPI flows into India over the next two years.
  • Reduce the cost of funding:  The exit will reduce the cost of funding for UAE-based banks and reduce their dependence on wealthy clients from the region. As cost reduces and the fund flow from other countries improves, some of it will find its way to India as FDI or portfolio flows.
  • Reputation as a Fund Jurisdiction: The exit could enhance or reinstate UAE’s reputation as a fund jurisdiction.

Conclusion:

The UAE's exit from the FATF grey list is a significant boost for FPI flows into Indian NBFCs, easing restrictions and fostering cross-border collaborations. This development signals increased economic cooperation, potentially propelling both nations to greater heights of investment and growth.

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