India’s central bank is preparing rules that could prevent private equity firms from exercising control over more than one non-bank lender, a move aimed at limiting the risk that financial distress at a major investment firm could spread across several institutions in the country’s rapidly expanding credit market.
The Reserve Bank of India (RBI) is concerned that problems at a global private equity firm or its affiliates could trigger wider instability if the investor controls multiple non-banking financial companies, two people familiar with the discussions told Reuters.
The proposed restrictions would target controlling ownership rather than all investments. Authorities intend to allow smaller financial stakes with less regulatory scrutiny, preserving foreign capital inflows while limiting the concentration of influence over lenders.
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Under the proposed framework, holdings of 15% or less would be treated as financial investments and attract lighter scrutiny, one of the sources said. A draft is expected to be finalized after public consultation, with formal rules potentially issued early next year.
Indian law defines control through ownership and governance rights. For listed companies, a stake of 25% is generally considered significant, but an investor can also be deemed to exercise control with a smaller holding if it has the right to appoint a majority of directors or influence management and policy decisions.
Private equity firms often invest through multiple funds and affiliated entities. A firm may hold a minority equity position but still exercise substantial influence over a lender through board representation, management arrangements or other governance rights.
The RBI’s proposed approach seeks to prevent one financial sponsor from accumulating controlling influence across several non-bank lenders, while allowing it to maintain smaller investments in different businesses.
India’s financial sector has attracted substantial interest from foreign investors as demand for credit remains strong and loan delinquencies have stayed relatively low. Non-bank lenders, in particular, have become important targets for private equity firms seeking exposure to consumer finance, business lending and other segments of the credit market.
Private equity investment in India’s financial sector reached approximately $5.4 billion last year, an increase of 6% from 2024 and 17% from 2023, according to Grant Thornton data. A further $3.6 billion flowed into the sector through the end of September this year.
That capital has helped finance expansion and ownership changes across India’s lending industry. However, the RBI’s concern is that allowing the same investor to control several lenders could create common vulnerabilities across institutions that are supposed to operate independently.
If a major private equity firm faces liquidity problems, creditor pressure, or is forced to sell assets, the consequences could extend to multiple lenders under its control. The investor could also make similar strategic decisions across its portfolio companies, potentially increasing correlated risks within the financial system.
The proposed rules would give regulators greater oversight of ownership structures and reduce the possibility that financial stress at one investment group could affect several important credit providers simultaneously.
The RBI has previously applied restrictions to individual transactions. Last year, it approved US private equity firm Bain Capital’s acquisition of a 41.7% stake in Manappuram Finance on the condition that Bain divest its 93% ownership in another non-bank lender, Tyger Capital, formerly Adani Capital.
The decision demonstrated that the central bank was prepared to attach conditions to investments that could create overlapping control in the non-bank lending sector. The new proposals would establish a broader framework for addressing similar ownership arrangements.
The principle has also extended beyond private equity firms. Japan’s Mizuho Financial Group holds majority stakes in two Indian non-bank lenders, Mizuho Capsave and Credit Saison India, and has announced plans to acquire KKR-backed financial services firm Avendus.
Media reports have said the RBI asked Mizuho to submit a comprehensive plan to integrate or consolidate its existing Indian non-bank financial businesses.
These cases show that the regulatory concern is not limited to private equity ownership. The major concern is the concentration of control across multiple lending institutions, regardless of whether the investor is a financial sponsor or a banking group.
Some analysts believe the proposed restrictions are capable of creating friction with private equity and venture capital firms that want to invest across India’s financial services industry through separate funds and affiliated entities.
The Indian Venture and Alternate Capital Association has lobbied the RBI for permission allowing different entities within the same group to acquire stakes of more than 20% in multiple non-banking financial companies.
Siddarth M Pai, co-chair of the association’s regulatory affairs committee and founder of venture capital firm 3one4 Capital, said private equity firms and venture capital funds often want exposure to fintech and financial services businesses across their various investment vehicles but face difficulties because of ownership thresholds.
The industry’s argument is that separate funds may have different investors, investment mandates and risk profiles. Treating them as a single controlling entity could restrict capital deployment even when the individual investments do not create the same level of concentration risk.
The RBI will have to determine how to distinguish genuinely separate financial investments from arrangements that allow a single sponsor to exercise control through multiple entities. That question could become key to the final rules, particularly where funds share management, governance structures or decision-making authority.
The move comes as large investors continue to commit substantial sums to Indian non-bank lenders. Blackstone agreed this week to acquire a 16% stake in IIFL Finance for $535 million, while Singapore’s Temasek plans to invest approximately $265 million in Godrej Capital.
Both transactions demonstrate the continued appetite for India’s lending market. They also show why the RBI is seeking to establish clearer ownership boundaries as foreign capital becomes more prominent in the sector.
The proposed 15% threshold for lighter scrutiny could provide investors with a route to maintain exposure across several lenders without seeking the same level of regulatory approval required for controlling investments. However, the treatment of board appointments, management rights and indirect ownership will determine how much flexibility investors ultimately receive.
The RBI’s challenge now is to prevent concentrated ownership from creating channels through which financial stress can spread, without discouraging the capital needed to expand lending and support economic activity.
India’s non-bank finance sector remains an important source of credit, particularly for borrowers and businesses that may not be fully served by traditional banks. Analysts believe restricting investment too aggressively could limit competition and reduce funding for these institutions. Allowing overlapping control without adequate safeguards, however, could leave several lenders exposed to the financial decisions and vulnerabilities of the same investor.
The proposed rules are thus seen as an attempt to balance those competing objectives.