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THE government has asked the US-based mortgage insurance company Genworth Financial to divest 51% stake in its Indian arm to domestic partners, following the guidelines of the Reserve Bank of India to limit foreign direct investment in mortgage guarantee firms at 49%.

In asking the US company to divest majority stake, the Foreign Investment Promotion Board (FIPB) reversed its 2006 decision to allow Genworth to set up a wholly-owned subsidiary in the country.

As per the RBI guidelines issued in February last year, the FIPB decided to limit FDI in mortgage guarantee companies. The guidelines prohibit a foreign investor to hold more than 49% equity stake in such a firm, a senior official in the department of industrial policy and promotion (Dipp), who didn’t wish to be named, said.

Mortgage guarantee is an insurance tool that helps an individual in buying a house with minimal down payment. Normally, banks extend housing loan after the buyers agree to pay 20% or more of the total amount. The property is purchased in the name of the bank and the buyer makes the payment in instalments. If the buyer stops paying instalments, the mortgage guarantee firm protects the lender from the financial loss. As lenders have the protection, they are able to offer more mortgage loans with lower down payments.

The FIPB, keeping in view RBI’s guidelines, asked Genworth to reduce its equity stake in the Indian operation — Genworth India. Genworth had approached FIPB to clarify the position in the wake of RBI’s directive last year to cap FDI in such companies at 49%. Genworth wanted to infuse $41 million in the equity capital of its Indian subsidiary.

Genworth has informed FIPB it is in the process of identifying potential Indian partners who could pick up 51% equity stake in its local arm, the official said.

Several other such firms of the US — such as PMI Group, Mortgage Guaranty Insurance Corp and Radian — had also shown interests in setting up wholly-owned subsidiaries in India, the official said.

According to the RBI guidelines of last year, mortgage guarantee companies cannot be a subsidiary of a company registered outside India. Moreover, no individual or company registered outside India can, directly or indirectly, have any controlling interest in mortgage guarantee company.

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