Financial Services

India’s financial services sector stands at a historic inflection point. Driven by a population exceeding 1.4 billion and a rapidly growing middle class, the sector has transitioned from an emerging market story into a sophisticated, technology-enabled ecosystem. The scale is substantial: India’s banking system manages deposits exceeding USD 1.5 trillion, annual insurance premiums exceed USD 100 billion, and capital market capitalisation is approaching USD 3 trillion. This webinar seeks to provide existing and prospective foreign investors with a comprehensive guide to navigating this dynamic landscape.

The webinar, ‘Investing in India – Financial Services’, hosted by Khaitan & Co, was moderated by Ashraya Rao, Partner, Corporate, M&A and Private Equity Practice Group and led by Vidushi Gupta, Partner, Corporate & Commercial Practice Group. Please see below a summary of the key points discussed in the webinar.

The recording can be viewed here: Financial Services | Investing in India

Key Points Discussed

• The Indian Market and M&A Trends: The financial services sector is currently the primary driver of deal-making in India, accounting for nearly 70% (seventy percent) of all M&A activity this year. Within this space, lending remains the dominant subsector, comprising over 1/3 (one-third) of financial services transactions. The fastest-growing opportunities sit at the intersection of finance and technology, drawing historic gross FDI inflows, which scaled to USD 94.5 billion in the financial year 2025-2026.
• Key Regulators: The sector is governed primarily by 3 (three) key regulators: the RBI, SEBI, and the IRDAI. The regulatory approach has notably shifted from compliance-based to risk-based supervision.
• FDI Routes: Investments fall under either the automatic route (no prior government approval required) or the government route. For example, FDI in private sector banks is capped at 74% (seventy-four percent), with up to 49% (forty-nine percent) permitted under the automatic route.
• Investor Considerations: Foreign investors must navigate strict screening mechanisms, including:
  • FATF Compliance: Investors from non-compliant jurisdictions cannot acquire “significant influence”, defined as 20% (twenty percent) or more of voting power, assessed on an aggregate direct and indirect basis.
  • Press Note 3 (PN3): Investments from countries sharing a land border with India require prior government approval. The recent Press Note 2 of 2026 amended this framework, anchoring the beneficial ownership definition to the PMLA threshold of 10% (ten percent). Non-controlling investments up to 10% (ten percent) from bordering countries can now proceed under the automatic route, subject to reporting.
• Approval Triggers and Timelines: Regulatory approvals are mandatory upon hitting specific thresholds and typically take 4 (four) to 6 (six) months. For banks, acquiring 5% (five percent) or more of voting rights triggers prior RBI approval. For NBFCs, prior RBI approval is required upon any of the following:
  • A change of control (direct or indirect).
  • A shareholding change of 26% (twenty-six percent) or more.
  • A change in management exceeding 30% (thirty percent) of directors (excluding independent directors).
• Introduction of Unregistered Type 1 NBFCs: Recent amendments (effective 1 July 2026) introduced a 3-tier classification for NBFCs:
  • Type 1 NBFC: Entities with no public funds and no customer interface.
  • Unregistered Type 1 NBFC: Entities with no public funds, no customer interface, and an asset size below INR 1,000 Crores. These do not require RBI registration and are practically unregulated, though they face restrictions on foreign investment and overseas investments.
  • Type 2 NBFC: Entities that utilise public funds or have a customer interface. Note: The RBI defines “public funds” and “customer interface” very broadly, looking through group structures to prevent systemic risks.
• Due Diligence and Structuring Considerations: When conducting due diligence on financial entities, investors must prioritise regulatory inspection reports, as recent years have seen an increase in severe penalties and ‘cease and desist’ orders. Other red flags include sector-specific non-compliances (capital adequacy, NPAs) and IT/AI governance deficiencies.
• Licensing Routes: Regarding structuring, investors must weigh the benefits of a “Greenfield” entry (a clean slate avoiding legacy liabilities, taking 5 (five) to 6 (six) months for licensing) against a “Brownfield” acquisition (an operational platform that inherits past liabilities and requires change of control approvals). Share acquisitions remain the most common and regulator-preferred route due to their structural simplicity.

Key Takeaways

• Proactive Regulatory Engagement: The RBI and other regulators have become highly sophisticated and interactive. They actively seek stakeholder feedback on draft directions and focus heavily on emerging risks like AI governance, data quality, and operational resilience.
• Look-Through Assessments are Critical: For private equity funds with multi-layered offshore structures, the RBI scrutinises ultimate beneficial ownership, limited partner influence, and source of funds. Beneficial ownership and governance analyses should be prepared early in the deal-planning stage.
• Dividend Repatriation is Capped: Investors should not model returns solely on short-term dividend extraction. NBFC dividend payouts are typically capped at 50% (fifty percent) of net profits and are contingent upon maintaining capital adequacy and keeping net NPAs below 6% (six percent) for 3 (three) consecutive years.
• Control Deals are Viable: Despite stringent regulations, Indian regulators are increasingly receptive to foreign ownership and control deals across all subsectors, provided the investor demonstrates financial stability, transparency, and strong compliance capabilities.

Conclusion

India is unequivocally open for financial services investment, with policy directions clearly supporting long-term foreign capital participation. However, regulation remains a tangible execution risk. Transactions are more likely to be delayed or derailed by regulatory hurdles than by commercial disagreements. Investors who succeed in this market are those who assess ownership restrictions early, map out approval triggers upfront, conduct deep regulatory due diligence, and engage transparently and proactively with Indian regulators.