Mumbai: Nearly a year after French bank BNP Paribas SA agreed to acquire local brokerage firm Sharekhan Ltd, the Foreign Investment Promotion Board (FIPB) on Tuesday rejected the proposal.

The FIPB notification did not mention any specific reason for rejecting the proposal.

In one of the largest deals in the financial services space last year, BNP Paribas on 30 July agreed to acquire 100% share capital of Sharekhan (other than shares held by Human Value Developers Pvt. Ltd) for nearly 2,200 crore.

“We are not aware of what has gone wrong; once we get an on-record letter from FIPB in the next 3-4 days, we will have clarity on how to take this forward," said a person aware of the matter, declining to be identified.

“We have received Reserve Bank of India (RBI), Securities and Exchange Board of India (Sebi) and exchange approval for the transaction. We will reapply with the changes that they would seek," the person added.

In an email response, BNP Paribas said, “We do not have official communication from FIPB about the rejection of the application or the reasons for it and, therefore, cannot comment."

According to the FIPB notification, Sharekhan has been categorized as a non-banking financial company (NBFC).

A second person familiar with the matter said that during the deal process, BNP had indicated that it would like to carve out Sharekhan’s commodity brokerage platform once the transaction is closed, or would not include it as part of the deal, as regulatory approvals are required for foreign shareholding in a brokerage.

Currently, under the foreign direct investment (FDI) policy, a foreign investor can acquire up to 100% in a stockbroking firm under the automatic route. However, similar investments in commodity broking firms require FIPB approval.

An official from the finance ministry who did not want to be identified cited “some compliance issue" for the rejection, adding “BNP and Sharekhan were not able to fulfil certain conditionalities".

Interestingly, a banker familiar with the transaction had told Mint on the day of the transaction last year that global private equity funds General Atlantic Llc and Warburg Pincus Llc, which were seen as leading contenders for buying Sharekhan, had wanted “indemnity" against any roadblocks arising due to clearances needed from agencies such as the FIPB.

A third person, an investment banker familiar with the matter, said: “The problem could arise from BNP Paribas’s exposure to Geojit, but there are no regulations which prevent BNP from acquiring any other brokerage in India."

BNP Paribas currently holds about a 33% stake in brokerage firm Geojit BNP Paribas.

The purchase of Sharekhan was aimed to reinforce BNP Paribas’s retail broking operations in a country where it offers corporate and retail banking, investment banking and wealth management.

“Sharekhan will serve as a platform for the group’s strategy in India to offer a comprehensive range of products from pure brokerage to asset-based investment services, including mutual funds and savings products," Joris Dierckx, country head of BNP Paribas India, had said in a statement when the transaction was announced last year.

Shareholders of Sharekhan, owned by a clutch of private equity funds—the Rohatyn Group Llc, Baring Private Equity Asia, IDFC Ltd and Samara Capital—have been looking to exit their investments since 2014.

The deal was driven by Rohatyn, which had acquired Citi Venture Capital International’s portfolio, and Sharekhan was a part of that investment pool.

According to data from VCCEdge, the financial research platform of VCCircle, in 2015, the NBFC space witnessed 16 merger and acquisition (M&A) transactions worth $529.5 million, up from 14 transactions worth $410 million in the previous year.

Data shows that private equity investors pumped $1.17 billion into the NBFC businesses in 2015, across 30 transactions, almost double the previous year’s activity.

So far in 2016, the NBFC space has witnessed five investments worth $255.5 million.

“While there are no precedents of a single foreign entity holding stakes in multiple stock and commodity broking entities in India, that may not be a ground on which FIPB would reject the proposal, as it is more a Sebi issue," said Tejesh Chitlangi, partner at law firm IC Legal.

Whatever the grounds of rejection, they will be communicated to them and if any structural changes are required, those can be carried out and the parties can reapply for FIPB approval," Chitlangi added.

Asit Ranjan Mishra in New Delhi contributed to the story.

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