nbfcs
TRANSCRIPT
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Presentation
By
CS NEERAJ VERMA
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-Legal framework for NBFCs
-Regulatory framework for NBFCs
-USHA THORAT Committee
1. Recommendations
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A company which carried on as its business or part of its business the following activities:
- financing
- acquisition of securities
- hire purchase
- insurance
- chit fund
- mutual benefit company
But does not include a company which carries on as its principal business:
- agricultural operations,
- industrial activities
- Sale and purchase of goods
- providing of services
- purchase, sale and construction of immovable property
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Definition of Principal Business
RBI Press Release Dt. April 8, 1999
- If 50% or more of a company’s total assets (netted
off by intangible assets) are financial assets
and
- If 50% or more of a company’s gross income is
from financial assets
then the Principal Business of the company is of a NBFC
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Always Remember
NBFC per se is a licensed activity like
Banking, Stock Broking, Money
Changing.
Acceptance of Public Deposits is irrelevant for NBFC test.
Income earned & Deployment of Funds
are determining factors
RBI Press Release No.
1999-2000/1042 dated 8.2.2000
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Registration and Net Owned Fund (Sec 45- IA)
No NBFC shall commence or carry on
business of NBFI without obtaining a Certificate
of Registration & having minimum Net owned
funds
•Registration with RBI is mandatory for all companies
interested in carrying on non- banking finance activities.
• Minimum Net Owned funds of Rs.2 Crores.
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Computation of Net Owned Fund
Paid up share capital
Add : free reserves (created through an allocation of profits)
Deduct : accumulated balance of losses
: deferred revenue expenditure
: other intangible assets
Deduct : if the following are in excess of 10% 0f the above
-Investment in shares in shares of
subsidiaries, cos., in the same group and other NBFCs
-Book value of debentures, bonds, loans & advances to
subsidiaries and cos. in the same group
-Deposits with subsidiaries and cos. in the same group
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- 1. Housing finance company
- 2. Insurance company
- 3. Chit Fund company
- 4. Stock exchange
- 5. Securitisation and Reconstruction company
6. Mortgage Guarantee Company
- 7. Nidhi company
- 8. Mutual Benefit Company
- 9. Venture capital fund company
- 10. Micro Finance company
- 11. Merchant banking company
- 12.Stock brokers and sub-brokers
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Provided they comply with the following
conditions:
Hold registration with SEBI under related
regulations,
Do not accept or hold public deposits.
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Exemption to NBFCs engaged in Micro Financing
Provided the following conditions are met:
- providing credit not exceeding Rs.50,000 for a
business enterprise and Rs.1,25,000 for meeting
the cost of a dwelling unit to any poor person,
- licensed U/S. 25 of the Companies Act, 1956 and
- not accepting public deposits.
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Provided they comply with the following
conditions:
Registered with SEBI under related regulations,
Acquires securities only as a part of its
merchant banking business,
Does not carry on any other financial activities
and
Does not accept or hold public deposits
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-Doing the business of stock broker or sub-
broker and
- holding a valid certificate of registration from
SEBI.
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Definition:
-If 90% or more assets are invested in Group Companies (subsidiaries, Associates and JVs) ( as
per last audited accounts)
- it is not trading in those shares( except for block
sale)
- does not carry any other NBFI activities and
- it is not accepting or holding any public
deposits.
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-CICs having asset size of Rs. 100 Crores and more: -to be considered as systemically important CICs. (CICs-ND-SI)
- all group CICs to be clubbed for calculating the asset size.
- would require registration u/s 45-IA of the RBI Act.
- 90% criteria to be seen as investment in equity, preference shares as well as loans to group companies (with only minimum 60% in shares).
- can make bank deposits and investment in money market securities and Govt. Securities
-Transitory provision: can apply within six months and can continue to carry on business till decision of RBI regarding registration.
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A large number of NBFCs are working without registration:
Companies working without registration and
Companies rejected by RBI still operating.
Penalties:
Imprisonment 1 to 5 years and
Fine of Rs. 1 lakh to 5 lakhs.
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1. 1.Application for Registration in the prescribed Form containing:
- Identification Particulars,
- Capital Funds & Risk Assets,
- Information on Management. Ann-III
2.MOA, AOA, Board Resolution, Accounts and Business Plan.
3. Application to be filed on line.
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- Management Background BOD
Executive
Funding
- Track record of other NBFCs in the
group
- CR from Bankers
- Interview of promoters/directors
- Definitive business plan
- Auditor’s certificate
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-Appeal against the RBI Order rejecting the Application to the Central Government, Ministry of Finance
- To 1. to dispose of financial assets within 3 years from date of rejection/cancellation.
2. If deposit taking –
i) repay deposits and
ii) report outstanding position on monthly basis (NBS-4)
3. Take up Other objects & change the name
4. Voluntary winding up
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- -Certificate from statutory auditors to be
submitted to RBI every year.
- - Confirming that it continue to undertake business
of NBFI and therefore requires to hold CoR granted
by RBI.
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For all NBFCs:
- public notice 30 days before effecting the
sale or transfer,
- in two newspapers one English and local
vernacular language,
- jointly by NBFC, transferor and transferee,
- within seven days of publication, intimation
to RBI
For Deposit Accepting NBFCs
- Prior approval of RBI
- Obligation towards deposit holders
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Classification of NBFCs
• Based on nature of business:
•Asset finance companies
•Investment companies
•Loan companies
•Infrastructure finance companies
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AFC: Financing of physical assets supporting productive economic activities such as automobiles, tractors, earth moving machinery,lathe machines, generator sets, material handling equipments and general purpose industrial machinery.
IFC: long term funding for developing or operating and maintaining or developing, operating and maintaining any infrastructure project in road, highway, port, airport inland port, waterways, water supply, irrigation project, water treatment, sanitation and sewage system or solid waste management, telecom services (basic or cellular), network and internet service, transmission or distribution of power, laying down and maintenance of gas, crude oil and petroleum pipelines
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Classification of NBFCs
Based on acceptance of Public Deposits
- Deposit holding/accepting Company - Category ‘A’
- Non-Deposit holding/accepting Company - Category ‘B’
Based on investment pattern
- Investment company (Cat ‘A’ or Cat ‘B’)
- Core Investment company - Category ‘C’
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-NBFC Acceptance Of Public Deposit (RB)
Directions, 1998
-NBF (Deposit Accepting or Holding)
companies Prudential Norms (RB)
Directions,2007
- NBFC Advertisement Rules,1977.
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Regulated deposits and exempt deposits
Quantum of deposit
Credit rating
Advertisement/ Statement in lieu of
Advertisement
Period of deposit
Rate of interest
Rate of brokerage
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Repayment of deposit
Regularisation of excess deposit
Premature payment of deposits
Loan against deposit
Default in payment of deposit or interest thereon
Interest on overdue deposits
Deposit Register
Deposit Receipts
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Percentage of Liquid assets
Nature of liquid assets
Mode of liquid assets
Safe custody of approved securities
Floating charge on liquid assets in favour of
depositors
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KYC norms
Due diligence of deposit accepting
agents/brokers
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-Qtly returns (NBS 3)
-Annual Return (NBS 1)
-Audited financial statements with directors
report
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-NBF (Non-Deposit Accepting or Holding )
Companies Prudential Norms (RB)
Directions, 2007
-Additional rules for NBFCs-ND-SI (having
total assets of Rs.100 Crores and above as
shown in the last audited Balance Sheet).
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-To maintain prescribed minimum capital ratio and leverage ratio.
-Adjusted net worth should not be less than 30% of aggregated risk weighted assets on balance sheet and risk adjusted off balance sheet items.
-outside liability should not exceed 2.5 times of its adjusted net worth based on the last audited accounts.
Would be entitled to exemptions: - of maintaining minimum NOF
- of prudential norms relating to capital adequacy and exposure norms.
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1. Separately for Category ‘A’ and Category
‘B’ companies.
2. Additional requirements for Category ‘A’
companies.
3. Exemptions.
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Accounting policies
Accounting standards
Revenue recognition
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Investment in land & building
Investment in shares
Policy on investment and disclosure
Income from investment
Exposure to capital market
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Classification of debtors
Provisioning norms
Disclosure
Accounting for Repossessed assets
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Policy for call/demand loans
- - Period
- - Interest
- - Renewal
- - Reporting and approval
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Concentration of loans/investment
- single borrower
- more than one borrowers in one group
- investment in one company
- investment in more than one companies in a
group
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Schedule to the Balance Sheet
- to be appended to the Balance sheet prescribed
under the Companies Act, 1956
- showing loans and advances and deposits
outstanding and overdue
- borrower groupwise classification of all assets, lease,
HP and Loans and advances
- Investor groupwise classification of all investment
in shares and securities
- information on NPAs.
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Communications to RBI (DNBS)
Change in director ship
Change in ownership
Change in address of registered office
Change in statutory auditors
Deposit accepting branch- opening & closure
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- Code for Fair Practices
- To be framed and adopted by BOD
- To be filed with RBI
- To be publicised
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Half yearly returns (NBS-2)
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Returns to Fraud Monitoring Cell.
Information regarding prevention of money
laundering under PMLA.
AIR information under Income Tax Act.
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Off-site surveillance
Returns
Auditors’ Reports
Market intelligence
On-site surveillance Inspections
Special audits
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A minimum asset size of more than Rs 50 crores
for registering any new NBFC.
Transfer of shareholdings , direct or indirect of
25% and above ,change in control, merger or
acquisition of any registered NBFC will require
prior approval of RBI.
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Twin criteria of assets and income for determining
the principal business of an NBFC increased to 75% of
the total assets and 75%of the total income.
Tier –I capital for capital to risk weighted assets
ratio(CRAR) purposes would be specified at12%to be
achieved in three years.
NBFC’s would be subject to regulations similar to
Banks while lending to stock brokers and merchant
banks and similar to stock brokers , as specified by
SEBI.
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-Risk weights for NBFC’s that are not sponsored by banks or that do not have any bank as part of the group would be raised to 150 % for capital markets exposures and 125% for CRE exposures.
NBFC’s would be given the benefit under Securitization and Reconstruction of Financial Assets and Enforcement of securities interest(SARFAESI) Act , 2002.
All registered NBFC’s with assets of Rs 1000 crores and above whether listed or not should comply with Clause 49 of listing agreement including induction of independent Directors.
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