nbfcs -regulatory and compliance issues 0811 nbfc.pdf · existing laws and types of nbfcs...

NBFCS- REGULATORY AND COMPLIANCE ISSUES

J A Y A N T T H A K U R

C H A R T E R E D A C C O U N T A N T

3 R D S E P T E M B E R 2 0 1 1

OUTLINE

• Summary of existing law and types of NBFCs

• Important issues

• Role of Auditors

• Systemically Important Companies• Systemically Important Companies

• CICs

• Various types of confirmations from auditors

• Auditors Directions

• Others

• RBI report on NBFCs

• State Laws/Recent Supreme Court Decision

• Sahara Case3rd September 2011 NBFCs - Jayant Thakur 2

EXISTING LAWS AND TYPES OF NBFCS

• Reserve Bank of India Act

• Directions – Acceptance of Deposits and Prudential

Norms

• Directions to Auditors

• Various Circulars, Guidelines, other notifications, etc.

3rd September 2011 NBFCs - Jayant Thakur 3

WHAT IS AN NBFC?

• Principal Business

• Registration and continuation thereof

• Exemptions

• Severe consequences of non-registration

• Formula of Reserve Bank of India and certification

by auditor


SYSTEMICALLY IMPORTANT NBFC

• Asset size

• Implications


DEPOSITSDEPOSITS

•What are deposits

•What are public deposits

• Eligibility/limits, etc. re deposits• Eligibility/limits, etc. re deposits

• Separate detailed subject

•What are “exempted” deposits

• Shareholder/director deposits

• ICDs


AUDITORS DIRECTIONS

• Reporting of non-compliance• Requirements of registration

• Compliance with deposits directions

• Compliance with Prudential Norms• Compliance with Prudential Norms


CIC

• Background

• Holding companies

• Definition problem

• Legal views/Reserve Bank of India’s exemptions

• Problems of holding companies• Problems of holding companies

• Reserve Bank of India’s concerns

• Over-leverage

• Proposed solution

• New separate Directions notified for CICs

• Definition of SI-CIC

• Public Funds


CIC

• Requirement of registration – time schedule

• “Group” Companies

• SI-CIC vs. Non-”SI-CIC” Vs. Non-”SI”-CIC

• Non-SI-CIC

• Companies that become CICs

• Who can register

• What about those who do not register

• Requirements relating to business

• Holding of assets

• Activities


CIC

• Continuing requirements

• Capital Adequacy Ratio

• Debt Equity Ratio

• Outside liabilities

• “at no point of time”• “at no point of time”

• Transitional problems

• Auditors Certificate


MERGER/TAKEOVER OF NBFCSMERGER/TAKEOVER OF NBFCS

• Issues involved• Merger of NBFC with another NBFC/non-NBFC

• Acquiring shares/control of NBFC

• Whether the NBFC holds deposits

• Deposit accepting• 2009 Directions • 2009 Directions

• Prior written approval required• Deposit taking NBFC • Takeover/acquisition of control• Merger of NBFC • Merger with NBFC

• Other cases• Section 391/394 merger

• Other mergers/acquisition of control


PENAL ACTIONS

• Non-registration

• Acceptance of deposits in violation of directions

• Willfully false statements or omissions

• Non-compliance by auditor• Non-compliance by auditor

• Violation by non-corporate entities


RBI REPORT ON NBFC

• Scenario of NBFCs Regulations set to change

substantially

• Registration, non-deposit accepting, non-public

fund accepting, etc.

NBFCs not accepting deposit/asset size < 50 cr• NBFCs not accepting deposit/asset size < 50 cr

• NBFCs not accepting public funds/asset size < 1000

cr

• Good alternative to amendment of Act

• Change of control of NBFC

• Principal Business definition 50/50%.

• 75% for AFCs


RBI REPORT ON NBFC

• Merging of loan/investment categories

• Limts on acceptance of deposits by AFCs

• Weightage for capital market/real estate exposure

• Finally, explicit tax relief to NBFC same as banks • Finally, explicit tax relief to NBFC same as banks

recommended

• SARFESI benefits for NBFCs too like banks

• Financial conglomerates that have merchant

banking, brokers, NBFCs, etc in group.

• Government owned NBFCs

• New deposit-accepting NBFC


RBI REPORT ON NBFC

• SI status and multiple NBFCs

• Captive NBFCs

• NBFCs having assets more than Rs. 100/1000 crores

and clause 49

• New types of NBFCs to be registered

• Minimum NOF for NBFCs


SEBI PROPOSED AIF REGULATIONS

• Relevance for NBFCs

• Deposits Vs. Shares

• Background of Regulations

• New way to structure certain entities• New way to structure certain entities

• Minimum net worth

• Minimum involvement of “Promoters”

• Detailed, micro-regulations of AIFs

• Registration

• Types

• Straight-jacketed categories


SEBI PROPOSED AIF REGULATIONS

• No and minimum amount by investors

• Maximum size of funds

• Investment pattern of fund

• All existing and new AIFs to register• All existing and new AIFs to register

• Existing VCFs excepted


SEBISEBI’’s Sahara Orders Sahara Order

• Relevance for NBFCs and others

• Background

•Alleged raising of funds through OFCDs•Alleged raising of funds through OFCDs

• Small unit size of OFCDs

• Possibly thousands of subscribers


SEBI’s Sahara Order

• SEBI’s interpretation re Section 67(3)• “even if an issue is made by way of private placement

to fifty or more persons, it would be deemed to be a public issue irrespective of whether it was offered to public at large or to just a section of the public chosen, in whatever manner.”chosen, in whatever manner.”

• “associated/affiliated or connected with Sahara India Group of Companies “

• Other implications

• NBFC Directions and other law relating to deposits

• SEBI Regulations


States Depositors’ Protection Act

• Recent Supreme Court decision

• K. K. Baskaran (C.A. 2341 of 2011 dated 4th March 2011)

• Constitutional validity

• Earlier Bombay High Court FB decision

• Maharashtra, Gujarat, Tamil Nadu, Bihar, etc.• Maharashtra, Gujarat, Tamil Nadu, Bihar, etc.


States Depositors’ Protection Act

• Broad features of state laws• Financial/non-financial establishments

• Company/non-company

• Deposits in cash/kind

• Limited exemptions• Limited exemptions

• Unreasonably high interest or unreasonable deployment of funds

• Fraudulent intent – actual/deemed

• Punishment/attachment of assets of Company, promoters, employees, etc.

• Supreme Court’s decision


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