Ozg NBFC Consultant
Ozg Center, New Delhi & Mumbai
Phone # 09811415831-37-61-72-84-92-94
Website: www.nidhicompany.com
Email: ask@nbfc.in
Ref.DNBS.(PD).CC.No. 12 /02.01/99-2000
January 13, 2000.
To All Non-Banking Financial Companies including Residuary Non-Banking Companies
Dear Sirs,
Amendments to NBFC Regulations
As
you are aware, Reserve Bank has put in place a comprehensive regulatory
and supervisory framework in January 1998, in terms of which certain
measures were taken for protecting the interests of depositors and for
ensuring that the NBFCs function on sound and healthy lines. Reserve
Bank has since received a number of suggestions for fine tuning the
regulations with a view to enhancing the protection to the interests of
the depositors and ensuring that the NBFCs continue to play their
legitimate role in the Indian Financial System. Accordingly, the
following changes are being effected in the regulations :
A. Statutory changes
(1) NBFCs engaged in micro-financing activities
In
the backdrop of the need for a suitable national policy framework for
implementation of many credit linked poverty alleviation programmes to
meet the needs of hard core and asset-less poor, a High Powered Working
Group on Micro Financing in India was constituted by NABARD to recommend
a policy framework for sustainable growth of micro finance in the
country with participation of community based organisations at the grass
root level. The Task Force submitted its Report on October 18, 1999.
The Working Group has, inter alia, recommended that the policy and
regulatory framework should give a fillip to the Self Help Groups (SHGs)
or Non-Governmental Organisations (NGOs) engaged in micro-financing
activities. Accordingly, it has been decided to exempt such NBFCs
which are engaged in (i) micro financing activities, (ii) licensed
under Section 25 of the Companies Act, 1956 and (iii) which are not
accepting public deposits from the purview of Sections 45-IA
(registration), 45-IB (maintenance of liquid assets) and 45-IC (transfer
of profits to Reserve Fund) of RBI Act, 1934.
(2) Un-notified nidhi companies
(i)
A Nidhi company notified under section 620-A of the Companies Act is
classified at present as "Mutual Benefit Financial Company" by RBI and
regulated by the Bank for its deposit taking activities and by DCA for
its operational matters as also the deployment of funds. These
Companies enjoy exemption from core provisions of the RBI Act viz.
requirement of registration, maintenance of liquid assets and creation
of reserve fund, and RBI Directions except those relating to interest
rate on deposits, prohibition from paying brokerage on deposits, ban on
advertisements and the requirement of submission of certain Returns.
Such companies, however, are allowed to deal with their shareholders
only, for the purpose of accepting deposits and making loans. There are
a number of companies functioning on the lines of Nidhi companies but
not yet notified by DCA. As RBI Directions to classify them as loan
companies disallowed them the special dispensation available to Notified
Nidhi companies; Bank and the Government received representations
from a large number of such companies and their associations.
Government decided to give them a special dispensation and notified
that applications of companies incorporated on or before January 9, 1997
shall be considered for notifying as Nidhi Company under section
620-A of the Companies Act, 1956 only if they have minimum NOF of Rs.10
lakh or more. These companies shall be required to have net owned fund
of Rs.25 lakh by December 31, 2002 like companies already declared as
Nidhis. Government has also clarified that NOF shall have the same
meaning as assigned to it in the RBI Act, 1934. Thus a new class of
companies has been created i.e. the potential Nidhi companies. To
distinguish them from the notified Nidhi companies ( Mutual Benefit
Financial Companies) the term Mutual Benefit Companies (MBC) is being
used.
(ii) Since the
notified nidhi companies are exempted from the provisions of Section
45-IA (Compulsory Registration with RBI), Section 45-IB (Maintenance of
Liquid Assets) and Section 45-IC (Creation of Reserve Fund), it has been
decided on the lines of Government advice to exempt the MBCs in
existence as on January 9, 1997 and having NOF of Rs.10 lakh from the
above mentioned provisions of the Act in terms of powers vested with the
Bank under Section 45 NC of the Act and also from those provisions of
NBFC Directions on Acceptance of Public Deposits and Prudential Norms
which do not apply to notified nidhi companies.
(3) Government NBFCs
(i) There
are a number of Government NBFCs which fall within the ambit of RBI
Regulations. The Government Department or the Ministry or the Bureau of
Public Enterprises to which such companies are attached, are expected to
prescribe the norms for their operations on healthy lines and monitor
their financial health. Such companies being Government companies pose
little supervisory concern regarding repayment of the deposits held by
them and protection of interests of the depositors. Needless to mention,
all these companies are required to be audited by the statutory
auditors as per the provisions of Companies Act and the irregularities,
if any, in their functioning are brought to the notice of Government by
the auditors for corrective steps.
(ii)
Although, we do not intend to discriminate among the NBFCs on the basis
of ownership but in view of the role being played by these companies in
discharge of their social obligations and the norms prescribed for their
working by their respective supervisory departments and for avoiding
dual control over them, we have decided, in consultation with
Government, to exempt the Government companies as conforming to Section
617 of the Companies Act from applicability of the provisions of RBI Act
relating to maintenance of liquid assets and creation of reserve funds,
and the Directions relating to acceptance of public deposits and
prudential norms. The requirement of statutory registration of these
companies under Section 45-IA of the RBI Act, 1956 shall, however,
continue.
(4) Term deposits with banks to be reckoned as part of liquid assets along with Government papers
(i)
The NBFCs have been voicing their problems in securing desired lots of
Government securities in small towns and localities in the country. In
order to increase operational ease in maintenance of liquid assets, the
NBFCs have been permitted to maintain upto 5 percent of the public
deposits in the form of term deposits with scheduled commercial banks
out of present requirement of 15 percent of public deposits to be
invested in liquid assets. It is expected that it would enable the NBFCs
in establishing a relationship with their bankers and securing services
as the banker. These instructions are effective retrospectively from
the first day of the quarter beginning January 1, 2000.
(ii)
The NBFCs are, however, advised to strictly adhere to the requirements
of maintenance of liquid assets. It may also be reiterated that the
NBFCs holding public deposits should scrupulously furnish the liquid
asset return on quarterly basis and the delay in submission or
non-submission thereof would be viewed seriously and the concerned NBFC
would expose itself to levy of penal interest and adverse action under
Section 58-B(6) of the RBI Act.
(5) Additional terms and conditions for grant of Certificate of Registration Prior RBI approval for change in names of NBFC .
(i)
Instances have been brought to our notice of some NBFCs changing their
name, more particularly to add Infotec tag with a view to taking
advantage of the capital market sentiments, which may not only
jeopardise the interest of the depositors, but also of the investors.
Such a change in the name and the business plan of the company may also
result into the principal business of the NBFC becoming non-financial,
thereby affecting its eligibility for grant and holding of Certificate
of Registration under Section 45-IA (4) of the RBI Act. It has,
therefore, been decided in the public interest that an NBFC intending to
change its present name would need to obtain prior permission of RBI
before approaching the Registrar of Companies for change of name. Any
violation of these directions would attract serious action against the
company as provided for under the RBI Act including cancellation of the
Certificate of Registration if already granted, or rejection of its
application for registration, as the case may be.
Submission of information on Permanent Account Numbers (PAN) allotted by I.T. Department in respect of all the Directors of NBFCs.
(iii)(a)
A reference is invited to paragraph 2 (b) of our circular DNBS (PD).
CC.No.11/ 02.01/99-2000 dated November 15, 1999 in terms of which
the NBFCs have been directed to give 3 months prior public notice of the
intention of sale or transfer of the ownership by sale of shares or
transfer of control whether with or without sale of shares in one
leading national and another leading local vernacular newspaper. It has
been observed that the change in management also takes place by way of
amalgamation / merger of an NBFC with another NBFC or a non-financial
company and as such, these mergers / amalgamations would tantamount to
the change in the management, as aforesaid.
(b)
It has further been decided that it would be obligatory on the part of
such an NBFC seeking change in management or merger or amalgamation with
any other company to give an option to every depositor to decide
whether to continue the deposits with the company under the new
management or the transferee company or not. The company would also be
obliged to make the payment to the depositors who seek the repayment of
their deposits. The Bank would view the non-compliance of the above
instructions very seriously and penal action would be initiated against
the defaulter company on the merits of each case.
B. Amendments to NBFC Directions on Acceptance of Public Deposits
(1) Need for introduction of the depositors of NBFCs
It
has been brought to the notice of the Bank that some of the NBFCs were
holding benami deposits. In order to curb this practice, it has been
decided that the NBFCs should obtain proper introduction of the new
depositors before opening their deposit accounts and accepting the
deposits. They should also obtain written confirmation from their
introducers. In the absence of such introduction, any other document of
identity of the prospective deposit holders may be obtained and kept on
their record the evidence on which they have relied upon for the
purpose of such introduction.
(2) Minimum period of hybrid debt capital instruments and subordinated debts for exclusion from the description of public deposits.
A
few NBFCs introduced new deposit products, one of which was the
subordinated debts having a maturity period of 17 months. The intention
was to avoid the application of SEBI regulations applicable to the issue
of debentures and those provisions of the RBI directions applicable to
acceptance of public deposits because the hybrid debt capital
instruments and subordinated debts issued by an NBFC are treated as part
of Tier II capital in terms of the Prudential Norms Directions and by
virtue thereof, they would be exempt from the meaning of `public
deposit’. It has, therefore, been decided that the subordinated debt
instruments with a minimum maturity period of 60 months or above at the
time of their initial offer which (a) are unsecured and subordinated to
the claims of other creditors, (b) are free from restrictive clauses,
(c) are not redeemable at the instance of the holder or without the
consent of the supervisory authority of the NBFC, will only be exempted
from the definition of public deposits.
(3) Deposits received from joint shareholders by a private limited company.
Some of the private limited NBFCs have reportedly started accepting deposits from all the joint shareholders. This practice has been found to be irregular, undesirable and circumventing the NBFC Directions on Acceptance of Public Deposits. Accordingly, it has been decided that the deposits accepted by a private limited NBFC from the first named shareholders will only be exempted from the purview of public deposit. The deposits accepted from the rest of the joint shareholders will be treated as public deposit.
(4) Control over opening and closing of branches
Absence
of control on opening/closing of branches/offices by the NBFCs and
non-specification of operational area of their agents have raised many
regulatory concerns. Indiscriminate opening of branches not only
increases risk for protection of depositors interest, it creates
supervisory difficulties for RBI as the registered office of the company
may be in the jurisdiction of one Regional Office of RBI whereas major
chunk of business may be in the jurisdictional area of other Regional
Offices and thus the actual operations of the company remain unnoticed
by the Regional Office having jurisdiction over the company’s affairs.
Similarly, sudden closure of branches also evokes adverse public
reaction. Though a strict control over opening of branches/offices by
NBFCs or non-specification of area of operations of agents is neither
intended nor desirable in the present era of liberalisation, a
surveillance over opening and closing of branches/offices is considered
necessary from the view point of prudential supervision and protecting
the interests of depositors. Accordingly, it has been decided that NBFC other than RNBCs - (i)
an NBFC having a Certificate of Registration and otherwise entitled to
accept public deposits as per NBFC Directions on Acceptance of Public
Deposits is allowed to open its branch/office or allow its agents to
operate for mobilisation of public deposits -
- within the State where its registered office is situated if its NOF is upto Rs.50 crore; and
- any where in India if its NOF is more than Rs.50 crore and its fixed deposits programme has been rated by one of the approved credit rating agencies at 'AA' or above.
RNBCs
(ii)
An RNBC registered with the Bank and otherwise complying with all the
statutory requirements is allowed to open additional branches/offices
and/or allow its agents to operate for mobilisation of deposits -
- within the State of the location of its registered office if its NOF is upto Rs.50 crore; and
- any where in India if its NOF is above Rs.50 crore.
Prior intimation to RBI and public notice
(iii)
The NBFCs/RNBSs would be required to give 30 days’ notice to RBI prior
to the opening of any branch/office for mobilisation of public deposits
within the specified area of operation and prior public notice
of three months in leading newspapers before closing a branch. However,
it is clarified that the area of operation of the agents, if appointed
by the company for mobilisation of public deposits, would be congruous
with the area of operation of the branch/office to which such agents are
attached. A system of reporting the name, address, date of opening and
deposits held at each existing branch as also information on opening
and closing of branches has been put in place. These directions are
applicable prospectively to the existing as well as new NBFCs/RNBCs. For
the purpose of abundant clarification, it is advised that these
Directions govern only the deposit taking activities of the companies.
Opening of branches or engaging the services of agents for other than
deposit taking business is not intended to be governed by RBI.
In keeping with the existing policy of RBI to enlist the support of the
statutory auditors in ensuring compliance by the NBFCs of the RBI
regulations, the auditors of these companies have been entrusted with
the responsibility of direct reporting to RBI, along with other
contraventions, if any, on the matters of non-compliance with the
directions of RBI on control over opening and closing of branches and
engaging the services of agents for mobilisation of public deposits by
the NBFCs.
C. Amendments to NBFC Directions on Prudential Norms
(1) Compulsory Internal Audit System and Constitution of Audit Committees
On
the lines of scheduled commercial banks, it has been decided that all
NBFCs having asset size of Rs.50 crore or above should have compulsory
internal audit system accountable to the Chief Executive Officer of the
company. All these companies should also mandatorily constitute an
Audit Committee from among the members of their Board of Directors. This
provision is applicable to all NBFCs whether holding/accepting public
deposits or not.
(2) Information on suit filed accounts
In order to monitor the level of loan delinquencies in the NBFC sector,
NBFCs are being advised to furnish, in their Prudential Norms Return,
information on suit filed/decreed debts by and against them.
D. Other decisions/clarifications
It has been felt necessary to issue the following further instructions / clarifications for information and necessary action :
(1) Need for disclosure of information relating to aggregate dues from the companies in the same group and other entities
We had vide our Notification dated December 18, 1998 prescribed that
every NBFC should include in its advertisement the information relating
to exposure to its group companies and associates as per the
recommendations of the Task Force on NBFCs. It has been recently
brought to our notice that some of the NBFCs are still using the
application forms in the old formats for soliciting deposits. It is
clarified that the above disclosures should be included in the
application form for soliciting deposits without any further delay.
(2) Clarification on interpretation of the requirement of credit rating
By
an amendment made on 18 December 1998 to para 4(4) of the NBFC
Directions on Acceptance of Public Deposits, the NBFCs in the category
of equipment leasing and hire purchase finance (EL/HP) having minimum
CRAR of 15% have been permitted to accept public deposits without credit
rating. Some of the NBFCs have pointed out that Paragraph 4(1)(i) of
the Directions prohibits all NBFCs from accepting public deposits, if
they have not obtained the minimum investment grade credit rating. It
is clarified that the regulatory provisions for acceptance of public
deposits by EL/HP NBFCs are contained in paragraph 4(4) of the
Directions. Accordingly, para 4(1)(i) of the Directions is being
modified.
(3) Extension of time period to NBFCs having NOF of less than Rs.25.00 lakh
The
NBFCs still having NOF below the prescribed minimum level of Rs.25.00
lakh and whose applications for grant of Certificate of Registration are
pending with the RBI are allowed time upto January 9, 2000 as provided
in the RBI Act, to achieve the minimum NOF. All such NBFCs are advised
that this time limit has expired on January 9, 2000. It is further
clarified that RBI may not, in the normal course, grant extension of
time to those NBFCs which have not attained the prescribed minimum NOF
of Rs. 25 lakh by the above stipulated date and accordingly their
application may not be considered for registration. Those of the NBFCs
which have since achieved the minimum level of NOF should inform Reserve
Bank.
(4) Submission of Returns on liquid Assets by NBFCs not holding/accepting public deposits
In the wake of certain disquietening reports that some of the NBFCs
holding public deposits were not furnishing the liquid asset returns,
Bank had stipulated in January 1999 that all NBFCs (including those not
holding public deposits) should also submit liquid asset returns to the
Bank. The NBFCs not holding/accepting public deposits were advised to
file ‘Nil’ reports. We have received requests from various quarters that
the requirement for the NBFCs not holding public deposits to furnish
the above mentioned return should be done away with. As the auditors of
these companies continue to be responsible to report to RBI through
exception reports in regard to the violation of the provisions of the
RBI Act/Directions including non-submission of the return on liquid
assets, it has been decided that the NBFCs not holding public deposits
need not furnish the return to RBI on and from the quarter ended
December 1999.
(5) Provisioning against NPAs - Income reversal to be shown on Prudential Norms Return
We
have received queries from some of the NBFCs and their auditors
regarding disclosure of the amount of income reversed on NPAs which was
earlier taken to the credit of profit and loss account. We clarify that
the amount may be disclosed in the Prudential Norms Return Part F, Item
II.(A)(i)(a) col. (3) against the head "entire amount taken to the
credit of profit and loss account before the asset became NPA and
remaining unrealised".
(6) Aggregate ceiling on investments in unquoted shares
We have prescribed a prudential ceiling of 10 per cent of owned funds
on investments in unquoted shares by equipment leasing/hire purchase
finance companies and 20 per cent in the case of loan/investment
companies if they are accepting/holding public deposits. Some of the
companies are treating such ceilings as exposure norms against
individual investee company. It is clarified that the aforementioned
ceilings are aggregate ceilings on investments in the unquoted shares of
all the investee companies taken together.
(7) Issue of secured debentures by NBFCs outside the purview of description of public deposits -
The provisions of para 2(1)(xii)(f) read as under: "any amount raised by the issue of bonds or debentures secured by the
mortgage of any immovable property of the company; or by any other asset
or with an option to convert them into shares in the company provided
that in the case of such bonds or debentures secured by the mortgage or
any immovable property or secured by other assets, the amount of such
bonds or debentures shall not exceed the market value of such immovable
property/other assets"
The above provisions have been interpreted by some of the NBFCs in different manner. It is advised that -
- the debentures which are partly secured,
- the debentures which are secured by assets of a third party,
- the debentures which have matured for redemption but have not been redeemed and are overdue, and
- the debentures against which a charge has not been created in favour of the independent debenture Trustees (other than debenture holders) within the stipulated period of 90 days and extended period of further 90 days
2.
A copy each of the amending Notifications No. 134-140 is enclosed. You
are requested to ensure meticulous compliance with the regulatory
framework.
3. Please acknowledge the receipt of this letter to the General Manager/Deputy General Manager of the Regional Office of the Department of Non-Banking Supervision under whose jurisdiction the registered office of your company is located.
Yours faithfully,
Sd/-(V. S. N. Murty)
Chief General Manager In-Charge
Ozg NBFC Consultant
Ozg Center, New Delhi & Mumbai
Phone # 09811415831-37-61-72-84-92-94
Website: www.nidhicompany.com
Email: ask@nbfc.in
