Holding of investments in Group Companies__NBFC??

Brief for opinion

 “X”  Pvt  Ltd incorporated under The Companies Act, 1956 is having paid up share capital of Rs. 490,000 and free reserves of Rs 36 crores.  It  has made investments in Shares ( Rs 3 crores) and Optionally Fully Convertible Debentures (Rs 34 crores ) of certain group companies and also holds fixed deposits in banks.  Dividend/ interests received on these investments are the main source of its income. The company has not made any investment out of any borrowed funds. It would also be relevant to point out that

(i)                 The Company is merely holding the shares as investment and is not engaged in trading of shares or leasing or financing activities.

(ii)               It  is not carrying the business of lending in any manner.

(iii)             It is not holding/accepting public deposits.

According to the press release dated April 8, 1999 (Press Release: 1998-99/1269) in order to identify a particular company as a (NBFC), one has to consider both, the assets and the income pattern as evidenced from the last audited balance sheet of the company to decide its principal business. The company will be treated as an NBFC if its financial assets are more than 50 per cent of its total assets (netted off by intangible assets) and income from financial assets should be more than 50 per cent of the gross income. Both these tests are required to be satisfied as the determinant factor for principal business of a company.

In view of the facts mentioned above the querist would like to have your considered opinion on the following issues :

1.      Whether X Pvt Ltd will be classified as a NBFC on the basis of guidelines issued by RBI in this regard?

2.      Is it required to apply to RBI and obtain registration as NBFC?

3.      If the answer to the question no 2 is in affirmative, is there any possibility of the Company avoiding registration with RBI?

4.      Is there any guidelines issued by RBI, whereby an exemption is granted to the investment company with more than 90% of the total assets being invested in shares of other companies. ( Correspondence received from RBI in group company is enclosed for your perusal)

5.      If the answer to the question no. 4 is in affirmative, whether investment in Optionally Fully Convertible Debentures (OFCD) will also be considered for calculating 90% of the total assets.

6. What will be the implications if X Pvt. Ltd. has made investment in the mutual funds?
7. Suppose if X Pvt Ltd is carrying on Real Estates business since last 20 years and its investment in shares of other companies is less than 90% of total assets, whether X Pvt Ltd will be considered as a Financial Institution defined in Section 45-I(c) of the RBI Act, 1934.
8. Assuming if any new business activity is commence in X Pvt. Ltd, example trading in commodities with 2%-5% of funds being deployed for the purpose though remaining funds i.e more than 50% being utilized for the purpose of investment in other companies. Whether X Pvt Ltd will be considered as a Financial Institution defined in Section 45-I(c) of the RBI Act, 1934.
9. Any other advice whether you may consider appropriate in the matter.