NBFC Identification - Urgent

Please clarify the query in detail. 

Intangible assets will be excluded while calculating the limit of financial assets.

I am reproducing  an excerpt from notification  No RBI/2006-07 /158

The company will be treated as a non-banking financial company (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 is 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.

As Per RBI Notification , For the Purpose of Identifying whether the Company is an NBFC or Not Two Tests are Prerequisite :

1) Financial Assets shall Constitute 50% or More of the Total Assets .(These Total Assets shall be Considered after Netting it off from Intangible Assets).

                                                               AND

2) Income From Such Financial Assets should be 50% or More than total Income of the Company.

The Issue is What to Consider Precisely in Financial Assets??

First Hypothesis : Follow AS - 26 Definition and Apply accordingly.

                                                      OR

Second Hypothesis : As per S.45-IC first Categorise the nature of Company and then Consider its Main Business?

The Company is Escaping the Above Clause by Following Second Clause , identifying itself as a Loan Company thus Equity Shares are not Financial Assets as per the Company & suggesting that Income From Sale of Equity Shares is Not Income from Financial Assets and thus Second ( Income Test) Test is Not Positive. Thus it being Not an NBFC.

I Hope I made the Query Precisely Clear , Kindly Through Some Light !

@ Paras Sir: Your Point noted , But Sir the Issue is Actually the AMBIT/SCOPE of Financial Assets for an NBFC ??

Regards

Ankit Gulgulia

In my opinion Financial assets includes Equity Shares also.  

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The basis remained in  forming  such  opinion is - 

the definition of "financial  institution" given in Section 45-I of the RBI Act-1934. 

Please go through Section 45 I (c). 

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In my view we have to go in the following manner from upward to downward-

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First we have to decide , whether it is an NBFI or not.   Apply the test of 40-I(c) for its activity too.

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Then we have to decide the type of NBFI. 

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Being  an  NBFI  first , by idetifying it as a Loan Company  at a  subsequent stage ,  character of financial assets  and income generated therefrom by  an NBFI  would not change .

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So by going through "AS26 way"  shares are  Financial Assets- and Income from shares is income from Financial Assets.

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  Alternate route- Shares could not be treated as  other than financial assets and as  it is not correct to say that shares are goods held for sale & purchase.  

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As such in my view , the contention of company may  not be correct.

Thanks a Lot Sir !! That was very Helpful

can any one let me know the meaning of FINANCIAL ASSEST as per RBI ACT.its bit urgent???