Non-Banking Financial Companies RBI Directions – Important provisions

NBFC DIRECTIONS, 1998

1.      Directions as notified by the RBI and applicable to NBFCs:

a.      NBFCs Acceptance of Public Deposits (Reserve Bank) Directions, 1998 [AOPDRBD][Notified on 31-1-1998] 

b.      Non–Banking Financial Companies (Deposit Accepting or Holding) Prudential Norms (Reserve Bank) Directions, 2007 [PN(D)RBD] [Notified on 22-2-2007]; and Non–Banking Financial Companies (Non-Deposit Accepting or Holding) Prudential Norms (Reserve Bank) Directions, 2007 [PN(ND)RBD] [Notified on 22-2-2007]; 

c.      Non-Banking Financial Companies Auditor’s Report (Reserve Bank) Directions, 1998 [ARRBD] [Notified on 2-1-1998]

The principal on which these directions are issued is that they are aimed at deposit accepting NBFCs and are applicable in a restrictive manner (with a lot of compliance requirements) to NBFCs accepting/holding deposits, and in a limited manner (with least compliance requirements) to NBFCs not accepting deposits.

2.      Classification as an NBFC

The Reserve Bank of India has clarified that for a Company to be classified as an NBFC, to decide on its principal business, it will have to satisfy the two tests of assets and income. The financial assets should be more than 50% of the total assets (netted off by intangible assets) and the income from financial assets should be more than 50% of the gross income. Both these tests need to be satisfied for a Company to be termed as an NBFC.

3.      Registration Requirements

An NBFC cannot commence/carry on its business without—

(a) Obtaining the certificate of registration from the Reserve Bank of India; and

(b) Having a NOF of Rs. 25 lakhs (Rs. 200 lakhs for companies applying for registration after 21-4-1999)

4.      Definition of "Public Deposits"

The definition of "Public Deposits" has been amended by the AOPDRBD to provide for exclusion therefrom of the following items:

a.      Inter-corporate deposits;

b.      Deposits from shareholders of a private Company and from Directors of a limited Company or from relative of director of the NBFC.

c.      Amount received on issue of Optionally Convertible Debentures;

d.      Amount received from promoters based on Financial Institution stipulations.

The above four categories of deposits remain restrictive deposits, and are hence, exempt.

5.      Net Owned Fund (NOF) is defined in S. 45-1A of the Reserve Bank of India Act, 1934 and includes

a.      paid-up equity capital, 

b.      free reserves, and  

c.      paid-up preference share capital that is compulsorily convertible into equity.

From these items, one has to reduce,

·         accumulated balance of loss;

·         deferred revenue expenditure; and

·         other intangible assets; and

·         Excess of 10% of paid-up capital and "free reserves" over;

·         Investment in shares of subsidiaries / group companies / other NBFCs; and

·         Investment in debentures / bonds/ loans and advances (including HP / Lease Finance) made to subsidiaries / group companies.

6.      Deposit Acceptance Ceiling and Credit Rating

Deposit acceptance is now related to Credit Rating and compliance of all the Prudential Norms contained in the PNDRBD.

7.      NBFC with NOF less than Rs. 1 crore cannot accept deposits.
 

8.      Entitlement to hold / accept public deposits w.e.f. 18-12-1998 as under:

9.      Liquidity Norms

9.1 NBFCs accepting / holding public deposits are required to invest in unencumbered approved securities as a percentage of deposits accepted u/s 45 IB of the RBI Act, 1934 ranging from a percentage of 5% and 25% (as may be notified from time to time by the RBI) of the deposits outstanding at the close of the business of the business of last day of the 2nd preceding quarter. A Quarterly Return is required to be submitted by an NBFC within 15 days of the month succeeding the quarter to which it relates. The liquidity requirement limits are as under:

Non-compliance with the liquidity requirements is liable to penal interest on the shortfall @ 3% above the Bank Rate for delay of one quarter and delay beyond that @ 5% above Bank Rate.

10.  The ceiling of rate of interest is specified at 12.50% per annum w.e.f. 24th April 2007

11.  A NBFC shall have its accounting year as the financial year ending on 31st March every year.

12.  Returns to be filed by NBFC to RBI:

a.      Annual Return of Deposits in the prescribed form within 6 months of the financial year.

b.      Half yearly return on prudential norms in Form NBS2 within 3 months of the end of half year.

c.      Quarterly Return in form NBS-5 Monetary an Supervisory Return by all NBFCs holding public deposits of Rs.20 crores and above.

Note : NBFCs not holding / accepting public deposits are not required to file returns at (b) and (c) above.

13.  Ceiling on payment of brokerage: Brokerage / Commission/ Incentive/ any other benefits by whatever name called up not to exceed 2% of the deposits collected. In additions, reimbursement of expenditure can be made up to 0.5% of the deposits collected.

14.  The maturity period for public deposits is minimum 12 months and maximum 60 months.

15.  Premature encashment of deposits within 3 months is not permitted. However, interest rate on premature encashment are;

16.  The auditors are required to report upon 17 matters notified by the RBI Directives, in case of the annual finalized accounts of NBFC and in case of any qualified/adverse/unfavourable reporting, the Report is also to be sent, by the auditors, to the concerned Regional Office of the Department of Non-Banking Supervision, RBI where the registered office of the NBFC is situated. Contravention of RBI Act/Directions is also required to be forming part of statutory audit report to shareholders u/s 227(2).

17.  The Auditor of NBFC has to verify on a continuous basis compliance of capital adequacy ratio requirement. 

18.  A Schedule as per format prescribed in the notification No. DIVBS 167/GGM (OPA)-2003 dt. 29-3-2003 should be given to Reserve Bank of India.

MERGERS, AMALGAMATION AND ACQUISITIONS

The term "mergers" and "amalgamation" are practically synonymous while acquisitions usually refer to acquisition of undertakings though all these three terms are often used interchangeably in common parlance. However, mergers/amalgamation are referred to amalgamation of companies carried out pursuant to section 394 of the Companies Act, 1956 while acquisition are referred to acquisition of undertakings. A typical restructuring transaction such as amalgamation or acquisition has many implications apart from the requirements of the Companies Act, 1956 but some of such implications are referred to herein bellow: