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NON-BANKING FINANCIAL COMPANIES

NEED FOR REGISTRATION

Section 45-IA of the Reserve Bank of India Act, 1934 provides that No non-

banking f inancial company shal l commence or carry on business of a non-banking

financial inst i tut ion without

(a) obta ining a cer t i fica te of regist ra t ion i ssued under Chapter I I IB; and

(b) having the net owned fund of twenty-five lakh rupees or such other

amount , not exceeding two hundred lakh rupees , as the Bank may , by

notif icat ion in the Official Gazet te, specify.

Reserve Bank of India vide its PRESS RELEASE dated 8 t h April 1999 has

announced that in order to identify a particular company as a non-baking

financial company (NBFC), it will consider both, the assets and the income

pattern as evidenced from the last audi ted balance sheet of the company to decide

i t s pr inc ipal bus iness. The company wi l l be t reated as an NBFC i f i t s f inancial assets are more than 50 per cent of its total assets (netted off by intangible

asse t s ) and income f rom f inancial asse t s should be more than 50 per cent o f the

gross income. Both these tests are required to be satisfied as the determinant

factor for principal business of a company.

Reserve Bank of India vide i t s Not i f i cat ion No. DNBS 132 / CGM (VSNM) 99 ,

dated 20/04/1999 has increased the requi rement of net owned fund f rom Rs.25

lakh to Rs .200 Lakh for the NBFC which commences bus iness of a non-banking

financial inst i tut ion on or after Apri l 21, 1999.

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(i) the finan cing, whe ther by way of makin g loans or adva nces or

otherwise, of any act ivi ty other than i ts own;

( i i ) the acquisi t ion of shares , s tock, bonds , debentures or secur it ies i ssuedby a Government or local authori ty or other marketable securi t ies of a l ike

nature;

( i i i ) l e t t ing or del iver ing of any goods to a hi rer under a hi re-

purchase agreement as defined in clause (c) of section 2 of the Hire

Purchase Act , 1972 (26 of 1972);

( iv ) t h e c ar ry in g o n o f a ny c la ss o f i ns u ra nc e b u si ne ss ;

(v) managing, conducting or supervising, as foreman, agent or in any other capaci ty, of chits or kuries as define d in any law which is for the time

being in force in any State, or any business, which is similar thereto;

( vi ) c ol le ct in g, f or a ny p u rp o se o r u nd er a ny s ch em e o r a rr an g em en t

by whatever name called, monies in lump sum or otherwise, by way of

subscriptions or by sale of units, or other instruments or in any other

manner and awarding prizes or gif ts , whether in cash or kind, or disbursing

monies in any other way, to persons from whom monies are col lected or to

any other person,

but does not include any institution, which carries on as its principal

business

( a) a gr ic ul tu ra l o p er at io ns ; o r

( aa) i ndus t ri a l ac ti v it y ; o r

(b ) t he purchase o r s a le o f any goods (other t han secur i ti e s) o r t he

providing of any services; or (c) the purchase, construct ion or sale of immovable property, so,

however, that no portion of the income of the institution is

der ived from the f inancing of purchases , const ruct ions or sa les

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( i ii ) such o the r non-bank ing i nst i tu t ion o r c l as s o f such i nst i tu t i ons ,

as the Bank may, with the previous approval of the Central Government and

by notif icat ion in the Official Gazet te, specify.

EFFECT OF NON-REGISTRATION

Sub-sect ion (4A) of Sect ion 58B of the Reserve Bank of India Act , 1934 provides

I f any person cont ravenes the provis ions of sub-sect ion (1) of sec t ion 45-IA, he

shal l be punishable with imprisonment for a term which shal l not be less than oneyear but which may extend to

f ive years and with f ine which shal l not be less than

one lakh rupees but which may extend to f ive lakh rupees.

Section 58C provides as fol lows

(1) Where a person committ ing a contravention or default referred to in sect ion

58B is a company , every person who a t the t ime the cont ravention or

default was committed, was incharge of, and was responsible to, the

company for the conduct of the business of the company, as well as the

company , shal l be deemed to be gui l ty of the cont ravent ion or defaul t

and shal l be l iable to be proceeded against and punished accordingly:

Provided that nothing contained in this sub-section shall render any

such person l iable to punishment i f he proves tha t the cont ravent ion or

default was commit ted wi thout h i s knowledge or tha t he had exerc ised

al l due di l igence to prevent the contravention or default .

(2) Notwiths tanding any thing conta ined in sub-section (1) , where an

offence under this Act has been committed by a company and it is

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COMPLIANCES FOR NBFC

Under Part icular Frequency Appl icabi li ty

Under Reserve Bank of India Act , 1934

Sect ion 45-IA NBFC have to make app l icat ion fo r reg is t rat ion wi th RBI and

shall not commence or carry on business of a non-banking

financial insti tution without obtaining registration from RBI

and main tain ing NOF.

NOF requirement for NBFC registered

Before 21/04/1999 = Rs.25 lacs

On or after 21/04/1999 = Rs.200 lacs

One time Al l NBFC

S ect ion 45- IB Mai n ten an ce of p ercen tage of as se ts

Invest and con t inue to invest 5% to 25% (speci f ied by RBI) o f

deposits outstanding on the last working day of the second

preced ing quar ter in unencumbered approved secur i t ies .

Not i f icat ion No. DFC.121/ED(G)-98 dated 31 .01 .1998 and No.

DFC(COC) NO.108-ED(JRP)-97 dated 30 .04 .1997

Ongoing NBFC accept ing /

holding Public

Deposi t

S e ct i on 4 5 -I C R e se r ve F un d

Every NBFC shal l create a reserve fund and t ransfer therein asum not less than 20% of i t s net p rof i t every year as d isclosed

in the profit and loss account and before any dividend is

declared .

Yearly Al l NBFC

S ect ion 45-M Du ty of NBF C to fu rn ish s ta tem en ts et c . , req u ired b y Ban k When asked for Al l NBFC

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Under Non-Banking Financial Companies Acceptance of Publ ic Deposi t (Reserve Bank) Direct ions, 1998

Noti f icat ion No.DFC.118/DG(SPT)-98 dated 31.01.1998

Para 4 Minimum Cred i t Rat ing , Proh ib i t ion on accep tance of Deposi t ,

repayable on demand, Period of Deposit (12 to 60 Months

only), Ceiling on quantum of deposits (depends on status,

rat ing , e tc . ) , S tatus in case o f Downgrad ing of cred i t ra t ing ,

Regularis ation of Public Deposit accepted earlier, Ceiling on

the rate o f in terest (max 11%), Payment o f Brokerage, e tc .

ongoing

All NBFC

N ot a pp li ca bl e

subject to

1 ) n o t a c ce p ti n gPubl ic Deposi t

2) passed a

resolution under

para 9

Para 4A, 4B Branches, agen ts , c losures o f b ranches

Para 5 In format ion to be included in the Boards repor t

e .g . to tal no . o f accounts o f publ ic deposi t , to tal amount due or

unpaid , e tc .

Para 6 Safe custody of approved secur i t ies

Para 7 Employee Secur i ty Deposi t

Para 8 Copies of balance sheet and accounts together with the

Directors repor t , aud i to rs repor t , no tes on accounts , re tu rns

in Form NBS 1 and intimation of any change in address,

d i rectors , p r incipal o ff icers , specimen s ignatures etc should be

furn ished to the Reserve Bank wi th in 30 days o f the occurrence

of event.

Para 9 Non-appl icabi l i ty o f Direct ion to cer tain types o f NBFCa) Insurance company

b) Loan company, an investment company, a hire purchase

company or equipment leasing company not holding or

accep t ing publ ic deposi t s and

pass a reso lu t ion to the ef fect

wi th in 30 days o f the commencement o f the f inancial year

c) An investment company ( invest ing on ly in group companies

Every year wi th in 30

days f rom the

commencement o f

f inancial year

Al l NBFC, which

wants to claim

exempt ions

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not less than 90% of i t s assets) and pass a reso lu t ion that

has no t accep ted and would no t accep t Publ ic Deposi t and

would no t t rade in such shares/ secur i t ies wi th in 30 days o f

the commencement o f the f inancial year .

Under Non-Banking Financial Companies Prudential Norms (Reserve Bank) Direct ions, 1998

Noti f icat ion No.DFC.119/DG(SPT)-98 dated 31.01.1998

P ara 3 , 4 , 5 , 6 In come recogni t i on

Income from NPA shall be recognized only when actually

real i sed . Al l unreal i sed income on NPA shal l be reversed .

Ongoing Al l NBFC

Income from investment

Dividend income on shares and un i ts o f Mutual Funds shal l be

taken on cash basis .

Income f rom Bonds and Debentures f rom Govt . Secur i t ies may

be taken on accrual basis .

Income f rom secur i t ies (guaran teed by Central Govt . o r S tate

Govt . ) may be taken on accrual basis .

Accounting Standards

Account ing s tandards shal l be fo l lowed

Accounting of investment

Board of Directors shal l f rame investment po l icy

Other requ i rement regard ing account ing of investmentP a ra 6 A N e ed f o r P o li c y o n D e ma n d / C a ll L o an s

Pol icy fo r demand / cal l loan shal l be f ramed

Ongoing All NBFC g iving

loan etc.

Para 7, 8, 9

Asset class i f icat ion

Assets shal l be class i f ied as S tandard , Sub-standard , Doubtfu l

and Loss assets .

Ongoing Al l NBFC

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Provis ioning requirements

Provision for assets (i .e. loans, advances or other credit

facil i t ie s including bil ls purchased & discounted, Leased and

hire purchased assets) shal l be made

Ongoing

Disclosure in the Balance Sheet

Provision as in para 8 should be disclosed without nett ing off

Year ly

P a ra 9 A C o ns t it u ti o n o f A u di t C o mm i tt e e

Company having assets of Rs.50 crore and above shall

const i tu te an Audi t Commit tee.

O ngo ing N BFC ha vi ng as se ts

of Rs.50 crore and

above

P a ra 9 B , 9 B B A c co u nt i ng Y e ar

Every NBFC shal l p repare i t s B/S and P/L as on 31 s t March

Yearly Al l NBFC

Schedule to the Balance Sheet

Every NBFC shal l append to i t s B/S par t icu lars in the fo rmat asset in schedule

P a ra 9 C T r an s ac t io n i n G o ve r nm e nt S e cu r it i es

NBFC shal l ho ld investment in approved secur i t ies in a

demater ial i sed fo rm only .

Ongoing Al l NBFC

P a ra 1 0 R e qu i re me n t a s t o C a pi t al a d eq u ac y

NBFC shal l main tain min imum cap i tal ra t io

Ongoing NBFC accept ing /

holding Public

Deposi t

P a ra 1 1 L o an a g a in s t N B FC s o w n s h ar e s p r oh i bi t ed

No loan against own shares shal l be g iven

Ongoing Al l NBFC

P ara 11A NBF C fa i l in g to rep ay pu b l ic d epos i t p roh ib i t ed f rom

making loans and investments

As long as defau l t

ex is ts

NBFC accep t ing /

holding public

deposi t

P ara 11B Res tri c t ion s on in ves tm en t in l and an d bu i l di n g and

unquoted shares

Rest r ic t ion has been speci f ied (10% of NOF)

Ongoing NBFC accept ing /

holding public

deposi t

P a ra 1 2 C o nc e nt r at i on o f c r ed i t / i n ve s tm e nt Ongoing NBFC accept ing /

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Rest r ic t ion has been speci f ied (Lend or invest to s ing le person

15% and group 25%) (Both lend and invest 25% and 40%

respect ively)

holding Public

Deposi t s

P a ra 1 3 S u bm i ss i on o f h a lf - ye a rl y r e tu r n

Half year ly retu rn in Form NBS-2 to be submit ted

Ha lf Ye al y N BFC ac ce pt ing /

holding Public

Deposi t and RNBFC

P ara 13A In form at ion in regard to ch an ge of ad d ress , di rec tors ,

auditors, Principal officer, etc. to be submitted by

NBFCs not accept ing/holding publ ic deposi t

With in 30 days f rom the date o f occurrence of any change

Whenever change

occur

Al l NBFC

P a ra 1 3 B E x po s ur e t o C a pi t al M a rk e t

Quarter ly retu rn in Form NBS-6

Q ua rt er ly N BF C h ol di ng p ub li c

deposi t o f Rs.50

crore o r more andRNBFC having

l iab i l i t ies o f Rs.50

crores o r more

P a ra 1 3 C N o rm s r e la t in g t o I n fr a st r uc t ur e L o an

Rest ructur ing of In fras t ructure Loan .

Al l NBFC g iv ing

Infrast ructure Loan

Under various Not i f icat ion / Press release i ssued by Reserve Bank

Circular No. DNBS (DD) CC.No. 15/02.01/2000-01 dated

27/06/2001Asset Liabi l i ty Management (ALM) System

Ongoing Al l NBFC having

assets more thanRs.100 crores

Noti f icat ion No. RBI/2005-06/157 dated 6 t h September 2005

Month ly retu rn on impor tan t f inancial parameters on NBFC not

accep t ing / ho ld ing publ ic deposi t s and hav ing assets s ize o f

Rs.100 crores and above

Monthly Al l NBFC having

assets more than

Rs.100 crores

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AND ALSO NEEDS TO SUBMIT NET WORTH CERTIFICATE ISSEUED BY A C.A. BEFORE 30TH JUNE EVERY

YR .