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Presents The Power of 30!
A web series of 30 episodes covering different areas of corporate, securities and financial laws for the corporate professionals
across the country.
COPYRIGHT•The presentation is a property of Vinod Kothari & Co.
•No part of it can be copied, reproduced or distributed in any manner, without explicit prior permission.
•In case of linking, please do give credit and full link
Abhirup GhoshVinod Kothari & Company
Kolkata
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Phone:033-22811276/ 22813742/7715E: [email protected]
New Delhi
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Phone:011-41315340/ 65515340
Mumbai
403-406, 175 , Shreyas Chambers,
D.N. Road, Fort, Mumbai – 400 001
Phone: 022 22614021/ 62370959
www.vinodkothari.comEmail: [email protected] / [email protected]
NON-BANKING FINANCIAL COMPANIES:AN OVERVIEW
1st September, 2018
MEANING OF NON-BANKING FINANCIAL COMPANY
Non-Banking Financial CompanyHas to be a company registered under
Companies Act, 2013 or any other
erstwhile laws
A foreign body corporate in not a
company
An LLP is not a company
Question of considering unincorporated
entities does not arise
Must be a financial institution,
therefore, must be in the business
of conducting financial activities
The definition of financial
activities may be taken from the
section 45I(c) of the RBI Act,
1934
Must not be a banking company
Financial activities must be
conducted as principal business
activities of the company
LEGAL DEFINITION OF NBFCS & MEANING OF FINANCIAL ACTIVITIES
Section 45I(f) of RBI Act, 1934
- Financial institution which is a company;
- NBI which is a company and whose
principal business is accepting of
deposits
- such other class of companies, as the
RBI may notify
Definition of NBFC
Section 45I(c) of RBI Act, 1934
A NBI which carries on the following
activities
1. Financing
2. Acquisition of shares, stocks or securities
3. Hire purchase
4. Insurance – excluded by notification
5. Management of chits, kuries, etc
6. Money circulation schemes
Definition of financial
institution
Section 45I(c) excludes the following
activities from the purview of financial
activities:
- Agricultural activities
- Industrial activities
- Purchase or sale of goods, or provision
of services
- Purchase, construction or sale of
immovable properties, provided that
the income from such activities do not
arise from financing of purchase or
sale of construction of immovable
properties
Activities which are not
financial activities
PRINCIPAL BUSINESS TEST
Financial assets> 50%
of its total assets
Income from financial
assets> 50% of the gross
income
Principal business
test
Quantitative factors Qualitative factors
nature of the business of an entity,
its principal thrust areas,
schematic and consistent distribution of assets, resources and activities.
Press Release 1998-99/1269 dated April 8, 1999
SOME FAQS & CASE STUDIES ON PRINCIPALITY TEST 1/2A Ltd. is a company engaged in trading activities, it also has made investments in shares of other companies amounting to more than 50% of its total assets. However, trading income constitutes majority of its total income. Whether the Company is an NBFC?
• Principal business criteria shall be deemed to have been made when both the asset and the income criteria are met. Therefore, the Company is not an NBFC.
In continuation to the above case, during one financial year, the Company fails to generate substantial amount of trading income and the income from the investments made in shares represent the majority of the gross income. Whether the Company now becomes an NBFC?
• In this case, the Company fulfils both the asset and income criteria, therefore, it satisfies the principal test.
• However, it has to be determined whether the Company intends to carry on the business of NBFC. If the intention of the company is to stick to its existing line of business, then mere fulfilment of the principal business test in one financial year will not change the nature of the entity.
• However, if in subsequent years similar trend follows and then it will be evident that the actual nature of the Company is that of an NBFC.
SOME FAQS & CASE STUDIES ON PRINCIPALITY TEST 2/2
What if the Company takes NBFC registration, in the second year it fails to the satisfy the principal business test and again in the third year it attains the criteria? Does that mean the Company will obtain CoR in the first year, surrender in the second and again obtain in the third year?
• No. There can be temporary fluctuations in the business, that cannot change the nature of the business. If the intention of the Company is to carry on the business of NBFC, it can continue to hold COR in the second year as well.
DIFFERENCE BETWEEN BANKS AND NBFCS (1/2)Particulars Banks NBFCs
Definition Banking is acceptance of deposits
withdrawable by cheque or demand;
NBFCs cannot accept demand deposits
NBFCs are companies carrying financial
business.
Scope of business Limited by sec 6 (1) of the BR Act. No bar on NBFCs carrying activities other
than financial activities.
Licensing requirements Licensing requirements are quite stringent.
Transfer of shareholding also controlled
by RBI.
It is quite easy to form an NBFC. Acquisition
of NBFCs is procedurally regulated and
are subject to approval.
Major limitations on business No non-banking activities can be carried. Cannot provide checking facilities.
Major privileges Can exercise powers of recovery under
SARFAESI and DRT law.
None, except 196 NBFC, specified by
Central Government, have powers under
SARFAESI or DRT law.
DIFFERENCE BETWEEN BANKS AND NBFCS (2/2)Particulars Banks NBFCs
Part of payment and settlement
system
Banks are a part of the payment and
settlement system.
NBFCs are not a part of the payment
and settlement system.
Deposits Can accept both demand deposits as
well as term deposits
Only some NBFCs are allowed to
accept term deposits
Foreign investment Upto 74% allowed to private sector
banks.
Upto 100% allowed
Regulations BR Act and RBI Act lay down stringent
controls over banks.
Controls over NBFCs are relatively
lesser stringent.
SLR/CRR requirements Banks are covered by SLR/ CRR
requirements.
NBFC-Ds have to maintain a certain
ratio of deposits in specified
securities; no such requirement for non
deposit taking companies.
Priority sector lending requirements Certain minimum exposure to priority
sector required.
Priority sector norms are not
applicable to NBFCs.
STATISTICS
12225
12029
11842
11682
11522
11402
10800
11000
11200
11400
11600
11800
12000
12200
12400
FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 Q1 FY 2018
NUMBER OF NBFCS IN INDIA
AFC CIC-SI IDF IFC Factor ARC MFI LC + IC
Over 93% of the registered NBFCs are either
Investment Companies or Loan Companies
Data source: RBI
REGISTRATION REQUIREMENTS
INDIA WORKS ON A MULTI-REGULATOR MODEL
Reserve Bank of
India
Ministry of
Corporate Affairs
State Registrar of
Chit Funds
National Housing
Bank
IRDA
SEBI
NBFCs
Nidhi Companies
Chit Funds
Housing Finance
Companies
Insurance
Companies
AIFs
Merchant Bankers
Mutual funds
Brokers/ sub-
brokers
Stock Exchanges
RBI Regulations do not apply
REGISTRATION OF NBFCS
In order to carry on the business of NBFC, a company has to register itself with the Reserve Bank of India under section 45-IA of the Reserve Bank of India Act, 1934
Conditions as per section 45-IA
The applicant should be registered as a company under Companies Act
The minimum net-owned funds of the applicant should be Rs. 200 lakhs
Meaning of net owned funds
Owned funds – exposure in group companies, to the extent the exceed 10% of owned funds
Meaning of owned funds
Aggregate of paid up equity capital and free reserves as reduced by accumulated balance of losses, deferred revenue expenditure and other intangible assets
If any person carries on the business of NBFC without obtaining registration, the same will attract penal provisions of section 58B of the RBI Act and shall be punishable with imprisonment which shall not be less than 1 year but may extend upto 5 years and with fine which shall not be less than Rs. 1 lakh but may extend upto Rs. 5 lakhs
NBFCS WHICH ARE NOT REQUIRED TO OBTAIN REGISTRATION WITH THE RBI
Housing Finance Companies,
Merchant Banking Companies,
Stock Exchanges,
Companies engaged in the business of stock-broking/sub-broking,
Venture Capital Fund Companies,
Nidhi Companies,
Insurance companies,
Chit Fund Companies
Core Investment Companies having asset size of less than Rs. 100 crores or not holding public funds
TYPES OF NBFCS
TYPES OF NBFCS 1/2
Based on the ability to
accept deposits
Deposit taking NBFCs
Non-deposit taking NBFC
Systemically important NBFC
Non-Systemically
important NBFC
Those with asset
size of Rs. 500
crores or above
Those with asset
size of less than
Rs. 500 crores
Total assets of all
NBFCs in a group must
be aggregated to
determine the limits
TYPES OF NBFCS 2/2
Based on the
nature of activities
Investment
activities
Lending or similar
activities
Investment
Company
Core Investment
Company
Non-Operative
Financial Holding
Company
Other activities
Loan Company
Asset Finance
Company
Micro Finance
Institution
Infrastructure
Finance Company
Infrastructure Debt
Fund
FactorsMortgage
Guarantee
Company
Peer-to-Peer
Lending Platform
Account
Aggregator
INVESTMENT COMPANIES
Company which is a financial institution carrying on as its principal business of making investments in shares or securities of other companies
In this case –
At least 50% of the total assets should be investments in shares/ securities of other companies; and
At least 50% of the gross income should come from such investments
CORE INVESTMENT COMPANIES
Core Investment
Companies
Systemically Important
Core Investment
Companies
Non Systemically
Important Core
Investment Companies
• Not less than 90% of its Total Assets in the form of investment in
equity shares, preference shares, debt or loans in group companies
• Its investment in equity or equity like instruments of group
companies must not exceed 60% of the total assets
• It does not trade in investments, except through block sale for the
purpose of dilution
• It does not carry on any financial activity other than the above. The
remaining 10% can be used for self use assets
• Its asset size is Rs. 100 crores or above
• It accepts public funds
• Non-systematically Important CIC does not have to register itself with
RBI.
• They do not have to comply with any of the CIC directions, in view of
the applicability of the operative provisions of the Directions to CIC-SI
only.
GROUP COMPANIES
Companies in the Group” means an arrangement involving two or more entities related to each other through any of the following relationships, viz.
Subsidiary – parent (defined in terms of AS 21),
Joint venture (defined in terms of AS 27),
Associate (defined in terms of AS 23),
Promoter-promotee [as provided in the SEBI (Acquisition of Shares and Takeover) Regulations, 1997] for listed companies,
A related party (defined in terms of AS 18)
Common brand name, and
Investment in equity shares of 20% and above).
CLASSIFICATION OF INVESTMENT COMPANIES DEPENDING ON THE EXTENT OF INVESTMENTS MADE IN GROUP COMPANIES
10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Not an NBFC Investment Company CIC
**Assuming investments in group companies is the only financial activity a company carries out
Scale of investments in group companies
NON-OPERATIVE FINANCIAL HOLDING COMPANIES
Financial institution through which promoter / promoter groups will be permitted to set up a new bank;
It’s a wholly-owned Non-Operative Financial Holding Company (NOFHC) which will hold the bank as well as all other financial services companies regulated by RBI or other financial sector regulators, to the extent permissible under the applicable regulatory prescriptions.
LOAN COMPANIES
Company which is a financial institution carrying on as its principal business the providing of finance whether by making loans or advances or otherwise for any activity other than its own. That means -
At least 50% of its total assets must be loan assets; and
At least 50% of the gross income should come from such loan assets
Does not include an Asset Finance Company.
ASSET FINANCE COMPANIES
Company which is a financial institution carrying on as its principal business the financing of physical assets supporting productive/economic activity;
Principality test for AFCs –
Principal
business
criteria for
AFCs
Asset finance
=> 60% of
Total Assets
Income from
asset finance
=> 60% of
Gross income
DIFFERENTIATING ASSET FINANCE AND LOAN
Product FeaturesWhether loan or
asset finance
Loan for car to be used
for personal use
Though the loan is used for financing an asset, however, the asset
does not support an economic/ productive activityLoan
Loan for car to be used
for commercial use
The loan is used for financing an asset, which supports an economic/
productive activityAsset Finance
Tractor loanThe loan is used for financing an asset, which supports an economic/
productive activityAsset Finance
Loan against propertyThe end use of the loan is not restricted. It may or may not be used
for financing asset.Loan
Working capital loan
secured by assets of the
borrower
The loan will be used to meet the working capital needs of the
borrower. It is not being used for financing any asset that could
support productive/ economic activity
Loan
MICRO FINANCE COMPANIESNBFC-MFI is a non-deposit taking NBFC having not less than 85% of its assets in the nature of qualifying assets which satisfy the following criteria:
The minimum net owned funds of the company must be Rs. 5 crores
Borrower’s profile: rural household annual income not
exceeding ₹ 1,00,000 or urban and semi-urban household income not
exceeding ₹ 1,60,000;
Ticket size of loan not more than ₹ 50,000 in the first cycle and ₹ 1,00,000 in
subsequent cycles;
Total indebtedness of the borrower does not exceed ₹
1,00,000;
Tenure of the loan not to be less than 24 months for loan
amount in excess of ₹ 15,000 with prepayment without
penalty;
Loans extended must be without collateral
Aggregate amount of loans, given for income generation, is
not less than 50 per cent of the total loans given by the
MFIs;
Loan is repayable on weekly, fortnightly or monthly
instalments at the choice of the borrower;
INFRASTRUCTURE FINANCE COMPANIES
Deploys at least 75 per cent of its total assets in infrastructure loans
Has minimum Net Owned Funds of ₹ 300 crore
Has a minimum credit rating of ‘A ‘or equivalent
CRAR of 15%
MEANING OF INFRASTRUCTURE
Transport Energy
Water & Sanitation Communication
Social and Commercial
Infrastructure
Roads and bridges; Ports; Inland
Waterways; Airport; Railway Track,
tunnels, viaducts, bridges; Urban
Public Transport
Electricity Generation; Electricity
Transmission; Electricity Distribution; Oil
pipelines; Oil/ Gas/ Liquefied Natural
Gas (LNG) storage facility; Gas
pipelines
Solid Waste Management; Water
supply pipelines; Water treatment
plants; Sewage collection, treatment
and disposal system; Irrigation; Storm
Water Drainage System; Slurry
Pipelines
Telecommunication (Fixed network);
Telecommunication towers;
Telecommunication & Telecom Services
Education Institutions; Hospitals; Three-
star or higher category classified hotels
located outside cities with population of
more than 1 million; Common
infrastructure for industrial parks, SEZ,
tourism facilities and agriculture
markets; Fertilizer; Post harvest storage
infrastructure for agriculture and
horticultural produce including cold
storage; Terminal markets; Soil-testing
laboratories; Cold Chain; Hotels with
project cost of more than Rs.200 crores
each in any place in India and of any
star rating; Convention Centres with
project cost of more than Rs.300 crore
each.
INFRASTRUCTURE DEBT FUND COMPANIES
Company registered as NBFC to facilitate the flow of long term debt into infrastructure projects;
Raise resources through issue of Rupee or Dollar denominated bonds with minimum maturity of 5 years;
Only Infrastructure Finance Companies (IFC) can sponsor IDF-NBFCs.
The intention of this type of NBFC is to raised funds from domestic/ offshore institutional investors and refinance existing debt of infrastructure companies, thereby creating fresh headroom for banks to lend to fresh infrastructure projects
NBFC-FACTORS
NBFC-Factor must be registered under Companies Act, 1956
Carries on factoring activities
Net owned funds of at least Rs. 5 Crs.
It must be registered with RBI
As per RBI FAQs, only NBFC Factors can carry out factoring activities In addition to RBI Directions, Factoring
Regulation Act, 2011 also applies on
Factoring Companies
Meaning of factoring: [Factoring Regulation Act,
2011]
2(j) “factoring business” means the business of acquisition
of receivables of assignor by accepting assignment of such
receivables or financing, whether by way of making loans
or advances or otherwise against the security interest over
any receivables but does not include—
(i) credit facilities provided by a bank in its ordinary course
of business against security of receivables;
(ii) any activity as commission agent or otherwise for sale
of agricultural produce or goods of any kind whatsoever or
any activity relating to the production, storage, supply,
distribution, acquisition or control of such produce or goods
or provision of any services.
MORTGAGE GUARANTEE COMPANIES
at least 90% of the business turnover is
mortgage guarantee business
at least 90% of the gross income is from
mortgage guarantee business
net owned fund is
₹ 100 crore.
MGC are financial institutions for which:
ACCOUNT AGGREGATOR
An NBFC registered with the RBI which carries out the following activities, for a fee or otherwise.
Financing
arrangement
Account
aggregation
contractConsolidate,
organise and
present financial
information
Retrieve or
collect financial
instrument
Bank deposits Deposits with
NBFCs
Structured Investment
Product (SIP)
Commercial Paper (CP)
Certificates of Deposit (CD)
Government Securities (Tradable)
Equity Shares Bonds
DebenturesMutual Fund
UnitsExchange Traded
Funds
Indian Depository Receipts
CIS (Collective Investment
Schemes) units
Alternate Investment Funds
(AIF) unitsInsurance Policies
Balances under the National
Pension System (NPS)
Units of Infrastructure
Investment Trusts
Units of Real Estate Investment
Trusts
Any other item, prescribed by
the RBI from time to time
Financial information means information relating to -
ACCOUNT AGGREGATOR – CONTD..
Needs to be registered with the RBI as an NBFC
Needs minimum NOF of Rs. 2 crores
Cannot carry out any activities other than account aggregation
Leverage of the company at any time after the registration of the NBFC should not exceed 7 times
PEER TO PEER LENDING PLATFORM
Collaboration
Arranges for
finance
It is an electronic platform which connects lenders and borrower
The lenders can be incorporated as well as unincorporated
entities
Same for borrowers
Has to be registered with the RBI as an NBFC
If the platform only acts as a DSA of one or more financial
institutions, it will not require registration
Minimum net owned funds of Rs. 5 crores
Long list of restrictions on these entities, including
Taking exposure on the borrowers themselves
Facilitating secured loans on their platform
Not cross sell financial products, except for loan specific
insurance products
Not facilitate international flow of funds
ABOUT USVinod Kothari & Co.,
Based in Kolkata, Mumbai, Delhi
We are a team of consultants, advisors & qualified professionals having over 30 years of practice.
Our Organization’s Credo:
Focus on capabilities; opportunities shall follow
