Presents The Power of 30!

Transcription

1 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.

2 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

3 NON-BANKING FINANCIAL COMPANIES: AN OVERVIEW 1 st September, 2018 Abhirup Ghosh Vinod Kothari & Company Kolkata Krishna Building 224 AJC Bose Road Kolkata Phone: / /7715 E: corplaw@vinodkothari.com New Delhi A/11, Hauz Khas, New Delhi Phone: / E: delhi@vinodkothari.com Mumbai , 175, Shreyas Chambers, D.N. Road, Fort, Mumbai Phone: / E: bombay@vinodkothari.com info@vinodkothari.com / vinod@vinodkothari.com

4 MEANING OF NON-BANKING FINANCIAL COMPANY Non-Banking Financial Company Must not be a banking company 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 Financial activities must be conducted as principal business activities of the company Has 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

5 LEGAL DEFINITION OF NBFCS & MEANING OF FINANCIAL ACTIVITIES Definition of NBFC Section 45I(f) of RBI Act, 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 financial institution 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 Activities which are not financial activities 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

6 PRINCIPAL BUSINESS TEST Quantitative factors Qualitative factors Press Release /1269 dated April 8, 1999 Financial assets> 50% of its total assets Income from financial assets> 50% of the gross income Principal business test nature of the business of an entity, its principal thrust areas, schematic and consistent distribution of assets, resources and activities.

7 SOME FAQS & CASE STUDIES ON PRINCIPALITY TEST 1/2 A 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.

8 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.

9 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.

10 DIFFERENCE BETWEEN BANKS AND NBFCS (2/2) Particulars Banks NBFCs Part of payment and settlement system Deposits Foreign investment Regulations SLR/CRR requirements Priority sector lending requirements Banks are a part of the payment and settlement system. Can accept both demand deposits as well as term deposits Upto 74% allowed to private sector banks. BR Act and RBI Act lay down stringent controls over banks. Banks are covered by SLR/ CRR requirements. Certain minimum exposure to priority sector required. NBFCs are not a part of the payment and settlement system. Only some NBFCs are allowed to accept term deposits Upto 100% allowed Controls over NBFCs are relatively lesser stringent. NBFC-Ds have to maintain a certain ratio of deposits in specified securities; no such requirement for non deposit taking companies. Priority sector norms are not applicable to NBFCs.

11 STATISTICS NUMBER OF NBFCS IN INDIA Over 93% of the registered NBFCs are either Investment Companies or Loan Companies FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 Q1 FY 2018 Data source: RBI AFC CIC-SI IDF IFC Factor ARC MFI LC + IC

12 REGISTRATION REQUIREMENTS

13 INDIA WORKS ON A MULTI-REGULATOR MODEL Reserve Bank of India Ministry of Corporate Affairs State Registrar of Chit Funds National Housing Bank IRDA NBFCs Nidhi Companies Chit Funds Housing Finance Companies Insurance Companies RBI Regulations do not apply Stock Exchanges Brokers/ subbrokers Mutual funds Merchant Bankers SEBI AIFs

14 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

15 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

16 TYPES OF NBFCS

17 TYPES OF NBFCS 1/2 Based on the ability to accept deposits Deposit taking NBFCs Non-deposit taking NBFC Systemically important NBFC Those with asset size of Rs. 500 crores or above Total assets of all NBFCs in a group must be aggregated to determine the limits Non- Systemically important NBFC Those with asset size of less than Rs. 500 crores

18 TYPES OF NBFCS 2/2 Based on the nature of activities Investment activities Investment Company Core Investment Company Non-Operative Financial Holding Company Loan Company Asset Finance Company Micro Finance Institution Infrastructure Finance Company Lending or similar activities Infrastructure Debt Fund Factors Mortgage Guarantee Company Other activities Peer-to-Peer Lending Platform Account Aggregator

19 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

20 CORE INVESTMENT COMPANIES Core Investment Companies 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 Systemically Important Core Investment Companies 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.

21 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).

22 CLASSIFICATION OF INVESTMENT COMPANIES DEPENDING ON THE EXTENT OF INVESTMENTS MADE IN GROUP COMPANIES Scale of investments 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

23 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.

24 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.

25 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

26 DIFFERENTIATING ASSET FINANCE AND LOAN Product Loan for car to be used for personal use Loan for car to be used for commercial use Tractor loan Loan against property Working capital loan secured by assets of the borrower Features Though the loan is used for financing an asset, however, the asset does not support an economic/ productive activity The loan is used for financing an asset, which supports an economic/ productive activity The loan is used for financing an asset, which supports an economic/ productive activity The end use of the loan is not restricted. It may or may not be used for financing asset. 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 Whether loan or asset finance Loan Asset Finance Asset Finance Loan Loan

27 MICRO FINANCE COMPANIES NBFC-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: 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; The minimum net owned funds of the company must be Rs. 5 crores

28 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%

29 MEANING OF INFRASTRUCTURE Transport Roads and bridges; Ports; Inland Waterways; Airport; Railway Track, tunnels, viaducts, bridges; Urban Public Transport Water & Sanitation Solid Waste Management; Water supply pipelines; Water treatment plants; Sewage collection, treatment and disposal system; Irrigation; Storm Water Drainage System; Slurry Pipelines Energy Electricity Generation; Electricity Transmission; Electricity Distribution; Oil pipelines; Oil/ Gas/ Liquefied Natural Gas (LNG) storage facility ; Gas pipelines Communication Telecommunication (Fixed network); Telecommunication towers; Telecommunication & Telecom Services Social and Commercial Infrastructure Education Institutions; Hospitals; Threestar 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.

30 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

31 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 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. In addition to RBI Directions, Factoring Regulation Act, 2011 also applies on Factoring Companies

32 MORTGAGE GUARANTEE COMPANIES MGC are financial institutions for which: at least 90% of the business turnover is mortgage guarantee business net owned fund is 100 crore. at least 90% of the gross income is from mortgage guarantee business

33 ACCOUNT AGGREGATOR An NBFC registered with the RBI which carries out the following activities, for a fee or otherwise. Consolidate, organise and present financial information Retrieve or collect financial instrument Account aggregation contract Financing arrangement Financial information means information relating to - Bank deposits Certificates of Deposit (CD) Debentures CIS (Collective Investment Schemes) units Units of Infrastructure Investment Trusts Deposits with NBFCs Government Securities (Tradable) Mutual Fund Units Alternate Investment Funds (AIF) units Units of Real Estate Investment Trusts Structured Investment Product (SIP) Equity Shares Exchange Traded Funds Insurance Policies Any other item, prescribed by the RBI from time to time Commercial Paper (CP) Bonds Indian Depository Receipts Balances under the National Pension System (NPS)

34 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

35 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

36 ABOUT US Vinod 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