1. Background Order Under Section 29A of the National Housing Bank Act, 1987 in respect of M/s Kerala Housing Finance Limited Kerala Housing Finance Limited, a company having its registered office at II Floor, Africa Plaza, Pulimood Junction, Thiruvananthapuram, Kerala- 695001 (hereafter referred to as the Company ) was registered as a housing finance company under Section 29A of the National Housing Bank Act, 1987 (the Act) and a Certificate of Registration (COR) No. 02.0064.06 dated April 17, 2006, without permission to accept public deposits, was granted to the company. In terms of the provisions of sub-section (6) of Section 29A of the NHB Act, the Bank is empowered to cancel a CoR granted to a housing finance institution, if such institution- (i) ceases to carry on the business of a housing finance institution in India; or (ii) has failed to comply with any condition subject to which the certificate of registration had been issued to it; or (iii) at any time fails to fulfil any of the conditions referred to in clauses (a) to (g) of sub-section (4); Section 29A of the NHB Act or (iv) fails- (a) to comply with any direction issued by the National Housing Bank under the provisions of this Chapter; or (b) to maintain accounts in accordance with the requirement of any law or any direction or order issued by the National Housing Bank under the provisions of this Chapter; or (c) to submit or offer for inspection its books of account and other relevant documents when so demanded by an inspecting authority of the National Housing Bank; or (v) has been prohibited from accepting deposit by an order made by the National Housing Bank under the provisions of this Chapter and such order has been in force for a period of not less than three months: Earlier, the Company had applied for grant of COR on June 12, 2001 under Section 29A of the NHB Act. The said application was examined and rejected vide Bank s letter No. NHB(ND)/DRS-RNS/KER 2/2504/2002 dated August 7, 2002 citing the reasons as under Failed to apply for registration under Section 29A of the NHB Act, 1987 within the time prescribed and continued to carry on the business of housing finance institution. Accepted deposits from public without being eligible to do so. 1
Failed to submit a copy either of the advertisement or of the statement in lieu of advertisement to the National Housing Bank before accepting/renewing deposits. Did not maintain adequate liquid assets as stipulated. Failed to comply with the Credit Concentration norms. Irregular in submission of various returns, statements and other information since inception. Failed to submit the Auditor s Certificate The Company appealed against the Order of NHB to the Appellate Authority which set aside the Bank s order vide order dated August 22, 2003 and advised to reconsider the application of the company based on the latest position. The Bank reconsidered the application of the Company and on the basis of the information furnished, it was again rejected on January 28, 2004 citing the reasons as under Total borrowing of the Company inclusive of public deposits and Non- Convertible Debentures exceeded the limit which was in contravention to Paragraph 3 (3) of the Directions. Irregular in submission of return to NHB. The Company failed to submit the Auditor s Certificate in terms of paragraph 38 of the Directions and has also not made available to NHB the Auditor s Report in terms of paragraph 29 of the Directions for 2001-02 and 2002-03. Failed to maintain liquid assets as required under Section 29B of the NHB Act and has also not paid the penal interest in full of Rs. 2,44,346.36 levied for shortfall in maintenance of liquid assets. Capital Adequacy Ratio as on 31 st March, 2002 was below the minimum prescribed level of 12% and thereby not eligible to accept public deposits in terms of paragraph 3(2) (ii) of the Directions. Inspite of this and inspite of prohibitory order issued by NHB, the company continued to accept public deposits. Not complying with provisions relating to provisioning and credit concentration of the Directions. The Company had an accumulated loss of Rs. 56.85 lakh as on 31 st March, 2002. The Company has failed to furnish the information desired by NHB. The Company again appealed to the Appellate Authority. The Appellate Authority vide its interim order dated June 14, 2004 advised the Bank to cause an inspection of the Company and submit a report before July 31, 2004. Accordingly, the Bank conducted an inspection and submitted the findings / report on July 30, 2004. 2
Subsequently, Appellate Authority passed an Order dated September 14, 2004 dismissing Appeal of the Company and upheld the Order of the Bank. The company filed a writ petition before the Hon ble High Court of Delhi on September 17, 2004 praying for quashing of order dated January 28, 2004 of NHB and Order dated September 14, 2004 of the Appellate Authority. In pursuance of the Order dated January 10, 2005, application of the Company was reconsidered. However, considering the contraventions/non-compliance of the provisions of the National Housing Bank Act, 1987 and the Directions issued thereunder by the Company, the application for grant of COR under Section 29A of the National Housing Bank Act, 1987 was rejected vide Order dated December 28, 2005. The Company filed an appeal before the Appellate Authority which set aside the Order of the Bank and directed the Bank to grant COR to the Company. Accordingly, a COR No. 02.0064.06 dated April 17, 2006, without permission to accept public deposits, was granted to the company. The inspection of the Company with reference to the financial position as on 31-03- 2013 was undertaken by the Bank in January, 2014 and the Company was observed to have been contravening various provisions of NHB Act 1987, and the Directions, Circulars, Guidelines, Codes etc., issued thereunder by NHB from time to time. Some of the major contraventions included short-provisioning against NPAs resulting in overstatement of Net Owned Funds, recognition of income on NPAs, issuance of unsecured NCDs which are not excluded from the definition of public deposits, noncreation of Reserve Fund as required u/s 29C of the NHB Act, contravening the provisions of Companies Act, SEBI Rules, accepting money in cash and nonmaintenance of records for cash transactions of more than Rs.10 lakh as required under Rule 3 of PMLA, 2002, etc. The Bank communicated the inspection findings/observations to the Company vide its letter No. NHB(ND)/HFC/DRS/Sup./9657/2014 dated June 30, 2014. In the meanwhile, the Company vide letter dated June 24, 2014 submitted that provisions of Housing Finance Companies issuance of Non-Convertible Debentures on private placement basis (NHB) Directions, 2014 are affecting the business of small housing finance companies and requested a hearing which was held on July 8, 2014 at the Head office of the Bank. Following the hearing, the Bank received representation from the Company vide letter dated July 14, 2014 seeking exemption from the applicability of these Directions. The Bank after having considered the facts decided not to grant any exemption to the Company from the applicability of the said Directions. Subsequently, a snap inspection of the Company was undertaken in July, 2014 to verify the status compliances with the provisions of the Housing Finance Companies issuance of Non-Convertible Debentures on private placement basis (NHB) Directions 2014. The inspection report brought out various contraventions on compliance with the provisions of the said Directions. 3
2. SHOW CAUSE NOTICES AND SUBMISSIONS Consequent to the above inspection, the Bank issued Show-Cause notice vide its letter No. NHB (ND)/HFC/DRS/Sup./11430/2014 dated August 1, 2014 on noncompliances with the NCD Directions and advised the Company not to issue/renew Non-convertible Debentures without obtaining prior written permission from the Bank. Further, a meeting with the Company officials was held on August 14, 2014, in which it was informed that the Company had stopped issuing/renewing of NCDs/Bonds after receipt of the above Show Cause Notice. During the meeting it was also agreed that the Company would immediately submit an action plan for repayment of NCDs collected on or after April 1, 2014, at the earliest. Further, in response to the Bank s letter No NHB(ND)/HFC/DRS/Sup./9657/2014 dated June 30, 2014, on compliance with the Sections 29A, 29B, 29C, 33(1) and (2), 34(2) of the NHB Act and other contraventions with regard to HFC (NHB) Directions 2010, Circulars, Guidelines etc., the Bank received a reply from the Company vide its letter dated August 25, 2014 which was examined and found to be not satisfactory. Accordingly, a Show cause notice was issued vide letter No NHB(ND)/HFC/DRS/ Sup./16696/2014 dated December 8, 2014. It is pertinent to mention that the Company was found to be irregular in submission of prescribed returns and filing its reply to the Bank. The Bank also levied penalties in this regard, in addition to the penalties levied for non-compliance with the provisions of the Directions/NHB Act, 1987. The Company had also paid the penalties by accepting non-compliances on its part. In the meanwhile, the Bank also informed SEBI vide its letter No NHB/HFC(DRS)/Sup./7232/2014 dated May, 29 2014 about issuance of NCDs by the Company which prima facie violated the various provisions of the Companies Act, 2013, SEBI Regulations in respect of offer of NCDs. The Bank also, vide its letter No NHB/HFC(DRS)/Sup./7937/2014 dated June, 04 2014, informed Financial Intelligence Unit-India about the non-compliance of Know Your Customer Guidelines and Anti-Money Laundering Measures. Based on the Bank s request, SEBI examined the matter on issuance of equity shares and Non-Convertible Debentures by the Company and passed an Order dated July 31, 2015 that the Company, its directors and promoters were restrained from mobilizing funds through issue of equity shares or through any other form of securities, to the public and / or invites subscription, in any manner whatsoever, either directly or indirectly till further directions. Further, vide another order dated 20th November 2015, SEBI directed the Company, inter-alia, to cease to mobilize fresh funds from investors through the Offer of NCDs or through the issuance of equity shares or any other securities, to the public and/or invite subscription, in any manner whatsoever, either directly or indirectly till further directions. 4
In view of the continuous non-compliance and poor response from the Company, a personal hearing was granted to the Company on July 20, 2015, wherein the Company was ill-prepared to respond to NHB s queries, it requested for another hearing to discuss pending issues and plan of action for repayment of NCDs. Accordingly, another meeting was held on July 30, 2015 to discuss its gross violations of NHB Act 1987, HFCs (NHB) Directions 2010, NCDs Directions 2014, Guidelines, Circulars etc. including various show-cause notices issued by the Bank on various contraventions. The major issues, inter-alia, deliberated in the said meeting with the officials of NHB were as follows: (a) Acceptance of public deposits in the form of NCDs in contravention to COR issued to the Company (b) Non-compliance with the NOF requirement as assessed NOF was below Rs.10 crore as on March 31, 2013. (c) Appointment of individual as Trustee which is not registered with the SEBI in contravention of SEBI Guidelines. (d) Acceptance of money in cash in respect of NCDs issued by the Company in contravention to the NCD Directions, 2014 (e) Acceptance of money in cash of Rs.10 lakh and non-reporting of STR/CTR to FIU-IND in these cases. (f) Not furnishing records / documents/vouchers in respect of payments made for purchase of land. The Bank has examined the reply received from the Company vide its letter dated December 24, 2014 and levied penalty of Rs.5,25,000/- vide letter No. NHB(ND)/HFC/DRS/Sup./8899/2015 dated September 10, 2015 after the reply was found to be not satisfactory. In view of the above, the Bank issued a Show Cause Notice vide letter No. NHB(ND)/HFC/DRS/Sup./ 12409/2015 dated December 11, 2015, to the Company, with regard to the cancellation of Certificate of Registration granted by NHB u/s 29A of the National Housing Bank Act, 1987, indicating the following contraventions: (a) Failure to comply with the condition subject to which the Certificate of Registration was issued to it, as the Company had accepted public deposits in disguise of NCDs. (b) Non-repayment of NCDs accepted /renewed on or after 01-04-2014 as advised by NHB (c) Non payment of penalty of Rs.5,25,000/- levied by NHB for non-compliance with the various provisions of NHB Act, Directions, Guidelines Circulars etc. 5
The Company vide its letter No. KHFL/HO/NHB/DRS/A 1/103/2015-16 dated December 15, 2015 (Received by NHB on 29-12-2015) in response to Bank s letter Nos. NHB/ND/DRS/Sup./8899/2015 dated September 10, 2015 and NHB/ND/DRS/ Sup./12409/2015 dated December 11, 2015, has submitted its reply which was duly considered by the Bank and found to be not satisfactory. Further, the Company has also not paid penalty of Rs.5,25,000/- within in prescribed time as directed by the Bank. 3. CONSIDERATION OF ISSUES I have carefully examined the facts and circumstances of the case. I have noted that the Company has not filed replies to the aforesaid show cause notices to the satisfaction of the Bank. I find that adequate opportunity had been given to the Company to put forth its views in the matter. Having considered the matter in totality, I am satisfied that this is a fit case for cancellation of the Certificate of Registration of Kerala Housing Finance Limited, considering that it has failed to comply with the provisions of NHB Act 1987, HFC (NHB) Directions 2010, NCD Directions 2014, Guidelines, Circulars, instructions issued by the Bank from time to time in this regard. 4. ORDER Therefore, I, in exercise of powers under sub-section (6) of Section 29A of the National Housing Bank Act, 1987, do hereby cancel the Certificate of Registration 02.0064.06 dated 17-04-2006, granted to Kerala Housing Finance Ltd., a company having its registered office at II Floor, Africa Plaza, Pulimood Junction, Thiruvananthapuram, Kerala- 695001. The Company be advised to surrender the Certificate of Registration to NHB and stop the business of housing finance, forthwith. This order, however, shall not prevent the Company from recovering its loans/installment of loans from the borrowers and repayment of liabilities and expenses. This order comes into force with immediate effect. Date: February 17, 2016 Place: New Delhi (Dr. Sanjeev Sharma) Executive Director National Housing Bank 6