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NBFC Identification - Urgent

CA Ankit Gulgulia (Jain) (B.COM (H) FCA CIFRS CBV R-ID (IICA) R. Valuer (IBBI)) (5842 Points)

18 December 2010

As per Press Release of RBI Dated 8th April,1998 - NBFC Shall be recognised on the basis of Financial Asset Structure and income generated from Such Assets.

Whether Financial Assets as per AS-26 acceeptable for this Purpose?

Regards

Ankit

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6 Replies

CA SURENDRA KUMAR RAKHECHA (Practising CA at Surat) (26258 Points)
Replied 13 January 2011

Please clarify the query in detail.

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CA PARAS BAFNA (Practising CA ) (33423 Points)
Replied 13 January 2011

Intangible assets will be excluded while calculating the limit of financial assets.

I am reproducing an excerpt from notification No RBI/2006-07 /158

The company will be treated as a non-banking financial company (NBFC) if its financial assets are more than 50 per cent of its total assets (netted off by intangible assets) and income from financial assets is more than 50 per cent of the gross income. Both these tests are required to be satisfied as the determinant factor for principal business of a company.

CA Ankit Gulgulia (Jain) (B.COM (H) FCA CIFRS CBV R-ID (IICA) R. Valuer (IBBI)) (5842 Points)
Replied 13 January 2011

As Per RBI Notification , For the Purpose of Identifying whether the Company is an NBFC or Not Two Tests are Prerequisite :

1) Financial Assets shall Constitute 50% or More of the Total Assets .(These Total Assets shall be Considered after Netting it off from Intangible Assets).

AND

2) Income From Such Financial Assets should be 50% or More than total Income of the Company.

The Issue is What to Consider Precisely in Financial Assets??

First Hypothesis : Follow AS - 26 Definition and Apply accordingly.

Second Hypothesis : As per S.45-IC first Categorise the nature of Company and then Consider its Main Business?

The Company is Escaping the Above Clause by Following Second Clause , identifying itself as a Loan Company thus Equity Shares are not Financial Assets as per the Company & suggesting that Income From Sale of Equity Shares is Not Income from Financial Assets and thus Second ( Income Test) Test is Not Positive. Thus it being Not an NBFC.

I Hope I made the Query Precisely Clear , Kindly Through Some Light !

@ Paras Sir: Your Point noted , But Sir the Issue is Actually the AMBIT/SCOPE of Financial Assets for an NBFC ??

Regards

Ankit Gulgulia

CA PARAS BAFNA (Practising CA ) (33423 Points)
Replied 14 January 2011

In my opinion Financial assets includes Equity Shares also.

The basis remained in forming such opinion is -

the definition of "financial institution" given in Section 45-I of the RBI Act-1934.

Please go through Section 45 I (c).

In my view we have to go in the following manner from upward to downward-

First we have to decide , whether it is an NBFI or not. Apply the test of 40-I(c) for its activity too.

Then we have to decide the type of NBFI.

Being an NBFI first , by idetifying it as a Loan Company at a subsequent stage , character of financial assets and income generated therefrom by an NBFI would not change .

So by going through "AS26 way" shares are Financial Assets- and Income from shares is income from Financial Assets.

Alternate route- Shares could not be treated as other than financial assets and as it is not correct to say that shares are goods held for sale & purchase.

As such in my view , the contention of company may not be correct.

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