Nbfc read with section 185 and section 186 of ica, 2013

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Kamna Tiwari (Querist)
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25 February 2014
Can NBFC Company give Guarantee or provide security for due payment of any loan granted by other parties to its group entities?
As per the definition given in FAQ issued by RBI, a CIC ND SI can give guarantees. Please support with other relevent provisions/FAQs/circulars etc.

If yes, what was the possible reason of not giving exemption to such Guarantee/security given by NBFC company under exemptions given in section 186 of ICA, 2013. Loans and Advances given by NBFC are exempt under 186 of ICA, 2013 but guarantee/security given by NBFC company has not been covered.

Please help me understand the intention of law framers behind introduction of exemption to NBFCs under section 186.

Nikhil Kaushik

Nikhil Kaushik (Expert)
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26 February 2014 well there is a perception that section 186(11) covers NBFC under "a company engaged in the business of financing of
companies". A clarification from MCA on this is most welcomed but hasnt come out yet. Also an additional clarification that the same also applies to financing on non-company borrowers.

Many institutions and corporate associations have sent representations on this to MCA. It is possible that some clarification comes out. Given that 186 has not yet been notified, there is time for clarification on the same.

Kamna Tiwari

Kamna Tiwari (Querist)
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26 February 2014 Hi Nikhil,

Thank you for that speedy response, but first part of my query still remains unanswered. It is clear from FAQ of RBI that NBFC can give Guarantees and securities for due payment of any loan given by other party, but I need more back up to support my view. If that is the case then why Guarantees/security were not covered under exemption of Section 186. Is it that for Guarantees and securities NBFC shall take shelter of proviso of section 185 under "Ordinary course of Business"

I completely understand that there is ambiguity in section 185 and 186. 185 is lossely drafted, but as of now I want to know whether NBFC can give granantee or security for due payment of any loan given by other party as per Companies Act,1956 and RBI circulars. Please support your answer with relevent circular, sections, back ups etc.

Nikhil Kaushik

Nikhil Kaushik (Expert)
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26 February 2014 as per RBI NBFC do issue guarantees. However, they don't issue to borrowers. They issue counter-guarantees etc. The master circular on prudential norms even provide for risk weight to be given to financial guarantees issued. you may refer http://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=8154

with regards to section 186, as I said before, it seems to be a case of bad drafting and you need to wait and see how the section is implemented and what clarification MCA issue on the queries raised by various industry associations.

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