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Nbfc

15 February 2013

Hi all,

When an NBFC can be classified as Category A NBFC or what are the conditions to be fulfilled to become a category A NBFC???????????????????

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GENERAL CONDITIONS APPLICABLE TO ALL NBFCs

Following is the set of general conditions which are applicable to both ‘deposit taking’ and ‘non-deposit taking’ NBFCs:

(i) Non-financial service sectors not permitted: The NBFCs are not permitted to make investment in non-financial service sectors.

(ii) Prohibited activities not permitted: Direct investment in activities prohibited under FEMA or in sectoral funds will not be permitted. Among others, investment in the business of chit fund or Nidhi Company is not permitted.

(iii) Regulation of core activity: NBFCs are permitted to invest only in those entities which have their core activity regulated by a financial sector regulator in the host jurisdiction. Thus, the core activity of foreign entity in which the concerned NBFC is interested in making investment, must be regulated by the financial sector regulator of that country.

(iv) Limit on overseas investment: As against the limit of 400% of net worth, in case of NBFCs the aggregate overseas investment should not exceed 100% of the NoF. Further, it is provided that the overseas investment in a single entity, including its step down subsidiaries, by way of equity or fund based commitment shall not be more than 15% of the NBFC’s owned funds. Thus, there shall be individual as well as aggregate investment limit.

(v) Multi layered and Cross jurisdictional structures not permitted: Overseas investment which the NBFCs desire to undertake should not involve multi layered, cross jurisdictional structures. The directions specify that at the most only a single intermediate holding entity shall be permitted.

(vi) Conditions as to CRAR:

u in case of deposit taking NBFCs: The CRAR of the deposit taking NBFCs, post investment in subsidiary abroad, should be not less than that applicable to deposit taking NBFCs in terms of Non-Banking Financial (Deposit Accepting or Holding) Companies Prudential Norms(Reserve Bank) Directions, 2007, as amended from time to time;

u in case of NBFC-ND-SI: The CRAR of the NBFC-ND-SI, post investment in subsidiary abroad, should be not less than that applicable to them in terms of Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007, as amended from time to time;

u in case of non-deposit taking NBFCs (other than NBFC-ND-SI): The CRAR of the non-deposit taking NBFCs (other than NBFC-ND-SI), post investment in subsidiary abroad, should not be less than 10%, or as modified from time to time;

(vii) Maintaining required level of NOF: The NBFC should continue to maintain required level of NOF after accounting for investment in the proposed subsidiary/investment abroad as prescribed in the Explanation to section 45-IA of the RBI Act, 1934. According to the Explanation, "net owned fund" means—

(a) the aggregate of the paid-up equity capital and free reserves as disclosed in the latest balance sheet of the company after deducting therefrom—

(i) accumulated balance of loss;

(ii) deferred revenue expenditure; and

(iii) other intangible assets; and

(b) further reduced by the amounts representing—

(1) investments of such company in shares of—

(i) its subsidiaries;

(ii) companies in the same group;

(iii) all other non-banking financial companies; and

(2) the book value of debentures, bonds, outstanding loans and advances (including hire-purchase and lease finance) made to, and deposits with,—

(i) subsidiaries of such company; and

(ii) companies in the same group, to the extent such amount exceeds ten per cent, of (a) above.

(iii) "subsidiaries" and "companies in the same group" shall have the same meanings assigned to them in the Companies Act, 1956.

(viii) Level of NPAs: The level of Net Non-Performing Assets of the NBFC concerned which desires to make overseas investment should not be more than 5% of the net advances.

(ix) Profit-earning NBFC: The NBFC should be earning profit for the last three years and its performance in general should be satisfactory during the period of its existence. In other words, loss making NBFCs (considering the last three years) are not permitted to invest.

(x) Adhering to FEMA Regulations: The NBFC shall comply with the regulations issued under FEMA, 1999 from time to time. FEM (Transfer or Issue of Foreign Security) Regulations 2000 govern the investment in JVs/WoSs abroad.

(xi) Servicing of public deposits: The directions provide that regulatory compliance and servicing of public deposits, if held by the NBFC, should be satisfactory.

(xii) Adhering to KYC norms: The NBFC shall comply with the KYC norms. In recent times, the KYC norms have attained much importance due to funding of terrorists activities.

(xiii) Norms as to Special Purpose Vehicles: As regards SPVs set up abroad or acquisition abroad, it is provided that they shall be treated as investment or subsidiary/joint venture abroad, depending upon percentage of investment in overseas entity.

(xiv) Submission of Annual certificate from statutory auditors: An annual certificate from statutory auditors shall be submitted by the NBFC to the Regional Office of Department of Non-Banking Supervision (DNBS) where it is registered, certifying that it has fully complied with all the conditions stipulated under these Guidelines for overseas investment.

(xv) Submission of Quarterly Return: A quarterly return in the specified format shall be submitted by the NBFC to the Regional Office of DNBS and also Department of Statistics and Information Management (DSIM). The periodicity of the return relates to the quarter ending March, June, September and December. The return contains vital information on the basis of which RBI can take a decision whether to continue with the permission already granted to the NBFC concerned.

(xvi) Withdrawal of permission: It is specified in the directions that if any adverse features come to the notice of the RBI, the permission granted shall be withdrawn.

SPECIFIC CONDITIONS APPLICABLE TO NBFCs

Following are the specific conditions subject to which a particular NBFC will be permitted to open branch or subsidiary or JV or representative office or to make any investment abroad.

(I) Specific conditions relating to opening of Branch overseas by NBFC

According to the directions, as a general policy, NBFCs shall not be allowed to open a branch abroad. Thus, there seems to be almost full restriction to opening of branch overseas. However, NBFCs which have already set up branches abroad for undertaking financial business shall be allowed to continue to operate them subject to complying with the revised guidelines, as applicable.

u Restriction on Guarantee: In case of opening of subsidiary abroad, the parent NBFC shall not be permitted to extend implicit or explicit guarantee to or on behalf of such subsidiaries.

u Restriction on letter of comfort: The directions specify that no request for letter of comfort in favour of the subsidiary abroad from any institution in India shall be permitted.

u Limit on NBFC’s liability: It shall be ensured that NBFC’s liability in the proposed overseas entity is restricted to its either equity or fund based commitment to the subsidiary. Thus, NBFC’s liability should not exceed the limit as mentioned above. In this respect it may be noted that the permission granted to any NBFC for setting up of overseas subsidiary shall be subject to condition that the subsidiary shall make disclosure in its Balance Sheet to the effect that liability of the parent entity in the proposed overseas entity shall be limited to its either equity or fund based commitment to the subsidiary;

u Restriction on ‘shell’ company: The directions specifically mention that the subsidiary being established abroad should not be a shell company i.e. "a company that is incorporated, but has no significant assets or operations." However, as a matter of abundant precaution, companies undertaking activities such as financial consultancy and advisory services with no significant assets shall not be considered as shell companies.

u Restriction on unethical use of subsidiary: It is provided in the directions that the subsidiary being established abroad by the NBFC should not be used as a vehicle for raising resources for creating assets in India for the Indian operations.

u Obtaining of periodical reports/audit reports: In order to ensure compliance of the provisions, the parent NBFC shall obtain periodical reports/audit reports about the business undertaken by the subsidiary abroad and shall make them available to Reserve Bank and inspecting officials of the RBI. This restriction has been imposed with a view that business of the subsidiary abroad relates to financial services. If the subsidiary has not undertaken any activity or such reports are not forthcoming, the approvals given for setting up a subsidiary abroad shall be reviewed/ recalled.

u Regulatory prescripttions of the host country: All the operations of the subsidiary abroad, which the NBFC undertakes to open, shall be subject to regulatory prescripttions of the host country.

(III) Specific conditions relating to opening of Joint Ventures abroad

Investments abroad, other than in subsidiaries also shall be governed by the same guidelines as those applicable to subsidiaries. Thus, JVs shall also be subject to the above conditions which are relevant in case of subsidiaries.