(The following post has been contributed by Vijay Kumar, a lawyer and a company secretary by qualification, who is practising as an Advocate in the Chennai High Court with the law firm of Iyer and Thomas)Non – Banking Finance Companies have been classified as
a. Asset Finance CompanyThe Reserve Bank of India (RBI) is now proposing to introduce a third category of companies called Systemically Important Non-Deposit Accepting Core Investment Companies within its fold. Traditionally investments in group companies are held through a special purpose vehicle (SPV) with a corporate structure. The business of these SPVs comprise acquiring shares/stocks and debentures and providing finance to the group companies. These companies are therefore covered within the definition of Non-Banking Finance Company in accordance with the Reserve Bank of India Act, 1934.
b. Investment Company
c. Loan Company
However these companies were not considered as carrying on the business of acquiring shares and stocks in the following circumstances:
- not less than 90% of their assets were in investments in shares for the purpose of holding stake in the investee companies;As a result these, promoters and investment companies were not required to obtain certificate of registration from the RBI.
- they were not trading in these shares except for block sale (to dilute or divest holding);
- they were not carrying on any other financial activities; and
- they were not holding / accepting public deposits.
However RBI is now proposing to introduce non deposit accepting core investment companies (CIC) with an asset size of more than Rs. 100 crores within its fold. Such companies will be considered as Systemically Important Core Investment Companies (CICs-ND-SI). As a result, RBI is proposing compulsory registration of these NBFCs. The restrictions applicable to CICs are the following-:
a. 90 per cent of the total assets of CICs-ND-SI should be in investments in equity, debt, or loans in group companies, provided that the investment in equity shares of Group companies for the purpose of holding stake in these companies is not less than 60% of total assets;The strategic advantages that a CIC-ND-SI would enjoy is that it would be exempted from-
b. CICs, including CICs-ND-SI, should not accept or hold public deposits;
c. Every CIC-ND-SI shall ensure that at all times it maintains a minimum Capital Ratio whereby its Adjusted Net Worth shall not be less than 30% of its aggregate risk weighted assets on balance sheet and risk adjusted value of off balance sheet items as on the date of the last audited balance sheet; and
d. Outside liabilities of a CIC-ND-SI shall not exceed 2.5 times of its Adjusted Net Worth calculated as on the date of the last audited balance sheet.
a. Maintenance of statutory minimum Net Owned fund requirement of Rs. 2 crores; andTherefore, it shall be entitled to make investment without regard to concentration norms as otherwise applicable to other investment companies. Concentration norms prevent NBFCs from making investments or providing financial facilities beyond certain percentage of the net worth to a single entity or its group. These exposure and concentration norms are perceived by NBFCs as hindrance to the growth of their asset portfolio and business. Apart from the above, CICs-ND-SI would now be required to furnish certain returns, which were otherwise not applicable previously.
b. Concentration and exposure norms.
This would have tremendous impact in case of promoter companies having huge investments and financial asset portfolio. These companies would be required to get themselves registered with RBI and obtain Certificate of Registration. Since CICs –ND-SI would be required to submit monthly returns, financial information of these promoter companies would become public at regular intervals enabling stake holders to take an educated call on these companies.
- Vijay Kumar