non banking financial companies nbfcs

1. Non Banking Financial Companies (NBFCs) Presentation By CA. Anil Sharma

3. NBFCs

4. Which is a NBFC? A company which carried on as its business or part of its business the following activities: - financing - acquisition of securities - hire purchase - insurance - chit fund - mutual benefit company But does not include a company which carries on as its principal business: - agricultural operations, - industrial activities - Sale and purchase of goods - providing of services - purchase, sale and construction of immovable property

6. Legal Framework Always Remember NBFC per se is a licensed activity like Banking, Stock Broking, Money Changing. Acceptance of Public Deposits is irrelevant for NBFC test. Income earned & Deployment of Funds are determining factors RBI Press Release No. 1999-2000/1042 dated 8.2.2000

9. Exemptions from registration 1. Housing finance company 2. Insurance company 3. Chit Fund company 4. Stock exchange 5. Securitisation and Reconstruction company 6. Mortgage Guarantee Company 7. Nidhi company 8. Mutual Benefit Company 9. Venture capital fund company 10. Micro Finance company 11. Merchant banking company 12.Stock brokers and sub-brokers

10. Exemption to Venture Capital Fund Companies Provided they comply with the following conditions: Hold registration with SEBI under related regulations, Do not accept or hold public deposits.

12. Exemption to Merchant banking Companies Provided they comply with the following conditions: Registered with SEBI under related regulations, Acquires securities only as a part of its merchant banking business, Does not carry on any other financial activities and Does not accept or hold public deposits

13. Exemption to Stock Brokers and sub-brokers -Doing the business of stock broker or sub-broker and - holding a valid certificate of registration from SEBI.

14. Exemption to Core Investment Companies (CICs) Definition: -If 90% or more assets are invested in Group Companies (subsidiaries, Associates and JVs) ( as per last audited accounts) - it is not trading in those shares( except for block sale) - does not carry any other NBFI activities and - it is not accepting or holding any public deposits.

15. Recent announcement relating to Core Investment Companies -CICs having asset size of Rs. 100 Crores and more: -to be considered as systemically important CICs. (CICs-ND-SI) - all group CICs to be clubbed for calculating the asset size. - would require registration u/s 45-IA of the RBI Act. - 90% criteria to be seen as investment in equity, preference shares as well as loans to group companies (with only minimum 60% in shares). - can make bank deposits and investment in money market securities and Govt. Securities -Transitory provision: can apply within six months and can continue to carry on business till decision of RBI regarding registration.

16. Concerned Areas A large number of NBFCs are working without registration: Companies working without registration and Companies rejected by RBI still operating. Penalties: Imprisonment 1 to 5 years and Fine of Rs. 1 lakh to 5 lakhs.

17. Registration Process 1.Application for Registration in the prescribed Form containing: - Identification Particulars, - Capital Funds & Risk Assets, - Information on Management. Ann-III 2.MOA, AOA, Board Resolution, Accounts and Business Plan. 3. Application to be filed on line.

18. Registration Process-vetting - Management Background BOD Executive Funding - Track record of other NBFCs in the group - CR from Bankers - Interview of promoters/directors - Definitive business plan - Auditor’s certificate

19. Registration Process- rejection & appeal -Appeal against the RBI Order rejecting the Application to the Central Government, Ministry of Finance - To 1. to dispose of financial assets within 3 years from date of rejection/cancellation. 2. If deposit taking – i) repay deposits and ii) report outstanding position on monthly basis (NBS-4) 3. Take up Other objects & change the name 4. Voluntary winding up

20. Continuance of business of NBFI -Certificate from statutory auditors to be submitted to RBI every year. - Confirming that it continue to undertake business of NBFI and therefore requires to hold CoR granted by RBI.

21. Change in control/management of a NBFC For all NBFCs: - public notice 30 days before effecting the sale or transfer, - in two newspapers one English and local vernacular language, - jointly by NBFC, transferor and transferee, - within seven days of publication, intimation to RBI For Deposit Accepting NBFCs - Prior approval of RBI - Obligation towards deposit holders

22. NBFCs

24. Asset finance co.(AFC) and Infrastructure finance co.(IFC) AFC: Financing of physical assets supporting productive economic activities such as automobiles, tractors, earth moving machinery, lathe machines, generator sets, material handling equipments and general purpose industrial machinery. IFC: long term funding for developing or operating and maintaining or developing, operating and maintaining any infrastructure project in road, highway, port, airport inland port, waterways, water supply, irrigation project, water treatment, sanitation and sewage system or solid waste management, telecom services (basic or cellular), network and internet service, transmission or distribution of power, laying down and maintenance of gas, crude oil and petroleum pipelines

26. RBI Regulations for Category ‘A’ companies -NBFC Acceptance Of Public Deposit (RB) Directions, 1998 -NBF (Deposit Accepting or Holding) companies Prudential Norms (RB) Directions,2007 - NBFC Advertisement Rules,1977.

27. NBFC Acceptance Of Public Deposit (RB) Directions, 1998 Regulated deposits and exempt deposits Quantum of deposit Credit rating Advertisement/ Statement in lieu of Advertisement Period of deposit Rate of interest Rate of brokerage

28. NBFC Acceptance Of Public Deposit (RB) Directions, 1998 Repayment of deposit Regularisation of excess deposit Premature payment of deposits Loan against deposit Default in payment of deposit or interest thereon Interest on overdue deposits Deposit Register Deposit Receipts

29. NBFC Acceptance Of Public Deposit (RB) Directions, 1998 Percentage of Liquid assets Nature of liquid assets Mode of liquid assets Safe custody of approved securities Floating charge on liquid assets in favour of depositors

30. NBFC Acceptance Of Public Deposit (RB) Directions, 1998 KYC norms Due diligence of deposit accepting agents/brokers

31. Returns to be filed with RBI Under NBFC Acceptance of Public Deposit (RB) Directions -Qtly returns (NBS 3) -Annual Return (NBS 1) -Audited financial statements with directors report

32. RBI Regulations for Category ‘B’ companies -NBF (Non-Deposit Accepting or Holding ) Companies Prudential Norms (RB) Directions, 2007 -Additional rules for NBFCs-ND-SI (having total assets of Rs.100 Crores and above as shown in the last audited Balance Sheet).

33. Regulatory Framework for CICs-ND-SI -To maintain prescribed minimum capital ratio and leverage ratio. -Adjusted net worth should not be less than 30% of aggregated risk weighted assets on balance sheet and risk adjusted off balance sheet items. -outside liability should not exceed 2.5 times of its adjusted net worth based on the last audited accounts. Would be entitled to exemptions: - of maintaining minimum NOF - of prudential norms relating to capital adequacy and exposure norms.

34. NBFC Prudential Norms 1. Separately for Category ‘A’ and Category ‘B’ companies. 2. Additional requirements for Category ‘A’ companies. 3. Exemptions.

35. NBFC Prudential Norms Accounting policies Accounting standards Revenue recognition

36. NBFC Prudential Norms Investment in land & building Investment in shares Policy on investment and disclosure Income from investment Exposure to capital market

37. NBFC Prudential Norms Classification of debtors Provisioning norms Disclosure Accounting for Repossessed assets

38. NBFC Prudential Norms Policy for call/demand loans - Period - Interest - Renewal - Reporting and approval

39. NBFC Prudential Norms Concentration of loans/investment - single borrower - more than one borrowers in one group - investment in one company - investment in more than one companies in a group

40. NBFC Prudential Norms Schedule to the Balance Sheet - to be appended to the Balance sheet prescribed under the Companies Act, 1956 - showing loans and advances and deposits outstanding and overdue - borrower groupwise classification of all assets, lease, HP and Loans and advances - Investor groupwise classification of all investment in shares and securities - information on NPAs.

41. NBFC Prudential Norms Communications to RBI (DNBS) Change in director ship Change in ownership Change in address of registered office Change in statutory auditors Deposit accepting branch- opening & closure

42. Directions for fair practices - Code for Fair Practices - To be framed and adopted by BOD - To be filed with RBI - To be publicised

43. Returns to be filed with RBI Under Prudential Norms Directions Half yearly returns (NBS-2)

44. Other Returns Returns to Fraud Monitoring Cell. Information regarding prevention of money laundering under PMLA. AIR information under Income Tax Act.

45. Monitoring by RBI Off-site surveillance Returns Auditors’ Reports Market intelligence On-site surveillance Inspections Special audits

46. NBFCs

47. AUDIT OF NBFCs- Issues Regulatory framework for auditors Reporting requirements for auditors

48. AUDIT OF NBFCs- Regulatory Framework Compliance of the provisions of: The Companies Act, 1956 The Reserve Bank of India Act, 1934 The Income Tax Act, 1961 Rules and Directions framed under these Acts. Disclosure requirements of SEBI( by listed cos.) Compliance of Auditing & Assurance Standards

49. AUDIT OF NBFCs- Legal &Regulatory Framework -Compliance of legal framework by NBFCs -Compliance of various directions given under the Act: -For deposit accepting or holding NBFCs -For non- deposit accepting or holding NBFCs -For SI-ND-NBFC.

50. Good Corporate Governance -Rotation of partners of statutory auditors audit firm of companies with deposits of Rs. 50 Crores and more -Rotation after every three years -Companies may incorporate terms in the letter of appointment to ensure compliance

51. AUDIT OF NBFCs- Regulatory Framework Compliance of Auditing & Assurance Standards: While discharging attestation function, it is duty of the member of the Institute to ensure that AASs are followed in audit of information covered by their audit reports. In case AASs could not be followed, the report should draw attention to the material departure.

52. AUDIT OF NBFCs- Regulatory Framework Compliance of Auditing & Assurance Standards: SA310 Knowledge of the Business. SA250 Consideration of Laws & Regulations in an Audit of financial statements. SA700 The Auditor’s Report on Financial Statements.

53. AUDIT OF NBFCs- Reporting Requirements Under the Companies Act, 1956 Report under Section 227(2) Report required by the Companies (Auditor’s Report) Order, 2003 Compliance of accounting standards.

54. AUDIT OF NBFCs- Reporting Requirements Under the Income Tax Act, 1961 Tax Audit Report under section 44AB

55. Reporting Requirements under the RBI Act Section 45MA – powers & duties of auditors -Duty of the auditor to enquire whether prescribed statements, information or particulars relating to deposits have been furnished to RBI -If not satisfied on enquiry, to make report to the Bank giving details of deposits, -Annual return of deposits, half yearly returns on prudential norms to be certified and filed.

56. Reporting Requirements under the RBI Act Section 45MA: Powers & duties of auditors NBFC Auditors Report(RB) Directions, 2008 ( Notification 201 dated 18.9.2008) in terms of section 45MA(1A) .

57. AUDIT OF NBFCs- Reporting Requirements -Special Report to the Board of Directors of the co. in terms of Para 2 of NBFC Auditors Report ( RB) Directions, 2008. -Exceptional Report to the RBI in specific circumstances in terms of Para 5 of NBFC Auditors Report( RB) Directions, 2008. -Schedule to the Balance sheet in terms of Prudential Norms Directions,2007. -Periodical Certified Returns to RBI.

58. Other Certificates to NBFCs -Yearly Certification of carrying of NBFC business - Certification attached to Annual Return and Half Yearly Returns

59. AUDIT OF NBFCs Guidance Note on the Duty Cast on the Auditors under Section 45MA of the Reserve Bank of India Act, 1934 – issued by ICAI Section 58B (4AA) of RBI Act- if any auditor fails to comply with any direction given or order made under section 45MA, he shall be punishable with fine which may extend to five thousand rupees.

60. Thank you.