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Presents The Power of 30!
A web series of 30 episodes covering different areas of corporate, securities and financial laws for the corporate professionals
across the country.
COPYRIGHT•The presentation is a property of Vinod Kothari & Co.
•No part of it can be copied, reproduced or distributed in any manner, without explicit prior permission.
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Anita BaidVinod Kothari & Company
Kolkata
1006-1009 Krishna Building224 AJC Bose RoadKolkata – 700017
Phone:033-22811276/ 22813742/7715E: [email protected]
New Delhi
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Phone:011-41315340/ 65515340
Mumbai
403-406, 175 , Shreyas Chambers,
D.N. Road, Fort, Mumbai – 400 001
Phone: 022 22614021/ 62370959
www.vinodkothari.comEmail: [email protected] / [email protected]
REGULATIONS GOVERNING NON-BANKING FINANCIAL COMPANIES
16th September, 2018
OVERVIEW OF NBFC
Sec 45I (c) of the RBI Act defines “financial institution”.
A non-banking company carrying business of financial institution will be an NBFC.
In order to carry on the business of NBFC, a company has to register itself with the Reserve Bank of India under section 45-IA of the Reserve Bank of India Act, 1934
Conditions as per section 45-IA
The applicant should be registered as a company under Companies Act
The minimum net-owned funds of the applicant should be Rs. 200 lakhs
TYPES OF NBFCS 1/2
Based on the ability to
accept deposits
Deposit taking NBFCs
Non-deposit taking NBFC
Systemically important NBFC
Non-Systemically
important NBFC
Those with asset
size of Rs. 500
crores or above
Those with asset
size of less than
Rs. 500 crores
Total assets of all
NBFCs in a group must
be aggregated to
determine the limits
TYPES OF NBFCS 2/2
Based on the
nature of activities
Investment
activities
Lending or similar
activities
Investment
Company
Core Investment
Company
Non-Operative
Financial Holding
Company
Other activities
Loan Company
Asset Finance
Company
Micro Finance
Institution
Infrastructure
Finance Company
Infrastructure Debt
Fund
FactorsMortgage
Guarantee
Company
Peer-to-Peer
Lending Platform
Account
Aggregator
REGULATORY FRAMEWORK
The existing set of Master Circulars issued on various subjects stand withdrawn with the issue of the Master Direction on the subject
(specifically mentioned in the respective Master Directions)
Regulation for banking operations
Reserve Bank of India Act, 1934
Chapter IIIB- inserted by Act 55 of 1963
Provisions relating to non-banking institution receiving deposits and financial institutions
Notifications/Master Circulars
Master DirectionsGuidelines relating to income recognition, AS, provisioning, prudential norms, etc.
Beginning January 2016
Issued for each subject matter covering all instructions on that subject
LIST OF MASTER DIRECTIONS
Master Direction -
Core Investment
Companies (Reserve
Bank) Directions,
2016
Master Direction - Non-
Banking Financial
Company – Non-
Systemically Important
Non-Deposit taking
Company (Reserve Bank)
Directions, 2016
Master Direction - Non-
Banking Financial
Company - Systemically
Important Non-Deposit
taking Company and
Deposit taking Company
(Reserve Bank)
Directions, 2016
Master Direction - Non-
Banking Financial
Companies Acceptance
of Public Deposits
(Reserve Bank)
Directions, 2016
NBFC-CICNBFC-ND-SI NBFC-ND-NSINBFC-D
Master Direction - Non-
Banking Financial
Companies Auditor’s
Report (Reserve Bank)
Directions, 2016
Master Direction- Non-
Banking Financial
Company Returns
(Reserve Bank)
Directions, 2016
Master Direction -
Information Technology
Framework for the
NBFC Sector
Master Direction -
Monitoring of Frauds in
NBFCs (Reserve Bank)
Directions, 2016
Pri
nci
pa
l D
irect
ions
MASTER DIRECTIONS FOR NBFC-ND-NSI
CONTENTS OF THE MASTER DIRECTIONSChapter Content
Chapter II Definitions
Chapter III Registration
Chapter IV Prudential Regulations
Chapter V Fair Practice Code
Chapter VI Specific Directions to Factors
Chapter VII Specific Directions to IDF
Chapter VIII Specific Directions to MFIs
Chapter IX Acquisition/ Transfer of Control
Chapter X Opening of Branch/Subsidiary/Joint Venture/
Representative Office or Undertaking Investment Abroad
by NBFCs
Chapter XI Miscellaneous Instructions
Chapter XII Reporting Requirements
APPLICABILITYCategory of NBFC Customer Interface Public Funds Applicability
NBFC-ND having asset
size of less than Rs. 500
crores
NBFC-ND having asset
size of less than Rs. 500
crores
NBFC-ND having asset
size of less than Rs. 500
crores
NBFC-ND having asset
size of less than Rs. 500
crores
Entire Directions
Entire Directions, except
the following:
Chapter IV, Para 68 and
Chapter V
Entire Directions, except the
following:
Para 68 and Chapter V
Entire Directions, except
the following:
Chapter IV
LEVERAGE RESTRICTION ON NBFC-ND-NSI
Leverage =
• Leverage to be maintained at 7 times
Outside
Liabilities
Owned
Funds
total liabilities as appearing on the liabilities side of the balance sheet excluding 'paid up capital' and 'reserves and surplus', instruments compulsorily convertible into equity shares within a period not exceeding 5 years from the date of issue but including all forms of debt and obligations having the characteristics of debt, whether created by issue of hybrid instruments or otherwise, and value of guarantees issued, whether appearing on the balance sheet or not.
paid up equity capital, preference shares which are compulsorily convertible into equity, free reserves, balance in share premium account and capital reserves representing surplus arising out of sale proceeds of asset, excluding reserves created by revaluation of asset, as reduced by accumulated loss balance, book value of intangible assets and deferred revenue expenditure, if any
ASSET CLASSIFICATION, INCOME RECOGNISTION & PROVISIONING NORMS
PROVISIONING REQUIREMENTS:
Standard assets:
0.25%
Sub-standard:
10%
Doubtful assets:
Unsecured
portion Secured
portion
100%
1st year- 20%
2nd year-30%
3rd year
onwards- 50%
Non-Performing Assets
Income recognition:
On accrual basis
Income recognition:
On cash or recovery basis
FAIR PRACTICE CODE Applicable to NBFCs having customer interface
• Details to be mentioned in the application form
• NBFCs should devise a system of giving acknowledgement of applications received
• Manner of loan appraisal
• Details to be disclosed in vernacular language – Amount sanctioned, terms and conditions, annualised rate of return etc
Loan appraisal, its processing and terms/conditions
Grievance redressal mechanism has to be set up by the Board
Fair Practice Code will have to adopted and mentioned at all places of business and website
Loan agreements must have built in repossession clause
Interest rate policy must be adopted by the Board of Directors to set down the principles of determining interest rate on loans
OTHER REQUIREMENTS
• Policy on Demand/ Call Loans- Board of Directors to frame a policy on Demand/ Call Loans
• Lending against gold- Separate set of directions governing gold lending
• Lending against security of shares- NBFC with asset size of Rs.100 crores and above have to maintain LTV of 50%
• Norms for restructuring of advances – On the lines of the norms specified by the RBI for banks as modified and set forth
•Information with respect to change of address, directors, auditors etc – The company to inform the RBI the following within 1 month from the date of occurrence
ACQUISITION/TRANSFER OF CONTROL
Prior approval from RBI
For takeover or acquisition of control of
an NBFC, which may or may not result in
change of management
For change in the shareholding of an
NBFC, which would result in acquisition/
transfer of shareholding of 26 per cent
or more of the paid up equity capital
For change in the management of the
NBFC which would result in change in
more than 30 per cent of the directors,
excluding independent directors
Prior public notice
For change in control
or ownership
At least 30 days public notice will have to be given
In at least one leading national and one leading local regional language newspaper
PRIOR APPROVAL FROM RBI (1/3)
Takeover or acquisition of control
Meaning of
Control
Same as the meaning assigned to it under SEBI (SAST) Regulations, 2011, which means right exercisable directly or indirectly:
• to appoint majority of directors; or
• to control management or policy decisions
Individually or along with PAC
By virtue of shareholding, management rights or agreements or any other manner
MEANING OF PAC
• As per the SEBI (SAST) Regulations, 2011, PACs are persons with a common object of acquisition or
control.
• Includes:
The company, its holding and subsidiary company, and company under the same management or
control
The company, its directors, and any person entrusted with the
management of the company
• Deemed PACs have also been defined, and among others would include a collective investment scheme
and its collective investment management company, trustees and trustee company, venture capital fund
and its sponsor, trustees, trustee company and asset management company, are also treated as persons
deemed to be acting in concert
PRIOR APPROVAL FROM RBI (2/3)
Change in the shareholding of an NBFC, including progressive increases over time, which
would result in change of shareholding of 26% or more of the paid up equity capital
• The transfer need not be at one go, it can be cumulative as well.
• Includes progressive transfers over time – but time period not mentioned
• Transfer of preference share capital will have no impact
• Does not cover change in shareholding due to buyback of shares/reduction of
capital, which has been approved by competent court
PRIOR APPROVAL FROM RBI (3/3)
Change in management which would result in change in more than 30% of the
composition of the Board of Directors
• For computation of total strength of the BOD – Independent
Directors are to be excluded
• Does not cover re-election of directors subject to retirement by
rotation
MASTER DIRECTIONS FOR NBFC-ND-SI
CONTENTS OF THE MASTER DIRECTIONSChapter Content
Chapter II Definitions
Chapter III Registration
Chapter IV Capital Requirement
Chapter V Prudential Regulations
Chapter VI Fair Practice Code
Chapter VII Specific Directions to Factors
Chapter VIII Specific Directions to IDF
Chapter IX Specific Directions to MFIs
Chapter X Acquisition/ Transfer of Control
Chapter XI Corporate Governance
Chapter XII Opening of Branch/Subsidiary/Joint Venture/ Representative
Office or Undertaking Investment Abroad by NBFCs
Chapter XIII Miscellaneous Instructions
Chapter XIV Reporting Requirements
ASSET CLASSIFICATION, INCOME RECOGNISTION & PROVISIONING NORMS
PROVISIONING REQUIREMENTS:
Standard assets:
0.40%
Sub-standard:
10%
Doubtful assets:
Unsecured
portion Secured
portion
100%
1st year- 20%
2nd year-30%
3rd year
onwards- 50%
Non-Performing Assets
Income recognition:
On accrual basis
Income recognition:
On cash or recovery basis
CAPITAL REQUIREMENT
Maintain a minimum capital ratio consisting of Tier I and Tier II capital which shall not be less than 15 percent of its aggregate risk weighted assets on-balance sheet and of risk adjusted value of off-balance sheet items.
CRAR=
Degrees of credit risk are expressed as percentage weightages that have been assigned to balance sheet assets. The value of each asset / item is to be multiplied by the relevant risk weights to arrive at risk adjusted value of assets.
Tier I + Tier II Capital
Aggregate risk weighted assets
TIER I & TIER II CAPITAL
“Tier I Capital” means
• owned fund
• reduced by
• investment in shares of other non-banking financial companies and
• in shares, debentures, bonds, outstanding loans and advances including hire purchase and lease finance made to and deposits with subsidiaries and companies in the same groupexceeding, in aggregate, ten per cent of the owned fund;
• and perpetual debt instruments issued by a non-deposit taking non-banking financial company in each year to the extent it does not exceed 15% of the aggregate Tier I Capital of such company as on March 31 of the previous accounting year;
“Tier II capital” includes the following:
• preference shares other than those which are compulsorily convertible into equity;
• revaluation reserves at discounted rate of fifty five percent;
• General provisions (including that for Standard Assets) and loss reserves to the extent these are not attributable to actual diminution in value or identifiable potential loss in any specific asset and are available to meet unexpected losses, to the extent of one and one fourth percent of risk weighted assets;
• hybrid debt capital instruments;
• subordinated debt; and
• perpetual debt instruments issued by a non-deposit taking non-banking financial company which is in excess of what qualifies for Tier I Capital, to the extent the aggregate does not exceed Tier I capital.
CONCENTRATION NORMS
lend to
any single borrower exceeding fifteen per
cent of its owned fund; and
any single group of borrowers exceeding twenty five per cent of its owned fund;
invest in
the shares of another company exceeding fifteen per cent of its
owned fund; and
the shares of a single group of companies
exceeding twenty five per cent of its owned
fund;
lend and invest (loans/investments taken
together) exceeding
twenty five per cent of its owned fund to a
single party; and
forty per cent of its owned fund to a single group of
parties.
Applicable NBFC (except NBFC-MFIs with asset size of ` 500 crore and above) shall not:
CORPORATE GOVERNANCE
Formation of committees, namely, Audit, Nomination, Asset Liability Management
and Risk Management Committee;
Framing a policy for ascertaining the fit and
proper criteria;
Obtain a declaration and undertaking along with a
Deed of Covenant from the existing directors and upon every appointment and re-
appointment;
Submission of a statement on change of directors and
a certificate from the Managing Director
confirming the compliance of fit and proper criteria;
Disclosure requirement w.r.t the annual financial statements is to be
complied with;
Framing internal guidelines on corporate governance
MASTER DIRECTIONS FOR CIC
REGULATIONS APPLICABLE TO CIC-SISystemically important CIC
Company having asset not less than Rs. 100 crore- Either individually or with other group CICs
Which raises or holds public deposits
“Companies in the Group”means an arrangement involving two or more entities related to each other through any of thefollowing relationships
Subsidiary – parent (defined in terms of AS 21), Joint venture (defined in terms of AS 27), Associate (defined in terms of AS 23), Promoter-promotee [as provided in the SEBI (Acquisition of Shares and Takeover)
Regulations, 1997] for listed companies, a related party (defined in terms of AS 18) Common brand name, and investment in equity shares of 20% and above.
REGULATORY FRAMEWORK FOR CIC-SI
Leverage ratio:
The 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;
Adjusted Net worth means:
Aggregate of owned funds as appearing in the last balance sheet:
Increased /reduced by-
• 50% of unrealized appreciation /diminution in the book value of quoted investments
• Increase /reduction, if any, in equity share capital
Capital requirements 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.
RETURNS AND CERTIFICATES
Sr. Name of the Return Periodicity Reference DateReporting
TimeDue on Remarks
1 NBS1 Quarterly 31st March/ 30th June/ 30th
Sept./ 31st Dec.
15 days 15th April/ 15th July/
15th Oct./ 15th Jan.
2 NBS2 Quarterly31st March/ 30th June/ 30th
Sept./ 31st Dec.
15 days15th April/ 15th July/
15th Oct./ 15th Jan.
3 NBS3 Quarterly31st March/ 30th June/ 30th
Sept./ 31st Dec.
15 days15th April/ 15th July/
15th Oct./ 15th Jan.
4 ALM (NBFC-D) Half yearly 31st March/
30th Sept.
30 days 30th April/
30th Oct.
NBFCs-D having public deposit of > ₹
20 crore Or asset size of> ₹ 100 crore
5 Branch Information return Quarterly31st March/ 30th June/ 30th
Sept./ 31st Dec.
15 days15th April/ 15th July/
15th Oct./ 15th Jan.
7 Reporting to Central Repository of Information on
Large Credits (CRILC)
Quarterly31st March/ 30th June/ 30th
Sept./ 31st Dec.
21 days21st April/ 21st July/ 21st
Oct/ 21st Jan
8 Reporting of Special Mention Account status (SMA-
2 return)
Weekly On Every Friday
9 Statutory Auditor Certificate Annual 31st MarchOne month from the date of finalisation of
Balance Sheet. Not later than 31st December.
REPORTING REQUIREMENTS FOR SYSTEMICALLY IMPORTANT, DEPOSIT TAKING NBFC
Sr. Name of the Return Periodicity Reference Date Reporting Time Due on
1 NBS7 Quarterly31st March/ 30th June/
30th Sept/ 31st Dec.
15 days15th April/ 15th July/
15th Oct./ 15th Jan.
2 NBFCs-ND-SI 500cr Quarterly31st March/ 30th June/
30th Sept./ 31st Dec.
15 days15th April/ 15th July/
15th Oct./ 15th Jan.
3 ALM-1 Quarterly31st March/ 30th June/
30th Sept./ 31st Dec.
15 days15th April/ 15th July/
15th Oct./ 15th Jan.
4 ALM-2 & 3 Half yearly 31st March/
30th Sept.
30 days 30th April/
30th Oct.
5 ALM-(NBFC-ND-SI) Annual 31st March 15 days 15th April
6 Branch Info return Quarterly31st March/ 30th June/
30th Sept./ 31st Dec.
15 days15th April/ 15th July/
15th Oct./ 15th Jan.
7 Reporting to Central Repository of
Information on Large Credits (CRILC)
Quarterly31st March/ 30th June/
30th Sept./ 31st Dec.
21 days21st April/ 21st July/
21st Oct/ 21st Jan
8 Reporting of Special Mention Account
status (SMA-2 return)
Weekly On Every Friday
9 Statutory Auditor Certificate Annual31st March One month from the date of finalisation of Balance Sheet. Not later than 31st December.
REPORTING REQUIREMENTS FOR SYSTEMICALLY IMPORTANT, NON DEPOSIT TAKING NBFC
Sr
NoName of the Return Periodicity Reference Date Reporting Time Due on
1 NBS-9 Annual 31st March 60 days 30th May
2 Statutory Auditor Certificate Annual 31st March One month from the date of finalisation of Balance
Sheet. Not later than 31st December.
REPORTING REQUIREMENTS FOR NBFC WITH ASSET LESS THAN 100CR.Sr
NoName of the Return Periodicity Reference Date Reporting Time Due on
1 NBS-8 Annual 31st March 60 days 30th May
2 Statutory Auditor Certificate Annual 31st MarchOne month from the date of finalisation of Balance
Sheet. Not later than 31st December.
REPORTING REQUIREMENTS FOR NBFC WITH ASSET SIZE BETWEEN 100CR. – 500CR.
SNAPSHOT OF APPLICABILITY OF VARIOUS REQUIREMENTS TO THE DIFFERENT CLASSES OF NBFCS
NBFC-ND
with no PF
NBFC-ND
with PF
CIC CIC-SI with
Asset 100 -
500 crs
CIC-SI with
Assets > 500
crs
NBFC-ND-SI
with PF
NBFC-ND-SI
without PF
Concentration
Norms
Not Applicable Not Applicable Not Applicable Not Applicable Not Applicable Applicable Applicable
Capital Adequacy Not Applicable Not Applicable Not Applicable Respective
Directions
Respective
Directions
Applicable Applicable
Provisioning norms Not Applicable Applicable Not Applicable Not Applicable Applicable Applicable Applicable
Asset Classification Not Applicable Applicable Not Applicable Not Applicable Applicable Applicable Applicable
Statutory Auditor
Certificate
Applicable Applicable Not Applicable Applicable Applicable Applicable Applicable
Leverage Ratio Not Applicable 7 times Not Applicable 2.5 times 2.5 times Not Applicable Not Applicable
Corporate
Governance Norms
Not Applicable Not Applicable Not Applicable Not Applicable Not Applicable Applicable Applicable
ABOUT USVinod Kothari & Co.,
Based in Kolkata, Mumbai, Delhi
We are a team of consultants, advisors & qualified professionals having over 30 years of practice.
Our Organization’s Credo:
Focus on capabilities; opportunities shall follow
