Non Banking Financial

Companies (NBFCs)

Presentation
By
CA. Anil Sharma
 NBFCs- Overview

1. -Legal framework for NBFCs

1. -Regulatory framework for NBFCs

1. -Audit of a NBFCs
NBFCs

Legal Framework
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
 Definition of Principal Business

RBI Press Release Dt. April 8, 1999

- If 50% or more of a company’s total assets (netted

off by intangible assets) are financial assets

and

- If 50% or more of a company’s gross income is

from financial assets

then the Principal Business of the company is of a NBFC

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
 Registration and Net Owned Fund (Sec 45- IA)

No NBFC shall commence or carry on

business of NBFI without obtaining a Certificate
of Registration & having minimum Net owned
funds

•Registration with RBI is mandatory for all companies

interested in carrying on non- banking finance activities.

• Minimum Net Owned funds of Rs.2 Crores.

 Computation of Net Owned Fund
Paid up share capital
Add : free reserves (created through an allocation of profits)
Deduct : accumulated balance of losses
: deferred revenue expenditure
: other intangible assets

Deduct : if the following are in excess of 10% 0f the above

-Investment in shares in shares of

subsidiaries, cos., in the same group and other NBFCs

-Book value of debentures, bonds, loans & advances to

subsidiaries and cos. in the same group

-Deposits with subsidiaries and cos. in the same group

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
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.
Exemption to NBFCs engaged in Micro Financing

Provided the following conditions are met:

- providing credit not exceeding Rs.50,000 for a

business enterprise and Rs.1,25,000 for meeting
the cost of a dwelling unit to any poor person,

- licensed U/S. 25 of the Companies Act, 1956 and

- not accepting public deposits.

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
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.
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.

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.
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.
Registration Process
1. 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.
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
 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
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.
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
NBFCs

Regulatory Framework
 Classification of NBFCs

• Based on nature of business:

•Asset finance companies

•Investment companies
•Loan companies
•Infrastructure finance companies
 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
 Classification of NBFCs

Based on acceptance of Public Deposits

- Deposit holding/accepting Company - Category ‘A’

- Non-Deposit holding/accepting Company - Category ‘B’

Based on investment pattern

- Investment company (Cat ‘A’ or Cat ‘B’)

- Core Investment company - Category ‘C’

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.

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

 1. Separately for Category ‘A’ and Category

‘B’ companies.


 2. Additional requirements for Category ‘A’

companies.

 3. Exemptions.
NBFC Prudential Norms

 Accounting policies
 Accounting standards
 Revenue recognition
NBFC Prudential Norms

 Investment in land & building

 Investment in shares
 Policy on investment and disclosure
 Income from investment
 Exposure to capital market
NBFC Prudential Norms

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

 Policy for call/demand loans

- - Period
- - Interest
- - Renewal
- - Reporting and approval
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
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.
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
Directions for fair practices

 - Code for Fair Practices

 - To be framed and adopted by BOD
 - To be filed with RBI
 - To be publicised
Returns to be filed with RBI Under
Prudential Norms Directions

 Half yearly returns (NBS-2)

Other Returns

 Returns to Fraud Monitoring Cell.

 Information regarding prevention of money

laundering under PMLA.

 AIR information under Income Tax Act.

Monitoring by RBI

 Off-site surveillance

 Returns
 Auditors’ Reports
 Market intelligence

 On-site surveillance
 Inspections
 Special audits
NBFCs

Issues relating to audit

AUDIT OF NBFCs- Issues

 Regulatory framework for auditors

 Reporting requirements for auditors

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
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.
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
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.
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.
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.
AUDIT OF NBFCs- Reporting Requirements

Under the Income Tax Act, 1961

Tax Audit Report under section 44AB

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.
 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)

 .
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.
Other Certificates to NBFCs

 -Yearly Certification of carrying of NBFC

business

 - Certification attached to Annual Return and

Half Yearly Returns
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.
Thank you.

You can reach me at:

[email protected]
9811320203