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NBFC & Notified EntitiesRegulations 2007
SUDEV JYOTHISI (SCMS-
COCHIN)
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Transitions History
CATEGORY REGULATOR FRAMEWORK
NBFCs SECP NBFC Rules 2003
Modarbas SECP Modarba Companies
Ordinance 1980 & rules
DFIs SBP PRs
In November, 2002 The NBFIs were divided into:
April 2003 NBFC 2003 rules notified
2004 PRs for NBFCs notified
Nov 2007 NBFC and NE Regulations, 2007 notified
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The Scope of the Framework
Establishment of NBFC
Operations of NBFC & N.ENBFC &NE Regulations,
2007
NBFC
Rules,
2003
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Transition from 2003 Framework
NBFC Rules 2003
Prudential Regulations
for NBFCs
issued by SECP
NBFC & NE
Regulations,
2007
Regulates
Establishment of NBFCs
Regulates
operations
Now
superseded
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What are NBFCs?
Under
section
282 A (a)
LeasingInvestment
Finance
Housing
FinanceAsset
Management
Discounting
Services
Investment
Advisory
Services
VCI
Same
license
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And Notified Entities?
A Company or class of companies or
corporate body or trust or person as notifiedby the Federal Government
These entities are engaged in business not
covered by 282 A (a)
New!
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The Finance Act 2007
Introduced the Notified Entities
SEC Powers enhanced: to make regulations under 282 B (2)
to impose penalty upto Rs 50 million for violation
of Section VIIIA of the Ordinance
For Rehabilitation of NBFCs and NE
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A BRIEF LOOKATTHE AMMENDMENTS
IN
THE 2003 NBFC RULES
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Summary of changes
The operating requirements (rules 12 to 86) movedto regulations
Terminology
Scope of work of investment advisor changed Fit and proper criteria introduced
External and internal audit and compliancerequirements strengthened
Restrictions on certain investments and transactionsimposed
Bar on acquiring controlling interest withdrawn
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Terms excluded
The following terms have been excluded
from the rules and the regulations:
Administrator
Liquid Net worth
Net capital
Risk Assets
Small Entrepreneurs
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Terms Defined
The following terms are now defined in the
2003 regulations:
Brokerage business
Discounting services
Major shareholder
Promoter / sponsor Regulations
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Expanded Terms
Asset management services extended tocollective investment schemes
Connected persons include: The managing NBFC to the Collective investment
scheme
The trustee/custodian to the collective inv scheme
Custodian now includes Trust Co that is subsidiary of Banking Co
NBFC engaged in IFS & approved by SEC
Other Co. approved by SEC
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Expanded Terms contd.
Equity now includes subordinated loans
Redeemable preference shares
Less: accumulated losses
Leasing definition expanded from IAS
definition to include any mode admissible bySEC
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Revised Terms Housing finance Services restricted to
Loans (as compared to financial services previously)
Residential (as compared to residential and
commercial previously)
Investment Advisor services changed frommanagement of closed-end funds to
discretionary and non discretionary clientaccounts for indiv &institutional investors
Investment company is a notified entity
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Important amendments
RULE TITLE AMMENDMENT
3 Eligibility
criteria
It now refers to the Fit and Proper Criteria
5 Condition
to form
NBFC
Licensing of AMS / IA/ both no other business
IFC/HFC/LC/DH cant obtain any other license
IA cannot manage closed-end funds
Conditions of:Minimum tiers of capital, 25% capital allotted topromoters, Promoters / directors to hold shares
in blocked CDC a/c,
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Important amendments contd.
RULE TITLE AMMENDMENT
6 Commencement of
Operations
License cancelled if no
operations within 1 year of
issue
7 Conditions applicable to
NBFCs
Of Management:
CFO experience requirement
now 3yrs
1/3 directors to be independent2 directors (ex-CEO) with Sr.
Management experience
CEO / directors/executives to
meet fit and proper criteria
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Important amendments contd.
RULE TITLE AMMENDMENT
7 Conditionsapplicable
to NBFCs
Of Compliance officers:
Auditor to be appointed from approved list
Internal auditor
Compliance officer
Of investments:
Investment in unquoted securities limited to 20% of
NBFC equityInvest. in subsidiary allowed from excess equity
Of Records & accounts:
Minutes of credit, investment & audit committee
Annual a/c filing period for all NBFCs 3 months
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Important amendments contd.
RULE TITLE AMMENDMENT
7 Conditionsapplicable to
NBFCs
Of Transactions
One broker < 10% of total annual brokerage
exp
Restriction on transactions, except as notified
by SEC:
Real estate on its own account
Unsecured facilities
Raise funds from individuals
Restricted the encumbrance of client securities
for own benefit
Transactions with directors, employees can be
allowed by BoD policy (director transactions
would need prior approval of SEC)
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Non-Banking Finance Companies
and Notified Entities Regulations,
2007
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The Scheme of Regulations
MAIN SECTIONS ABOUT
Part I All forms of business
Part II NBFCs engaged in Leasing, InvestmentFinance Services, Housing Finance Services
Part III (i) NBFC in Venture Capital Investment &(ii) Venture Capital Funds
Part IV (i) NBFC engaged in Asset ManagementServices /Investment Advisory Services,
(ii) Collective Investment Schemes managed
by such NBFC and
(iii) Investment Companies
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Minimum Equity Requirement (All
NBFCs)
Form Of
Business
Min
Equity
Time line
From June 30,
08
June
30, 09
June 30, 10
IFS 1,000 300 500 700 1,000
Leasing 700 200 350 500 700
AMS 200 30 100 150 200
IAS 50 30 35 40 50
HFS 700 100 300 500 700
VCI - 50 - - -
-All amounts in Millions of Rupees-
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Aggregate & Contingent
Liabilities (All NBFCs)
1
4
56
8
9
1
YR 1 YR YR YR 4 YR ~
AL
CL
Where the X column represents No. of years of operation, &
Y column represents the number of times of equity of the NBFC
Aggregate liabilities exclude contingent liabilities and security deposits
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OtherProvisions (All NBFCs)
Internal audit department mandatory.
Reporting to BoD
Compliance with NBFC rules/regulations/company policy
Periodic returns as specified by SEC
Compliance with code of conduct of Association
Steps to be taken to comply with Money laundering regulationsincluding:
Account Opening forms in name of each new a/c holder
KYC, verify identities
Avoid illegal money transactions Monitor customer status, account movement
Cash payment / receipt for one transaction
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NBFCs engaged in Leasing,
Investment Finance Services &Housing Finance Services
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Minimum investment by NBFC
having multiple licenses
easing
F
F
Other
Investment of assets in Leasing /IFS/ HFS business should be at least 20%
Exclude Cash& bank, unquoted shares, *(govt. securities, listed investment
that a PF can make)
New
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Raising funds1. Certificate of Deposits (CoIs excluded)
NBFC Criteria
2 years of profitable operations
NBFC/directors lawful conduct
Annual credit rating exceeds minimum Inv. Grade
Disclosure statement to accompany application for permission
Credit rating to be published in all ads
No CoD if credit rating falls below criterion
Issuance conditions:
CoD in specific name
Maturity >30 days
Rate fixed /floating
Deposits from individuals < 3Xequity of NBFC >15% of funds raised from CoD to be invested in *
Return for different CoDs can be different eg. based on maturities
2. Commercial paper, foreign debentures, redeemable capital, Lines of Credit,rediscounting
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Exposure Limits
%
1 %
%
%4 %
5 %
6 %
%
8 %
9 %1 %
i e Group A re te
e
u e
Tot
Column Y represents the maximum limit of exposure as % of NBFC equity
Exposure excludes liquid collateral subject to margins
No exposure against NBFCs/borrowers own shares, unsecured credit for
financing share floatation, director personal guarantee
No exposure to directors without approval of majority of NBFC directors
New
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Conditions forGrant of Facilities
CIB report Exposure> Rs 1,000,000
F/s Exposure >Rs 1,000,000
Loan application form & basic fact sheet Margins applicable to all securities
Borrowers:
total exposure< 10 X equity of borrower Current ratio 1:1 (may be relaxed to 0.75:1)
New
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Provisioning Time based Classification into:
Substandard(90 days),
doubtful(180 days); and Loss (1 yr, TBs 180 days, Credit Card 180 days)
Provisioning @ 25%, 50% & 100%
No provisioning for Govt. guaranteed exposure
Additional subjective evaluation
Declassification of rescheduled loans FSV ( other than realizable assets)
In case of leasing & IFS:
Discounted for yr 1, 2 & thereafter as 80%, 70% & 50%
Revaluation every 3 years by independent valuer
In case of HFS
Discounting @ 70%
Revaluation every 10 years by independent valuer
Types of charges
Quarterly credit review by NBFCs, annual by Auditors
Reversal of provision Cash receipt> 20%, 50%, 100% of NPL)
Quarterly list of delinquent / rescheduled accounts to SEC
New
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(I) Leasing
An NBFC engaged in Leasing shall meet thefollowing conditions:
Assets invested > 70% of total assets
Investment in Shares < 50% equity of NBFC
Investment in shares
Of one company < 10% equity of NBFC/Co
Lease period > 3 years
May not engage in land / residential building leases
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(II) Investment Finance Services
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Scope of work and Inv. Limits
Scope of work includes: Money market activities,
Capital market activities (including managing client portfolios)
Project financing activities; &
Corporate finance services
General activities
Investment limits %age of NBFC equityShares < 100Shares of1 company < 10
Equity futures < 100
Single future < 10
Reverse Repo & CFS < 250
Single CFS security < 25 (i.e. 10% of above)
Margin LoansTotal < 50
To 1 client < 10
(Margin shall be at least 30% of loan)
Margin loans approved according to pre-defined BoD policy
Underwriting commitments fully backed
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Managing Client Portfolios
Both discretionary and non-discretionary
Conditions include:
Must inform SEC Eligible investors only
Separate management and disclosure
Compliance with SEC regulations
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(III) Housing Finance Services
Additional functions w.r.t property: Mortgage finance to purchase/construct/alter property
Surveys and valuation
Arrange insurance
Manage mortgage investments
Investment in: Limit
HFS > 70% total assetsShares < 50% NBFC equity
Shares of 1 co < 10% -do-
Financing:
One party < Rs 20 million
Total Monthly InstallmentsConsumer loan < 60% NDI
DE ratio < 85:15
Period of Mortgage loan < 20 years
Appoint Lawyer, valuer
Review market every quarter
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(IV) Venture Capital Investment
& VCF
Venture Capital Company Exposure by NBFC to one person/group of Cos.
Recommended