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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superseded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Bar on acquiring controlling interest withdrawn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.