Nbfc
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Transcript of Nbfc
NBFC & Notified Entities Regulations 2007
Tahmeen Ahmad (ACA)
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
The Scope of the Framework
Establishment of NBFC
Operations of NBFC & N.ENBFC & NE Regulations,
2007
NBFCRules, 2003
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Now superseded
What are NBFCs?
Under section
282 A (a)
Leasing Investment
FinanceHousing Finance
Asset Management
Discounting Services
Investment Advisory Services
VCI
Same license
And Notified Entities?
“A Company or class of companies or corporate body or trust or person as notified by the Federal Government”
These entities are engaged in business not covered by 282 A (a)
New!
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
A BRIEF LOOK
AT THE AMMENDMENTS
IN
THE 2003 NBFC RULES
Summary of changes
The operating requirements (rules 12 to 86) moved to regulations
Terminology Scope of work of investment advisor changed Fit and proper criteria introduced External and internal audit and compliance
requirements strengthened Restrictions on certain investments and transactions
imposed Bar on acquiring controlling interest withdrawn
Terms excluded
The following terms have been excluded from the rules and the regulations:
Administrator Liquid Net worth Net capital Risk Assets Small Entrepreneurs
Terms Defined
The following terms are now defined in the 2003 regulations:
Brokerage business Discounting services Major shareholder Promoter / sponsor Regulations
Expanded Terms
Asset management services extended to collective 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
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 by SEC
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 from management of closed-end funds to discretionary and non discretionary client accounts for indiv &institutional investors
Investment company is a notified entity
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 to promoters, Promoters / directors to hold shares in blocked CDC a/c,
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 independent
2 directors (ex-CEO) with Sr. Management experience
CEO / directors/executives to meet fit and proper criteria
Important amendments contd.
RULE TITLE AMMENDMENT
7 Conditions applicable 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 equity
Invest. 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
Important amendments contd.
RULE TITLE AMMENDMENT
7 Conditions applicable to NBFCs
Of TransactionsOne 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)
Important amendments contd.RULE TITLE AMMENDMENT
7A Monitoring Fee An NBFC engaged in deposit taking shall, Payable annually to SEC within 3 months of yr end
8 Opening/ closing of bank a/c, broker a/c or branch
Previously only dealt with opening of branches
Approval of BoD required with notice to SEC
9 Insurance cover SEC power of specifying nature/limit withdrawn
11 Bar on acquiring controlling interest
Withdrawn
12-86 Operating rules Moved with amendments to 2007 regulations
Non-Banking Finance Companies and Notified Entities Regulations,
2007
The Scheme of Regulations
MAIN SECTIONS ABOUT
Part I All forms of business
Part II NBFCs engaged in Leasing, Investment Finance Services, Housing Finance Services
Part III (i) NBFC in Venture Capital Investment &
(ii) Venture Capital Funds
Part IV (i) NBFC engaged in Asset Management Services /Investment Advisory Services,
(ii) Collective Investment Schemes managed by such NBFC and
(iii) Investment Companies
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-
Aggregate & Contingent Liabilities (All NBFCs)
0123456789
10
YR 1 YR 2 YR 3 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
Other Provisions (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 regulations
including: 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 <Rs 50,000
Appointment/ change in directors / CEO to be approved by SEC – Complete application to be received 14 days before change– Any deficiency to be completed within 14 days of intimation
New
NBFCs engaged in Leasing, Investment Finance Services &
Housing Finance Services
Minimum investment by NBFC having multiple licenses
Leasing
IFS
HFS
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
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
Exposure Limits
0%10%20%30%40%50%60%
70%80%90%
100%
Single Group Aggregate
Clean
Funded
Total
•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
Conditions for Grant 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 Borrower’s:
total exposure< 10 X equity of borrower Current ratio 1:1 (may be relaxed to 0.75:1)
New
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
(I) Leasing An NBFC engaged in Leasing shall meet the
following 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
(II) Investment Finance Services
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 < 10Equity futures < 100Single future < 10Reverse Repo & CFS < 250Single CFS security < 25 (i.e. 10% of above) Margin LoansTotal < 50To 1 client < 10(Margin shall be at least 30% of loan)Margin loans approved according to pre-defined BoD policy Underwriting commitments fully backed
Managing Client Portfolios
Both discretionary and non-discretionary Conditions include:
Must inform SEC Eligible investors only Separate management and disclosure Compliance with SEC regulations
(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 equityShares of 1 co < 10% -do-Financing:One party < Rs 20 millionTotal Monthly Installments –Consumer loan < 60% NDI DE ratio < 85:15Period of Mortgage loan < 20 years Appoint Lawyer, valuer Review market every quarter
(IV) Venture Capital Investment & VCF
Venture Capital Company Exposure by NBFC to one person/group of Cos. <
40% of equity Raise funds by: shares issue and private placement
for VPVenture Capital Fund VCF conditions:
A Company, engaged solely in VPs with equity of Rs 50 m & managed by VCC
Exposure to one person/grp of Cos. < 40% of equity Exposure to director < 10% of total exposure Each investor to invest at least Rs 1,000,000 Registration can be suspended by SEC for 60 days. Can
lead to cancellation
(v) Asset Management Services
Asset Management services- Structure
AMC
Fund managerInvestment Committee
CIS CIS CIS
Sharia
If Islamic
trustee trustee trustee
Asset Management services- Terms and conditions
Designation of qualified fund manager to manage upto 3 CIS
At least 1 investment Committee, formed by BoD Comprise fund manager, Chief Investment Officer other
Key Personnel of AMC Reportable to CEO Quorum for investment decisions is 2/3 Ensure compliance with constitutive documents/policies
AMC to fulfill SEC conditions for managing multiple CIS
Shari’a appointed for Islamic CIS
Trustee of a Scheme Appointed with SEC approval for each open and closed end
scheme Trustee to be a
Scheduled bank Trust company Foreign bank CDC NBFC engaged in IFS Other SEC approved trustee
Obliged to take custody of, manage, a/c for loss of property of scheme
Issue trustee report to form part of annual report Ensure AMC/ IA has arranged for a diverse panel of brokers Ensure units of open end scheme \issued after sub money received Review adequacy of AMC/IA unit value calculation
May retire or be removed by the NBFC Will be independent of the AMC
Asset Management Companies- Restrictions & obligations Restrictions:
Acquiring control of an investee through CIS Transaction with 1 broker>10% annual brokerage exp Accepting deposits from CIS Loans from CIS assets Undertake brokerage services Enter underwriting contracts, invest in CIS except as
allowedCompliance required within 12 months of notification of Regulations
Obliged to manage assets in good faith and a/c to trustee for losses, maintain records, prepare a/cs, appoint auditor Annual report within 3 months of yr end, including No. of unit
holders and details of personnel of AMC Quarterly reports in 1, 2 and 1 month of qtr end Rating of scheme done annually.
Open & Closed End Schemes Registration as a notified entity
Application to be accompanied also by undertaking of AMC guaranteeing investment
3 months notice for winding up by AMC / Cancellation by SEC Ads to be approved by SEC & circulated within 60 days of
approval Offering document / prospectus to include investment policy,
type of securities it will invest in and the risk associated. Closed end schemes: securities offered at par if investment is
arranged by IA and the offer is underwritten Open end schemes:
Investment made after conclusion of issue of units 4 regular dealings per week Offer price and redemption price Redemption to be completed in 6 working days
Exposure Limits for CISLimit
By CIS to1 person< 10% Net Assets of scheme/ 10% of issued capital of person
By all CIS to 1 person < 49% of issued capital of the person
By CIS in 1 sector< 25% of net asset value of scheme By CIS in one group < 35% of net assets of CIS
By CIS in listed group Cos. Of AMC < 10% of net assets of CIS
Invested by equity based CIS in non listed securities < 0% (Pre-IPO 15%)
Open & Closed End Schemes (contd)
Limitations on AMC of scheme include short selling, forward purchase contracts, real estate dealing, delisting without SEC approval, lend/ borrow.
No transactions by AMC of scheme with connected persons Direct transactions b/w CIS of 1AMC notified to SEC in 2 days IA(AMC) to bear all inc. exp. Of closed (open) end scheme NAV notified to SE,SEC& self regulatory association 14 days of month end Discretionary and non discretionary a/cs:
DESCRIPTION BY TO AMOUNTAMC
remuneration
CIS AMC 5yrs: 3% of Avg. annual net assets of CIS
Afterwards, 2%
Annual fee AMC SEC 0.1% of AANA
Dividend AMC Shareholders of CIS
90% income
(VI) Investment Companies & IAs
Investment company(closed end fund)
Investment Advisor Custodian
Discretionary ClientPortfolio
Non discretionaryportfolio
External auditor-SEC panel
Investment Companies Registered as a Notified Entity A public co with Rs 250m equity & directors of integrity Application for registration can be cancelled if operations don’t
start in 6 months Investment Advisor
Appointed with SEC approval, for a period of upto 10 years Change of IA requires prior approval of SEC
Custodian: Appointed with SEC approval scheme of custody of assets settled with IC Custodian not to be AMC or IA Custodian to be independent of IC and IA
IC to report annually and qtrly to shareholders and SEC. The P&L of the IC will include that of the IA
Auditor Appointed from the SEC approved list Auditor rotation after 5 years Auditor of IC different from auditor or custodian or IA
Open & Closed End Schemes- (contd.)
Discretionary and non discretionary a/cs: Notice to SEC Due diligence Separate management & disclosure
Conversion of closed end fund to open end scheme: By Special resolution of certificate holders 5 years after fund launch Cert. holders not in favor can sell @ discount<3% of NAV Approval of SEC