Non Banking Financial Companies ( Nbfc)

Presented By:- Presented By:- DHAVAL DESHMUKHDHAVAL DESHMUKH

MEANING AND DEFINATION NBFC consist mainly of finance companies which carry on hire purchase finance,

housing finance, investment, loan, equipment leasing or mutual benefits. Reserve Bank(Amendment Act) 1997:- NBFC means1. A Financial institute which is a company.2. NBFC has it’s principal business as receiving of deposits under any Scheme or

arrangement or lending in any manner.

FUNCTION OF NBFC1. Brokers of loanable funds.

2. Mobilization Of Savings.

3. Channelization of fund into Investment.

4. Stabilize the capital market.

5. Provide Liquidity.

TYPES OF SERVICES PROVIDED BY NBFCS1. Hire Purchase Services.

2. Leasing Services.

3. Housing Finance Services.

4. Asset Management Company.

5. Venture Capital Companies.

IMPORTANCE OF NBFC1. Greater Reach.

2. Flexibility in tapping resources.

3. Retail Services to small and medium business.

4. Important Components of Financial Market.

MINIMUM INVESTMENT BY NBFC HAVING MULTIPLE LICENSES

Leasing20%

HPS20%

HFS20%

Other40%

RAISING FUNDS 1. Certificate of Deposits

A. NBFC Criteria1. 2 years of profitable operations2. NBFC/directors lawful conduct3. Annual credit rating exceeds minimum Inv. Grade4. Disclosure statement to accompany application for

permission

• Credit rating to be published in all ads• No CoD if credit rating falls below criterion

2 Commercial paper, foreign debentures, redeemable capital, Lines of Credit, rediscounting

INVESTMENT IN INDIA

PROVISIONING1. Time based Classification into:

a) Substandard(90 days),b) doubtful(180 days); andc) Loss (1 yr, TBs 180 days, Credit Card 180 days)

2. Provisioning @ 25%, 50% & 100%3. No provisioning for Govt. guaranteed exposure4. Additional subjective evaluation5. Declassification of rescheduled loans6. FSV ( other than realizable assets)

a) In case of leasing & IFS:i. Discounted for yr 1, 2 & thereafter as 80%, 70% & 50%ii. Revaluation every 3 years by independent valuer

b) In case of HFSi. Discounting @ 70%ii. Revaluation every 10 years by independent valuer

7. Types of charges8. Quarterly credit review by NBFCs, annual by Auditors9. Reversal of provision Cash receipt> 20%, 50%, 100% of NPL)10. Quarterly list of delinquent / rescheduled accounts to SEC

(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. LIMITS1. Scope of work includes:

a. Money market activities,b. Capital market activities (including managing client

portfolios)c. Project financing activities; &d. Corporate finance servicese. General activities

2. 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)

CONTINUE….3. Margin Loans

Total < 50To 1 client < 10(Margin shall be at least 30% of loan)Margin loans approved according to pre- defined BoD policy

4. Underwriting commitments fully backed

(III) HOUSING FINANCE SERVICES

1. Additional functions w.r.t property:

a) Mortgage finance to purchase/construct/alter propertyb) Surveys and valuationc) Arrange insuranced) 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 years2. Appoint Lawyer, valuer3. Review market every quarter

(IV) VENTURE CAPITAL INVESTMENT & VCF

Venture Capital Company1. Exposure by NBFC to one person/group of Cos. < 40% of equity2. Raise funds by: shares issue and private placement for VP

Venture Capital Fund1. A Company, engaged solely in VPs with equity of Rs 50 m & managed by

VCC2. Exposure to one person/grp of Cos. < 40% of equity3. Exposure to director < 10% of total exposure4. Each investor to invest at least Rs 1,000,0005. Registration can be suspended by SEC for 60 days. Can lead to

cancellation

(V) ASSET MANAGEMENT SERVICES

ASSET MANAGEMENT SERVICES- STRUCTURE

ASSET MANAGEMENT SERVICES- TERMS AND CONDITIONSA. Designation of qualified fund manager to manage upto 3 CISB. At least 1 investment Committee, formed by BoD

1. Comprise fund manager, Chief Investment Officer other Key Personnel of AMC

2. Reportable to CEO3. Quorum for investment decisions is 2/34. Ensure compliance with constitutive

documents/policiesC. AMC to fulfill SEC conditions for managing multiple CISD. Shari’a appointed for Islamic CIS

TRUSTEE OF A SCHEME1. Appointed with SEC approval for each open and closed end scheme2. Trustee to be a

a) Scheduled bankb) Trust companyc) Foreign bankd) CDCe) NBFC engaged in IFSf) Other SEC approved trustee

3. Obliged to take custody of, manage, a/c for loss of property of schemea) Issue trustee report to form part of annual reportb) Ensure AMC/ IA has arranged for a diverse panel of brokersc) Ensure units of open end scheme \issued after sub money receivedd) Review adequacy of AMC/IA unit value calculation

4. May retire or be removed by the NBFC5. Will be independent of the AMC

ASSET MANAGEMENT COMPANIES- RESTRICTIONS & OBLIGATIONS

• Restrictions:

1. Acquiring control of an investee through CIS2. Transaction with 1 broker>10% annual brokerage exp3. Accepting deposits from CIS4. Loans from CIS assets5. Undertake brokerage services6. Enter underwriting contracts, invest in CIS except as

allowed

OPEN & CLOSED END SCHEMES1. Registration as a notified entity

a) Application to be accompanied also by undertaking of AMC guaranteeing investment

2. 3 months notice for winding up by AMC / Cancellation by SEC

3. Ads to be approved by SEC & circulated within 60 days of approval

4. Offering document / prospectus to include investment policy, type of securities it will invest in and the risk associated.

5. Closed end schemes: securities offered at par if investment is arranged by IA and the offer is underwritten

6. Open end schemes: a) Investment made after conclusion of issue of units

b) 4 regular dealings per week

c) Offer price and redemption price

d) Redemption to be completed in 6 working days

CONTINUE….1. Discretionary and non discretionary a/cs:

a) Notice to SEC

b) Due diligence

c) Separate management & disclosure2. Conversion of closed end fund to open end scheme:

a) By Special resolution of certificate holders

b) 5 years after fund launch

c) Cert. holders not in favor can sell @ discount<3% of NAV

d) Approval of SEC

(VI) INVESTMENT COMPANIES & IAS

Investment company(closed end fund)

Investment Advisor Custodian

Discretionary ClientPortfolio

Non discretionaryportfolio

External auditor-SEC panel

INVESTMENT COMPANIES1. Registered as a Notified Entity2. A public co with Rs 250m equity & directors of integrity3. Application for registration can be cancelled if operations don’t start in 6 months4. Investment Advisor

a) Appointed with SEC approval, for a period of upto 10 yearsb) Change of IA requires prior approval of SEC

5. Custodian:a) Appointed with SEC approvalb) scheme of custody of assets settled with ICc) Custodian not to be AMC or IAd) Custodian to be independent of IC and IA

6. IC to report annually and qtrly to shareholders and SEC.a) The P&L of the IC will include that of the IA

7. Auditora) Appointed from the SEC approved list b) Auditor rotation after 5 yearsc) Auditor of IC different from auditor or custodian or IA

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%)

CONTINUE…… • 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 CISAfterwards, 2%

Annual fee AMC SEC 0.1% of AANA

Dividend AMC Shareholders of CIS

90% income