Return
to Story Page
To print: Select File and then Print from your
browser's menu
Anirban Nag
Mumbai, Aug 22: The Reserve Bank of India has drafted a new law--Parabanking Regulation Act--to regulate non-banking finance companies (NBFCs). The new Act will replace the relevant regulatory provisions in the RBI Act and form part of the central bank's new supervisory regime for mezzanine financing. The Act will work in conjunction with the laws that individual states are enacting to protect the interests of depositors in finance companies.
The draft law proposes to take away the Company Law Board's (CLB's) powers to pass orders on the settlement of dues by defaulting finance companies. Instead, it is proposed to set up an independent body on the lines of the existing banking ombudsman scheme that is currently in place in various states--Depositors' Grievance Redressal Bodies--to pass orders for recovering depositors' dues.
However, unlike the banking ombudsman scheme, the new Act will have the legal status of a civil court. It will be set up in various cities and the officers will be appointed by theRBI. The central bank will also provide the infrastructure for these bodies to carry out their functions.
The Parabanking Regulation Act will ease the statutory liquidity ratio (SLR) requirements of NBFCs as it intends to allow NBFCs to put surplus cash (which is not invested anywhere) held by them under the SLR bracket. At present, NBFCs are required to maintain 15 per cent SLR which includes only investments in approved securities. By including the surplus cash within the SLR stipulation, the RBI will in effect allow finance companies to invest less in approved securities.
The new law will have provisions for setting up a special court--on the lines of the special court set to look into the securities scam--to enable the speedy recovery of dues from the promoters of the defaulting NBFCs. The RBI will also have powers to nominate officers with special winding-up powers for speedy disposal of recovery cases.
There will also be a special provision to enable depositors to recover their dues, a sourcefamiliar with the drafting of the new supervisory regime told The Financial Express. Under this, once the RBI makes a case for winding up an NBFC, the court will have to pass a directive for winding it up and the RBI will appoint one of its own officers as a liquidator for taking over its assets and enabling depositors to recover their dues.
The new regulation will also bar NBFCs from carrying out any business apart from non-banking finance activities. This essentially means that an NBFC cannot float a subsidiary which will be into stocklending or sharebroking activities. "NBFCs will be barred from setting up subsidiaries as such companies are generally seen as fronts for siphoning off depositors' money," the source said. However, it has been clarified that while a hire purchase or equipment leasing company cannot carry on sharebroking activites through a subsidiary, it can carry out investment activities with its surplus cash.
The new regime also seeks to raise the entry barriers for NBFCs.Currently, existing finance companies need to have a net worth of Rs 25 lakh to carry on business. The threshold is likely to be raised to Rs 10 crore for new entrants.
Insight
Tightening up
The proposed new regime for NBFCs will tighten up and complement the amendments made to the RBI Act earlier to register NBFCs and give them a new regulatory framework. The steps include doing away with NBFC arms and imposing higher net worth requirements. The special courts for NBFCs should help speed up the liquidation process and make sure that the NBFC buck stops with the RBI. However, there will be appeals from the civil to the high courts. Also, with the minimum owned funds currently being Rs 25 lakh, the steep rise in net worth to Rs 10 crore raises the question of what will happen to existing players unable to meet the criterion.
Manas Chakravarty
Copyright © 1999 Indian Express Newspapers (Bombay) Ltd.
------------------------------------------------------------
This story was printed from Net Express located at http://www.expressindia.com. Net Express provides a portal to India, with news from The Indian Express and The Financial Express along with sites on travel and tourism, the entertainment industry, the power sector, the environment and much more.
------------------------------------------------------------