Rules for NBFCs aligned with Companies Act

Our Banking Bureau

Mumbai, Jan 1: The Reserve Bank on Tuesday finetuned the NBFCs’ regulations by aligning them with those provided under the Companies Amendment Act, 2000, as part of the rationalisation of regulations for NBFCs and residual non-banking companies (RNBCs).

NBFCs, which were so far private limited companies, but have now become public limited under the Companies Act because of their holding of public deposits, have to approach RBI for change in the certificate of registration to reflect its new name as a public limited company. Further changes include reporting to the Company Law Board in case of default in repayment of matured deposits or interest of small depositors; and the requirement of constituting an audit committee for companies with a paid-up capital of not less than Rs 5 crore or asset size of Rs 50 crore and above.

Again, in a tone that reflected the bad experience of the Tata Finance fiasco, the central bank underlined a greater role for statutory auditors by reiterating its directions to report directly to RBI, violations or irregularities, if any, noticed by them in the course of their audit of NBFCs. The RBI has also reiterated that every NBFC was required to maintain the prescribed minimum capital ratio not only as on reporting dates, but on an on-going basis.

Re-examining the issue of valuation of investments in the light of AS-13 of the Institute of Chartered Accountants of India, RBI also directed companies to frame an investment policy, classify each investment into current and long-term at the time of making the investment, make inter-class transfer at the lower of book value or market value without taking advantage of block valuation. Further, such transfer would be permissible only at the beginning of half-year and not on an ad-hoc basis.

RBI also asked companies whose applications for certificate of registration had been rejected or cancelled, to continue to repay their deposits, if any, on due dates and dispose of their financial assets or convert into NBFCs within three years from the date of rejection/cancellation.

Further, the central bank also allowed NBFCs and RNBCs to keep their mandated securities under its directions with a depository participant registered with Sebi, Stock Holding Corporation of India or in the constituent’s SGL account in addition to the designated banker. For this, NBFCs and RNBCs have to get prior written approval from RBI.

By way of a relaxation, it was decided that loans against hypothecation of automobiles, aircraft and ships registered with the concerned authority would be included for the purpose of classification of an NBFC into a equipment leasing and hire purchase finance company.

The Financial Express had earlier reported that the Association of Leasing & Financial Services Companies (AL&FS) had requested RBI to treat loans against hypothecation of assets along with equipment leasing and hire purchase assets for the purpose of satisfying the norm of 60 per cent of the total assets and the total income to get the status of equipment leasing or hire purchase (EL/HP) company.

“The main reason for us to make this request was to allow NBFCs to get a level-playing field as we faced the disadvantage of being applicable of being taxed if we process loans more than 60 per cent of the total assets and total income, we lose the recognition of being a EL/HP company,” said AL&FS executive director, Mahesh Thakkar.