Further, they could be subject to similar regulation as stipulated by Sebi for stock brokers while undertaking margin financing.
The Working Group is aware that stock brokers are involved in fund-based margin financing subject to Sebi regulations. It is understood that Sebi has allowed stock brokers to access public funds to the extent of five times NOF for margin financing with additional stipulation that margin should be at least 50%.
However, Dinesh Thakkar, chairman and managing director, Angel Broking, said subjecting NBFCs to the existing Sebi regulations for margin financing will result in shrinkage of books as Sebi has stringent norms for margin funding.
Taking a different stand, Sudip Bandyopadhyay, managing director & CEO, Destimoney Securities, said, There will not be any overlap and confusion between the regulators if the new regulations are implemented. It will avoid regulatory black whole. The report suggest uniformity between banks and NBFCs as far as lending to stock brokers is concerned, which is a good thing.
Merchant bankers also raise public funds for their underwriting obligation and IPO financing. Both stock brokers and merchant banks access public funds in the form of bank borrowing, CPs, NCDs from the market including from mutual funds. Anecdotal evidence suggests that stock broking entities also receive funding support from NBFC arms within the group. There are, however, no prudential CRAR type prescriptions on such entities.
The supervisory framework for NBFCs that have brokers and merchant bankers in the group, where the total assets in the group exceeds R1000 crore, should adopt a financial conglomerate approach and examine the implications of the spill-over of risk of such entities on the parent NBFC or group NBFC arm and issue appropriate directions for cushioning such risk, the committee says.
In general, all government-owned entities that qualify as NBFCs under the prescribed principal business criteria should be required to comply with the regulatory framework applicable to NBFCs at the earliest.
The RBI (in exercise of the powers conferred to it by Section 45NC of the RBI Act) has so far granted exemption from registration, maintenance of liquid assets and creation of reserve funds to NBFCs carrying on the business of stock broking and merchant banking provided they are not accepting deposits, are registered by Sebi and acquire securities as part of their merchant banking/stock broking activities.
This exemption was given as they were undertaking predominantly non-fund based activities. It was also perceived that these would not pose any risk or compromise depositors interest, as they are non-deposit taking entities and function directly under the oversight of Sebi.
Hence, dual regulation is avoided. It was also understanding that the leverage of stock broking entities and merchant bankers would be extremely limited and banks are allowed to finance their working capital activities.