Wednesday, May 28, 2014

Back with more!

I am posting after almost 6 months - in the meantime, I have moved law firms and have a new set of responsibilities. My NBFC focus at work has decreased a little but I continue to monitor the sector.

Amongst interesting developments, there is the RBI 'moratorium' on registering new NBFCs instituted through the First Bi-monthly Monetary Policy Statement, 2014-15. This was in view of the fact that the law relating to NBFCs is due for a complete overhaul which remains pending.

The RBI has now issued a notification relating to mergers and acquisitions involving NBFCs. This now makes mergers and acquisitions relating to NBFCs (whether deposit accepting or not) subject to prior approval of the RBI. The policy rationale behind this approach is to ensure that the acquirer / resulting entity following the merger/ acquisition is a “fit and proper person” that has the necessary qualifications to carry on the business of the NBFCs, and such that a transaction is not prejudicial to public interest or the interest of depositors. Interestingly, the RBI notification defines “control” as having the same meaning assigned to it in the SEBI Takeover Regulations. Therefore, any type of control over management and policy decisions of the company, whether through acquisition of shares or through other means such as shareholder agreements could fall within the purview of the RBI approval requirement. Hence, even acquisitions of minority stakes in NBFCs may be subject to scrutiny if they are accompanied by significant rights granted to acquirers/ investors through  protective provisions such as board nominations, quorum rights, veto rights and the like that may be contained in shareholders’ (or similar) agreements or in the articles of association of companies. In other words, the approval requirement may be triggered not just for outright acquisitions or takeovers but also investments that are accompanied by significant protective rights to the investors.

Friday, December 13, 2013

Participation of NBFCs in insurance sector

As per the extant instructions in relation to NBFCs participating in the insurance business issued on May 27, 2011, in case more than one company (irrespective of doing financial activity or not) in the same group of the NBFC wishes to take a stake in the insurance company, the contribution by all companies in the same group shall be counted for the limit of 50 per cent equity investment in the Insurance JV company.

In the operation of an insurance company, very often, the IRDA requires an insurance company to expand its capital taking into account the stipulations of the Insurance Act and the solvency requirements of the insurance company. The restriction of a group limit of the NBFC to 50% of the equity of the insurance JV company prescribed in the above mentioned circular may act as a constraint for the insurance company in meeting the requirement of IRDA.

Upon review, the RBI has decided that in cases where IRDA issues calls for capital infusion into the insurance JV company, the RBI may, on a case to case basis, consider need-based relaxation of the 50% group limit specified in the RBI circular dated May 27, 2011. The relaxation, if permitted, will be subject to compliance by the NBFC with all regulatory conditions specified in the relevant RBI circular dated February 10, 2004 and such other conditions as may be necessary in the specific case.

Thursday, July 18, 2013


Issue of debentures on private placement basis by NBFCs

NBFCs raise money by issuing capital/debt securities including debentures by way of public issue or private placement. In the case of public issue of such securities, institutions and retail investors can participate. Private placement, on the other hand, may involve institutional investors. The RBI has observed that NBFCs have lately been raising resources from the retail public on a large scale, through private placement, especially by issue of debentures. Hence, the RBI has issued guidelines in this regard, which require NBFCs to space out such issuances and also aim to bring NBFCs at par with other financial entities as far as private placement is concerned by restricting the maximum number of subscribers to forty nine (currently the ceiling of investors stipulated by the Companies Act 1956 for private placement is not applicable for NBFCs). In addition, certain clarifications are also made with regard to security cover for any debenture issue and the treatment of unsecured debentures as public deposits.

Upon further representations by industry, the RBI has revised the above guidelines as follows:

(a) The instruction with regard to minimum gap between two successive issuances of privately placed NCDs will not be operationalized immediately. A decision on the appropriate minimum time gap would be taken by the RBI  in due course. NBFCs, in the meantime, are advised to put in place before the close of business on September 30, 2013, a Board approved policy for resource planning which, inter-alia, should cover the planning horizon and the periodicity of private placement.

(b) Keeping in view the Primary Dealers’ obligations with regard to G-Sec market, it has been decided that the provisions of the said guidelines  shall not be applicable to Primary Dealers.

(c) The restrictions contained in paragraph 2.iii (viz., that an NBFC shall only issue debentures for deployment of funds on its own balance sheet and not to facilitate resource requests of group entities/ parent company / associates) shall not be applicable to Core Investment Companies.

(d) The provisions of paragraph B of the Annex to the said circular (i.e. NBFCs shall ensure that at all points of time the debentures issued, including short term NCDs, are fully secured. Therefore in case, at the stage of issue, the security cover is insufficient /not created, the issue proceeds shall be placed under escrow until creation of security, which in any case should be within one month from the date of issue) shall not apply to subordinated debt, as defined under paragraph 2(1)(xvii) of the Non-Banking Financial (Non-Deposit Accepting or Holding Companies Prudential Norms (Reserve Bank) Directions, 2007.

(e) Further, paragraph 1.i may be read as follows: “private placement means non-public offering of NCDs by NBFCs to such number of select subscribers and such subscription amounts, as may be specified by the Reserve Bank from time to time”.

 RBI Master Circulars

As usual, the RBI has come out with revised master circulars on July 1, 2013. The master circulars pertaining to NBFCs are linked here.
RBI Notices
My learned colleague, Mr. Jayant Thakur, CA has pointed out in the Indian Corporate Law blog that RBI has recently sent notices to thousands of companies asking them whether they are NBFCs. And, if yes, why they have not registered. This is worrying because if a Company is an NBFC and has not registered, it entails serious consequences for the Company and its concerned directors/officers. For example, the law provides for minimum and mandatory punishment of one year for non-registration as NBFC.

Tuesday, June 11, 2013

NBFCs not to be partners - Clarifications

The RBI noticed that some NBFCs have large investments in/ have contributed capital to partnership firms. In view of the risks involved in NBFCs associating themselves with partnership firms,
by way of a circular dated March 30,  2011, the RBI prohibited NBFCs from contributing capital to any partnership firm or to be partners in partnership firms. In cases of existing partnerships, NBFCs were advised to seek early retirement from the partnership firms.

By way of a circular dated June 11, 2013, certain additional clarifications have been made: 

(a) The prohibition on partnership firms will also include Limited Liability Partnerships (LLPs).

(b) The aforesaid prohibition will also be applicable with respect to associations of persons, these being similar in nature to partnership firms.

The RBI has advised NBFCs which have already contributed to the capital of a LLP/ association of persons or is a partner of a LLP/ association of persons to seek early retirement from such LLP/ association of persons. Logically, these restrictions are meant to prevent any adverse ripple-effect on the non-banking financial sector.

Arbitration of Shareholder Disputes

On a completely divergent note, in an article in the Financial Express, my colleague Debashish Sankhari and I have looked at whether disputes of oppression and mismanagement in relation to the affairs of a company can be adjudicated through arbitration. This is an important practical question for many a financial investor (and even a long-term strategic investor) who has agreed to arbitration clauses in the investment/ shareholder agreements, and which may also have been incorporated in the articles of association of the company.

After examining various CLB orders and the Supreme Court judgement in Booz Allen & Hamilton, we come to the conclusion that the test to determine as to whether the matter/ claim of oppression and mismanagement is to be relegated to arbitration is to examine as to whether the allegations of oppression/mismanagement can by adjudicated without reference to the terms of the arbitration agreement. In other words, the nature of the allegations should be such that if established, it could definitely be declared as an act of oppression/ mismanagement. In such cases, the matter cannot be referred to arbitration.

CICs - Entry into Insurance Business

By way of a circular dated April 1, 2013, the RBI has notified a separate regulatory framework for the entry of CICs into the insurance business. Prior to this, CICs were governed by the guidelines applicable to NBFCs under the circular DNBS(PD).CC.No.13/02.01/99-2000, dated June 30, 2000 issued by the RBI.

As per this circular, only such CICs registered with RBI, which satisfy the eligibility criteria (as mentioned below), are permitted to set up a joint venture company for undertaking insurance business with risk participation, subject to certain safeguards. The eligibility criteria for joint venture participant are as follows (as per the latest available audited balance sheet):

(a) The Owned Fund of the CIC shall not be less that INR 5,000,000,000;

(b) The level of net non performing assets shall be not more that 1% of the total outstanding advances;

(c) The CIC should have registered net profit continuously for three (3) consecutive years;

(d) The track record of performance of the subsidiaries, if any, of the concerned CIC should be satisfactory;
(e)The CIC shall comply with all the applicable regulations (including provisions of the  the Master Circular on Regulatory Framework for Core Investment Companies dated July 2, 2012, issued by the RBI ('CIC Master Circular')).

While no limit on the investment has been set by the said notification, the maximum equity contribution that such a CIC can hold in the joint venture company will be as per the Insurance Regulatory and Development Authority approval.

Further, NBFCs (in the group or outside the group) are not allowed to join an insurance company on risk participation basis and hence are required not to provide direct or indirect financial support to the insurance venture. Within the group, CICs are permitted to invest up to 100% of the equity of the insurance company (either on solo basis or in joint venture with other non-financial entities in the group).

CICs are prohibited from entering into insurance business in the capacity of “agents”. Further CICs cannot carry on insurance business departmentally.

As per this circular, all CICs (registered with the RBI) entering into insurance business as investor or on risk participation basis will be required to obtain prior approval of the RBI. CICs exempted from registration with the RBI (CICs other than systemically important CICs, as per the CIC Master Circular) are exempted from requirement of prior approval under the CIC Insurance Notification, provided such CICs fulfill all the necessary conditions of exemptions under the CIC Master Circular.

Wednesday, December 12, 2012

Overseas Investments by CICs

Core Investment Companies (CICs) invest primarily in group companies, in different sectors of the economy. Being holding companies they need to invest in both financial and non-financial activities. The RBI has therefore decided to issue a separate set of directions to CICs with regard to their overseas investments. 
Accordingly, all CICs investing in joint ventures/subsidiaries/representative offices overseas in financial sector will require prior approval from the RBI. This approval will be subject to the CIC fulfilling the conditions enumerated in the newly promulgated directions issued by RBI. Should CICs currently exempted from registration, desire to make overseas investments in financial sector, they would require a certificate of registration from RBI and shall have to comply with all the regulations applicable to registered CICs. However exempted CICs do not require to be registered with RBI for making investments in non-financial sector.