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.

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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.

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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.

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