RBI and NBFCs

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.

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.

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.

Et Cetera...

1. The RBI has issued a clarification regarding Core Investment Companies (CICs) issuing guarantees. As per the said clarification, before issuing guarantees or taking on other contingent liabilities for group entities, CICs must ensure that they can meet the obligations thereunder, as and when they arise. CICs which are exempt from registration requirements must be in a position to honour the obligation/s without recourse to public funds. If unregistered CICs with asset size above Rs. 100 crores access public funds without obtaining a certificate of registration from RBI, they will be seen as violating Core Investment Companies (Reserve Bank) Directions 2011 dated January 5, 2011.

2. As per a news article, the RBI has ruled out equal treatment for NBFCs and banks which are engaged in providing gold loans. It has declined to raise a cap of 60% of the value of ornaments that gold loan companies are allowed to lend to customers or bring commercial banks under the ambit of the ceiling, thus maintaining the edge of banks, which can lend more for the same pledged worth.

3. Per news reports, the Government of Karnataka is prosecuting NBFCs which are charging excessive interest on loans granted.

4. The Bombay High Court has admitted a petition filed by a NBFC, M/s. Alternative Investment and Credits Limited (AICL) against a RBI order canceling its certificate of registration. The single judge however left the maintainability issue open. As per news reports, AICL is 10 year old NBFC functioning as per the principles of Islamic finance, i.e. a non-interest bearing participatory finance model.

The call for contributors remains open. Comments/ suggestions/ criticism of all nature welcomed.