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.

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.

Checklists for NBFC Registration

In order to expedite the process of obtaining registration from RBI as NBFCs, the checklists of documents to be submitted along with the application form have been reviewed and made more exhaustive. As the businesses of the various types of NBFCs vary, the documentation required for registration may also vary.