RBI / 2009-10/19
DNBS (PD) CC No. 158 / 03.02.001 / 2009-10

July 1, 2009

To

All Non-Banking Financial Companies (NBFCs)

Dear Sir,

Master circulars- miscellaneous instructions to Non-Banking Financial Companies

In order to have all current instructions in one place, the Reserve Bank of India has issued master circulars to NBFCs on various subjects. It is advised that miscellaneous directions/ instructions issued upto June 30, 2009, which do not find a place in such master circulars have been compiled herein.  A consolidated list of all such instructions is enclosed for ready reference. The master circular has also been placed on the RBI web-site (http://www.rbi.org.in).

Yours sincerely

(P. Krishnamurthy)
Chief General Manager-in-charge

Certificate of Registration (CoR) issued under Section 45-IA of the RBI Act, 1934 – Continuation of business of NBFI - Submission of Statutory Auditors Certificate - Clarification

It has been observed that there are NBFCs which are no longer engaged in the business of NBFI and hence are not required/ eligible to hold the CoR granted by RBI. but still continue to do so. In order to ensure that CoRs are only held by  NBFCs which are actually engaged in the business of NBFI,  all NBFCs should submit a certificate from their Statutory Auditors every year to the effect that they continue to undertake the business of NBFI requiring holding of CoR under Section 45-IA of the RBI Act, 1934.

It is clarified that the business of non-banking financial institution  (NBFI) means a company engaged in the business of financial institution  as contained in Section 45 I(a) of the RBI Act, 1934. For this purpose, the definition of ‘Principal Business’ given, vide Press Release 1998-99/1269 dated April 8, 1999 may be followed.

[Details in DNBS (PD) C.C.No.79/03.05.002/2006-07 dated September 21, 2006 DNBS (PD) C.C.No.81/03.05.002/ 2006-07  dated October 19, 2006]

Operative instructions relating to relaxation/modification in Ready Forward  Contracts, Settlement of Government Securities Transactions and Sale of securities allotted in Primary Issues

All NBFCs / RNBCs are instructed to follow the guidelines on transactions in Government Securities as given in the circular IDMD.PDRS.05/10.02.01/2003-04 dated March 29, 2004 meticulously, wherever applicable. The revised guidelines come into effect from April 2,   2004.

All NBFCs including RNBCs may refer to the circular IDMD.PDRS.4777, 4779 & 4783 /10.02.01/2004-05  all dated May 11, 2005 addressed to all RBI regulated entities. All NBFCs / RNBCs are instructed to follow the guidelines on transactions in Government Securities as given in the circulars meticulously, wherever applicable. In cases of doubt they may refer to IDMD.

[Details in DNBS (PD) CC No. 38 /02.02/2003-04 dated June 11, 2004, DNBS (PD) CC No.49 /02.02/2004-05 dated June 9,  2005]

Prior Public Notice about change in control / management

Need for public notice before  (a) closure of the branch/office by any NBFC (b) sale/transfer of ownership by an NBFC

(a) NBFC should give at least three months public notice prior to the date of closure of any of its branches/ offices in, at least, one leading national news paper and a leading local (covering the place of branch / office) vernacular language newspaper indicating therein the purpose and arrangements being made to service the depositors etc.

(b) (i) A public notice of 30 days shall be given before effecting the sale of, or transfer of the ownership by sale of shares, or transfer of control, whether with or without sale of shares. Such public notice shall be given by the NBFC and also by the transferor, or the transferee or jointly by the parties concerned.

For this purpose, the term 'control' shall have the same meaning as defined in Regulation 2(1) (c) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.

(ii) The public notice should indicate the intention to sell or transfer ownership / control, the particulars of transferee and the reasons for such sale or transfer of ownership / control. The notice should be published in one leading national and another in leading local (covering the place of registered office) vernacular language newspaper.

Change in management and mergers/amalgamation

It has been observed that the change in management also takes place by way of amalgamation / merger of an NBFC with another NBFC or a non-financial company and as such, these mergers / amalgamations would tantamount to the change in the management, as aforesaid.

It would be  obligatory on the part of such an NBFC seeking change in management or merger or amalgamation with any other company to give an option to every depositor to decide whether to continue the deposits with the company under the new management or the transferee company or not. The company would also be obliged to make the payment to the depositors who seek the repayment of their deposits. The Bank would view the non-compliance of the above instructions very seriously and penal action would be initiated against the defaulter company on the merits of each case.

The following changes are effected in the above instructions in January 2006:

(i)  Merger and amalgamation in terms of the High Court Order.

(a)  Where merger and amalgamation takes place in terms of the High Court order in pursuance of Sections 391 and 394 of the Companies Act 1956, the company shall inform the Bank about merger or amalgamation along with Court’s order approving the same within a period of one month from the date of the order. As the public notice is given by the companies under the Companies Act 1956  and Rules made thereunder, no further public notice is required to be given by the companies in terms of the Bank’s Circular as mentioned above.

(b) However there will be no change in other instructions contained in paragraph 5(iii) (b) of the Company Circular DNBS (PD) .CC No.12/02.01/99-2000 dated January 13, 2000.

(ii) Other cases

Where merger and amalgamation or change in the management of the company takes place upon sale / transfer  otherwise than as stated in sub-paragraph (i) above,  the  NBFCs (including RNBCs)(deposit taking and non-deposit taking companies ) should give prior public notice of 30 days.

[Details in Company Circular DNBS (PD) CC.No.11/02.01/99-2000 dated November 15, 1999, DNBS (PD) CC No.12/02.01./99-2000 dated January 13, 2000, DNBS (PD) CC No. 63 / 02.02 / 2005-06 dated January 24, 2006 and DNBS (PD) CC No. 82  / 03.02.02 / 2006-07  dated     October 27, 2006]

Cover for public deposits – creation of floating charge on Liquid  Assets by deposit taking NBFCs

NBFCs raise funds for their operations from various sources like public deposits, bank borrowings, inter-corporate deposits, secured/unsecured debentures, etc.

In order to ensure protection of depositors interest, NBFCs should ensure that at all times there is full cover available for public deposits accepted by them. While calculating this cover the value of all debentures (secured and unsecured) and outside liabilities other than the aggregate liabilities to depositors may be deducted from the total assets. Further, the assets should be evaluated at their book value or realizable/market value whichever is lower for this purpose. It shall be incumbent upon the NBFC concerned to inform the Regional Office of the Reserve Bank in case the asset cover calculated as above falls short of the liability on account of public deposits.

NBFCs accepting/holding public deposits were directed to create a floating charge on the statutory liquid  assets invested in terms of Section 45-IB of the RBI Act, 1934, in favour of their depositors. Such charge should be duly registered in accordance with the requirements of the Companies Act, 1956.

In view of the practical difficulties expressed by the NBFCs in creating charge on the statutory liquid assets in favour of large number of depositors, it was subsequently  decided that NBFCs accepting/ holding public deposits may create the floating charge on the statutory liquid assets maintained in terms of Section 45-IB of the RBI Act, 1934 and notifications issued by the Bank from time to time, in favour of their depositors through the mechanism of ‘Trust Deed’.

[Details in DNBS (PD)C.CNo.47/02.01/2004-05 dated February 07, 2005 and DNBS(PD)C.C No.87/03.02.004/2006-07 dated  January 4, 2007]

FIMMDA Reporting Platform for Corporate Bond Transactions

SEBI has permitted FIMMDA to set up its reporting platform for corporate bonds.  It has also been mandated to aggregate the trades reported on its platform as well as those reported on BSE and NSE with appropriate value addition.

All NBFCs would be required to report their secondary market transactions in corporate bonds done in OTC market, on FIMMDA’s reporting platform with effect from September 1, 2007.  Detailed operational guidelines in this regard would be issued by FIMMDA. In the meanwhile, the NBFCs may approach FIMMDA directly for participating in the mock reporting sessions.

[Details in DNBS.PD/ C.C.No.105/03.10.001/2007-08  dated July 31, 2007]

Unsolicited Commercial Communications - National Do Not Call Registry

It is an emerging practice in India to engage agents/outsource business operations for the purpose of soliciting or promoting any commercial transactions using telecommunication mode. There is a need to protect the right to privacy of the members of public and to curb the complaints relating to unsolicited commercial communications being received by customers/non-customers, as part of best business practices.

Telecom Regulatory Authority of India (TRAI) has framed the Telecom Unsolicited Commercial Communications (UCC) Regulations for curbing UCC. Further, the Department of Telecommunications (DoT) has issued relevant guidelines for telemarketers alongwith the registration procedure on June 6, 2007. These guidelines have made it mandatory for telemarketers to register themselves with DoT or any other agency authorized by DoT and also specified that the telemarketers shall comply with the Guidelines and Orders/Directions issued by DoT and Orders/Directions/Regulations issued by  Telecom Regulatory Authority of India (TRAI) on Unsolicited Commercial Communications(UCC). The detailed procedure in this regard is also available on TRAI’s website (www.trai.gov.in).

NBFCs are therefore; advised

(i) not to engage Telemarketers (DSAs/DMAs) who do not have any valid registration certificate from DoT, Govt of India, as telemarketers; (ii) to furnish the list of Telemarketers (DSAs/DMAs) engaged by them along with the registered telephone numbers being used by them for making telemarketing calls to  TRAI;  and
(iii) to ensure that all agents presently engaged by them register themselves with DoT as telemarketers .

[Details in DNBS.PD/C.C No.109/ 03.10.001/2007-08 dated November 26, 2007]

Requirement of minimum NOF of Rs. 200 lakh for all deposit taking NBFCs

In accordance with the consultative approach adopted by the Bank in framing of guidelines, a draft circular on enhancement of minimum NOF level for deposit taking NBFCs  was placed on web-site www.rbi.org.in on May 21, 2007.

The suggestions/comments received in this regard were considered. To ensure a measured movement towards strengthening the financials of all deposit taking NBFCs  by increasing their NOF to a minimum of Rs.200 lakh in a gradual, non-disruptive and non-discriminatory manner, it has been decided to prescribe that:

(a) As a first step, NBFCs having minimum NOF of less than Rs. 200 lakh may freeze their deposits at the level currently held by them.

(b)   Further, Asset Finance Companies (AFC) having minimum investment grade credit rating and CRAR of 12% may bring down public deposits to a level that is 1.5 times their NOF while all other companies may bring down their public deposits to a level   equal to their NOF by March 31, 2009.

(c ) Those companies which are presently eligible to accept public deposits upto a certain level, but have, for any reason, not accepted deposits upto that level will be permitted to accept public deposits upto the revised  ceiling prescribed  above.

(d) Companies on attaining the NOF of Rs.200 lakh may submit statutory auditor's certificate certifying its NOF.

(e) The NBFCs failing to achieve the prescribed ceiling within the stipulated time period, may apply to the Reserve Bank for appropriate dispensation in this regard which may be considered on case to case basis.

[DNBS (PD) C.C. No.114 /03. 02.059 / 2007-08 dated  June 17, 2008]

Reclassification of NBFCs

In terms of Company Circular DNBS.PD. CC No. 85 / 03.02.089 /2006-07 dated December 06, 2006 it was advised that NBFCs financing real / physical assets for productive / economic activity will be classified as Asset Finance Company (AFC) as per the criteria given under paragraph 4 of that circular. Consequent upon re-classification of NBFCs, in the proposed structure the following categories of NBFCs will emerge:

(i) Asset Finance Company
(ii) Investment Company
(iii) Loan Company

Accordingly, it was advised that the companies satisfying the conditions specified may approach the Regional Office in the jurisdiction of which their Registered Office is located, along  with the original Certificate of Registration (CoR) issued by the Bank to recognize their classification as Asset Finance Companies. Their request must be supported by their Statutory Auditors’ certificate indicating the asset / income pattern of the company as on March 31, 2006.

As substantial time has elapsed, since the issue of the circular, it has now been decided that erstwhile EL/HP NBFCs should, duly supported by Statutory Auditors’ Certificate as on March 31, 2008, immediately approach the Regional Office concerned for appropriate classification latest by December 31, 2008 after which NBFCs which have not opted for the classification would be deemed to be loan companies.

[Details in DNBS.PD.CC.No.85/03.02.089/2006-07 dated December 06, 2006 and DNBS.PD.CCNo.128/03.02.059 /2008-09 dated  September 15, 2008]

Monitoring Framework for non-deposit taking NBFCs with asset size of Rs 50 crore and above but less than Rs 100 crore

It was  decided to call for basic information from non-deposit taking NBFCs with asset size of Rs 50 crore and above but less than Rs 100 crore at quarterly intervals. The first such returns for the quarter ended September 2008 were to be submitted by first week of December 2008. The quarterly return as at the end of each quarter were to be filed online with the Regional Office of the Department of Non-Banking Supervision in whose jurisdiction the company was registered, within a period of one month from the close of the quarter, while the  the procedure/system for online submission would be conveyed at a later date.

Applicable NBFCs were later advised to submit the above return as hard copy and soft copy (via e-mail in Excel format) to the Regional Office of the Department of Non-Banking Supervision in whose jurisdiction their company was registered, within a period of one month from the close of the quarter, till the online procedure in this regard is advised.

[Details in DNBS.PD/CC.No.130/03.05.002/2008-09 dated September 24, 2008 and DNBS.PD/ CC.No.137/03.05.002/2008-09 dated March 02, 2009]

Accounting for taxes on income- Accounting Standard 22- Treatment of deferred tax assets (DTA) and deferred tax liabilities (DTL) for computation of capital

As creation of DTA or DTL would give rise to certain issues impacting the balance sheet of the company, it is clarified that the regulatory treatment to be given to these issues are as under :-

          - The balance in DTL account will not be eligible for inclusion in Tier I or Tier II capital for capital adequacy purpose as it is not an eligible item of capital.

          - DTA will be treated as an intangible asset and should be deducted from Tier I Capital.

          - NBFCs may keep the above clarifications in mind for all regulatory requirements including computation of CRAR and ensure compliance with effect from the accounting year ending March 31, 2009.

In this connection it is further clarified that DTL created by debit to opening balance of Revenue Reserves or to Profit and Loss Account for the current year should be included under ‘others’ of “Other Liabilities and Provisions.”

DTA created by credit to opening balance of Revenue Reserves or to Profit and Loss account for the current year should be included under item ‘others’ of “Other Assets.”

Intangible assets and losses in the current period and those brought forward from previous periods should be deducted from Tier I capital.

DTA computed as under should be deducted from Tier I capital:

(i) DTA associated with accumulated losses; and

(ii)The DTA (excluding DTA associated with accumulated losses) net of DTL. Where the DTL is in excess of the DTA (excluding DTA associated with accumulated losses), the excess shall neither be adjusted against item (i) nor added to Tier I capital.”

[Details in DNBS(PD)C.C.No.124/03.05.002/2008-09 dated July 31,2008 and DNBS.PD/CC.No.142/03.05.002/2008-09 dated June 9, 2009]

List of circulars