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NBFCs- Overview
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-Legal framework for NBFCs -Regulatory framework for NBFCs -Audit of a NBFCs
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Which is a NBFC?
A company which carried on as its business or part of its business the following activities: - financing - acquisition of securities - hire purchase - insurance - chit fund - mutual benefit company But does not include a company which carries on as its principal business: - agricultural operations, - industrial activities - Sale and purchase of goods - providing of services - purchase, sale and construction of immovable property
Legal Framework
Always Remember
NBFC per se is a licensed activity like Banking, Stock Broking, Money Changing. Acceptance of Public Deposits is irrelevant for NBFC test. Income earned & Deployment of Funds are determining factors
-Investment in shares in shares of subsidiaries, cos., in the same group and other NBFCs
-Book value of debentures, bonds, loans & advances to subsidiaries and cos. in the same group -Deposits with subsidiaries and cos. in the same group
1. Housing finance company 2. Insurance company 3. Chit Fund company 4. Stock exchange 5. Securitisation and Reconstruction company 6. Mortgage Guarantee Company 7. Nidhi company 8. Mutual Benefit Company 9. Venture capital fund company 10. Micro Finance company 11. Merchant banking company 12.Stock brokers and sub-brokers
Hold registration with SEBI under related regulations, Do not accept or hold public deposits.
Registered with SEBI under related regulations, Acquires securities only as a part of its merchant banking business, Does not carry on any other financial activities and Does not accept or hold public deposits
-Doing the business of stock broker or sub-broker and - holding a valid certificate of registration from SEBI.
Definition:
-If 90% or more assets are invested in Group Companies (subsidiaries, Associates and JVs) ( as per last audited accounts) - it is not trading in those shares( except for block sale) - does not carry any other NBFI activities and
Concerned Areas
Companies working without registration and Companies rejected by RBI still operating.
Penalties:
Registration Process
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1.Application for Registration in the prescribed Form containing: Identification Particulars, Capital Funds & Risk Assets, Information on Management. Ann-III 2.MOA, AOA, Board Resolution, Accounts and Business Plan. 3. Application to be filed on line.
Registration Process-vetting
- Management Background
BOD
Executive Funding
- Track record of other NBFCs in the group - CR from Bankers - Interview of promoters/directors - Definitive business plan - Auditors certificate
-Certificate from statutory auditors to be submitted to RBI every year. - Confirming that it continue to undertake business of NBFI and therefore requires to hold CoR granted by RBI.
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Classification of NBFCs
Based on nature of business:
Asset finance companies Investment companies Loan companies Infrastructure finance companies
Classification of NBFCs
Based on acceptance of Public Deposits
- Deposit holding/accepting Company - Category A - Non-Deposit holding/accepting Company - Category B Based on investment pattern - Investment company (Cat A or Cat B) - Core Investment company - Category C
-NBFC Acceptance Of Public Deposit (RB) Directions, 1998 -NBF (Deposit Accepting or Holding) companies Prudential Norms (RB) Directions,2007
Regulated deposits and exempt deposits Quantum of deposit Credit rating Advertisement/ Statement in lieu of Advertisement Period of deposit Rate of interest Rate of brokerage
Repayment of deposit Regularisation of excess deposit Premature payment of deposits Loan against deposit Default in payment of deposit or interest thereon Interest on overdue deposits Deposit Register Deposit Receipts
Percentage of Liquid assets Nature of liquid assets Mode of liquid assets Safe custody of approved securities Floating charge on liquid assets in favour of depositors
Returns to be filed with RBI Under NBFC Acceptance of Public Deposit (RB) Directions
-Qtly returns (NBS 3) -Annual Return (NBS 1) -Audited financial statements with directors report
-NBF (Non-Deposit Accepting or Holding ) Companies Prudential Norms (RB) Directions, 2007 -Additional rules for NBFCs-ND-SI (having total assets of Rs.100 Crores and above as shown in the last audited Balance Sheet).
-To maintain prescribed minimum capital ratio and leverage ratio. -Adjusted net worth should not be less than 30% of aggregated risk weighted assets on balance sheet and risk adjusted off balance sheet items. -outside liability should not exceed 2.5 times of its adjusted net worth based on the last audited accounts. Would be entitled to exemptions:
- of maintaining minimum NOF - of prudential norms relating to capital adequacy and exposure norms.
1. Separately for Category A and Category B companies. 2. Additional requirements for Category A companies. 3. Exemptions.
Investment in land & building Investment in shares Policy on investment and disclosure Income from investment Exposure to capital market
Concentration of loans/investment
- to be appended to the Balance sheet prescribed under the Companies Act, 1956 - showing loans and advances and deposits outstanding and overdue - borrower groupwise classification of all assets, lease, HP and Loans and advances - Investor groupwise classification of all investment in shares and securities - information on NPAs.
Change in director ship Change in ownership Change in address of registered office Change in statutory auditors Deposit accepting branch- opening & closure
- Code for Fair Practices - To be framed and adopted by BOD - To be filed with RBI - To be publicised
Other Returns
Monitoring by RBI
Off-site surveillance
On-site surveillance
NBFCs
The Companies Act, 1956 The Reserve Bank of India Act, 1934 The Income Tax Act, 1961 Rules and Directions framed under these Acts. Disclosure requirements of SEBI( by listed cos.)
-For SI-ND-NBFC.
-Rotation of partners of statutory auditors audit firm of companies with deposits of Rs. 50 Crores and more -Rotation after every three years -Companies may incorporate terms in the letter of appointment to ensure compliance
While discharging attestation function, it is duty of the member of the Institute to ensure that AASs are followed in audit of information covered by their audit reports. In case AASs could not be followed, the report should draw attention to the material departure.
Knowledge of the Business. Consideration of Laws & Regulations in an Audit of financial statements. The Auditors Report on Financial Statements.
Under the Companies Act, 1956 Report under Section 227(2) Report required by the Companies (Auditors Report) Order, 2003 Compliance of accounting standards.
Section 45MA powers & duties of auditors -Duty of the auditor to enquire whether prescribed statements, information or particulars relating to deposits have been furnished to RBI -If not satisfied on enquiry, to make report to the Bank giving details of deposits, -Annual return of deposits, half yearly returns on prudential norms to be certified and filed.
Section 45MA: Powers & duties of auditors NBFC Auditors Report(RB) Directions, 2008
-Yearly Certification of carrying of NBFC business - Certification attached to Annual Return and Half Yearly Returns
AUDIT OF NBFCs
Guidance Note on the Duty Cast on the Auditors under Section 45MA of the Reserve Bank of India Act, 1934 issued by ICAI Section 58B (4AA) of RBI Act- if any auditor fails to comply with any direction given or order made under section 45MA, he shall be punishable with fine which may extend to five thousand rupees.