Monthly Archives: November 2014

ECBs – Parking of ECB proceeds

RBI has vide its circular dated 21st November, 2014 clarified that ECB proceeds can be parked for a limited period of 6 months in bank term deposits with AD Category I banks before being utilised for the purpose for which they were brought in as a Loan. This will be subject to complying with some conditions which are as below:

  1. The applicable guidelines on eligible borrower, recognised lender, average maturity period, all-in-cost, permitted end uses, etc. should be complied with.
  2. No charge in any form should be created on such term deposits i.e. to say that the term deposits should be kept unencumbered during their currency.
  3. Such term deposits should be exclusively in the name of the borrower.
  4. Such term deposits can be liquidated as and when required;

The circular is available at this link viz. http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=9346&Mode=0

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Levy of penal charges on non-maintenance of minimum balance in savings bank accounts

RBI has vide its circular dated 20th November, 2014 issued new guidelines on levy of penal charges on non-maintenance of minimum balance in savings bank accounts. The circular is available at this link i.e. http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=9343&Mode=0

The salient features of the new guidelines are as follows

Levy of charges for non-maintenance of minimum balance in savings bank account shall be subject to the following additional guidelines:

(i) In the event of a default in maintenance of minimum balance/average minimum balance as agreed to between the bank and customer, the bank should notify the customer clearly by SMS/ email/ letter etc. that in the event of the minimum balance not being restored in the account within a month from the date of notice, penal charges will be applicable.

(ii) In case the minimum balance is not restored within a reasonable period, which shall not be less than one month from the date of notice of shortfall, penal charges may be recovered under intimation to the account holder.

(iii) The policy on penal charges to be so levied may be decided with the approval of Board of the bank.

(iv) The penal charges should be directly proportionate to the extent of shortfall observed. In other words, the charges should be a fixed percentage levied on the amount of difference between the actual balance maintained and the minimum balance as agreed upon at the time of opening of account. A suitable slab structure for recovery of charges may be finalized.

(v) It should be ensured that such penal charges are reasonable and not out of line with the average cost of providing the services.

(vi) It should be ensured that the balance in the savings account does not turn into negative balance solely on account of levy of charges for non-maintenance of minimum balance.

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Labour Laws Exemption Bill

http://www.thehindu.com/news/national/rs-passes-bill-amending-labour-laws/article6634231.ece

The Rajya Sabha on Tuesday passed by voice vote the Labour Laws (Exemption from Furnishing Returns and Maintaining Registers by Certain Establishments) Amendment Bill, 2011 amid walkout by the CPI(M), the CPI, the Janata Dal (United) and the Trinamool Congress members.

These parties were opposed to some of the provisions of the Bill. The CPI, the CPI(M) and the TMC members moved certain amendments which were not carried.

Labour unions affiliated to these parties announced a countrywide protest on December 5 against the amendments on the ground that a large number of units will no longer be regulated for maintaining registers of attendance, wage slips of workers.

Moving the amended Bill, Minister of State for Labour and Employment Bandaru Dattatreya on Tuesday assured the Rajya Sabha that the government was “not at all” compromising on the interest of workers and the legislation was not meant to give exemption to any establishment. “The Bill is a social security measure. It simplifies procedures. The main purpose of bringing the Bill is transparency, accountability and proper enforcement. The EPF Universal Account Number will be a major benefit as it affords portability, transparency and efficiency,” he said.

The Bill, as amended, proposes to change the original Act of 1988 to increase the number of laws under which small establishments are exempt from furnishing returns and maintaining registers from nine to 16. It amends the definition of “small” establishments to cover units employing between 10 to 40 workers as against the limit of 19 workers at present.

The seven Acts that are added to the list include the Motor Transport Workers Act, 1961, the Payment of Bonus Act, 1965, the Inter-State Migrant Workmen (Regulation of Employment and Conditions of Service) Act, 1979, and the Building and Other Construction Workers (Regulation of Employment and Conditions of Service) Act, 1996. It will allow firms to maintain returns filed on electronic media. The Apprentices Act (Amendment) Bill, which too relates to labour laws, was introduced in the House soon after. It will come up for discussion on Tuesday.

The Bill proposes changes to the Apprentices Act, 1961 to allow an establishment operating in four or more States to be regulated by the Central government so that those establishments may no longer have to approach various State governments for employing apprentices.

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Apprentices Amendment Bill 2014

http://www.thehindu.com/news/national/parliament-passes-apprentices-bill/article6637197.ece

A Bill seeking to remove imprisonment as punishment for violating the provisions of the Apprentices Act, 1961 and allowing employers to fix the hours of work and leave as per their discretion or policy was passed by the Rajya Sabha on Wednesday.

The Apprentices (Amendment) Bill, 2014 was passed by voice vote with a majority of speakers favouring the legislation, saying it is aimed at enhancing the skills of youth and make them employable.

It had been passed by the Lok Sabha in the last session.

Some members, however, had reservations saying certain provisions in the Bill are “draconian” as employers have been given full powers to deal with apprentices in any manner.

Replying to the debate, Labour Minister Bandaru Dattatreya said the Bill was being brought to implement the Apprenticeship Policy by March 2015 which would help impart skills to youths and make them employable.

He said the government had brought the policy keeping transparency in view and it would involve all stakeholders.

Earlier, Satish Chandra Misra (BSP) said the government should not give so much power to the employers to deal with apprentices. “Don’t make such provisions which are draconian or do away with the penal provisions,” he said.

Naresh Agarwal (SP) and CPI(M) members Tapan Sen and P. Rajeeve also made some observations on providing protection to apprentices and said the penalty of Rs. 500 was not adequate deterrent for employers on violating the Act.

The Bill seeks to amend certain definitions, increases the minimum age for apprentices in hazardous industries and removes imprisonment as a punishment for violating the provisions of the Act.

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Bank account KYC – address proof

RBI has clarified vide this circular that Banks should not harass customers for producing multiple address proofs. If they have given permanent address proof, then that is sufficient and therefore Banks have been warned from asking for too many proofs for the address of the customers.

http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=9279&Mode=0

2. In this regard, it has been brought to our notice that despite issuing clear instructions regarding the requirement of one proof of address whether permanent or current, some banks are still insisting on submission of a proof of address for the current address even when a customer produces a proof of permanent address, which prevents many prospective customers, especially migrant workers, from opening bank accounts.

3. In view of the above, banks are advised to ensure that customers are not unnecessarily asked to submit additional proofs of addresses for current addresses in cases where proofs of addresses for permanent addresses are already available. Banks are requested to confirm latest by October 17, 2014, that the above mentioned instruction has been communicated to all their branches and the same have been meticulously complied with.

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FEMA – Compounding applications

RBI has vide its circular dated 16th October, 2014 as per copy below, delegated some compounding powers to its Regional Offices. The circular can be found at http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=9286&Mode=0

Compounding applications for delay in submission of form FC-TRS can now be sent to the Regional Offices.

Detailed circular follows:

Foreign Exchange Management Act, 1999 (FEMA) Foreign Exchange (Compounding Proceedings) Rules, 2000 (the Rules) – Compounding of Contraventions under FEMA, 1999

Attention of all the Authorised Dealer Category – I (AD Category – I) banks and their constituents is invited to A.P. (DIR Series) Circular no. 117 dated April 4, 2014 and the Foreign Exchange (Compounding Proceedings) Rules, 2000 notified by the Government of India vide G.S.R.No.383 (E) dated 3rd May 2000, as amended from time to time regarding delegation of powers to the Regional Offices of the Reserve Bank of India to compound the contraventions of FEMA.

2. In partial modification thereof, it has been decided to delegate further powers to Regional Offices as under:

Sr. No.

FEMA Regulation

Brief Description of Contravention

1

Regulation 10 A (b)(i) read with paragraph 10 of Schedule I toFEMA 20/2000-RB dated May 3, 2000 Delay in submission of form FC-TRS on transfer of shares from Resident to Non-Resident.

2

Regulation 10 B(2) read with paragraph 10 of Schedule I to FEMA 20/2000-RB dated May 3, 2000 Delay in submission of form FC-TRS on transfer of shares from Non-Resident to Resident.

3

Regulation 4 of FEMA 20/2000-RB dated May 3, 2000 Taking on record transfer of shares by investee company, in the absence of certified form FC-TRS.

3. The work of three divisions of Foreign Investment Division (FID) viz. Liaison/ Branch/ Project office(LO/ BO/ PO) division, Non Resident Foreign Account Division (NRFAD) and Immovable Property (IP) Division has been transferred to FED, CO Cell, Reserve Bank of India, 6, Sansad Marg, New Delhi- 110001 with effect from July 15, 2014. Accordingly, the officers attached to the FED, CO Cell, New Delhi office are now authorised to compound the contraventions as under:

Sr. No.

FEMA Notification

Brief Description of Contravention

1

FEMA 7/2000-RB, dated 3-5-2000 Contraventions relating to acquisition and transfer of immovable property outside India

2

FEMA 21/2000-RB, dated 3-5-2000 Contraventions relating to acquisition and transfer of immovable property in India

3

FEMA 22/2000-RB, dated 3-5-2000 Contraventions relating to establishment in India of Branch office ,Liaison Office or project office

4

FEMA 5/2000-RB, dated 3-5-2000 Contraventions falling under Foreign Exchange Management (Deposit) Regulations , 2000

4. The powers to compound the contraventions at Paragraph 2 and Paragraph 3 above have been delegated to all Regional Offices (except Kochi and Panaji) and FED, CO Cell, New Delhi respectively without any limit on the amount of contravention. Kochi and Panaji Regional offices can compound the above contraventions for amount of contravention below Rupees one hundred lakh (Rs.1,00,00,000/-). The contraventions of Rupees one hundred lakh (Rs.1,00,00,000/-) or more under the jurisdiction of Panaji and Kochi Regional Offices and all other contraventions of FEMA will continue to be compounded at Cell for Effective Implementation of FEMA (CEFA), Mumbai, as hitherto.

5. Accordingly, applications for compounding the above contraventions as at Paragraph 2 and Paragraph 3 above, up to the amount of contravention stated therein may be submitted by the concerned entities to the respective Regional Offices under whose jurisdiction they fall or to FED, CO Cell, New Delhi respectively. For all other contraventions, applications may continue to be submitted to CEFA, Foreign Exchange Department, 5th floor, Amar Building, Sir P.M.Road, Fort, Mumbai 400001.

6. The above modifications will come into force with immediate effect. All other instructions on compounding shall remain unchanged.

7. Authorised Dealers may bring the contents of this circular to the notice of their constituents and customers concerned.

8. The directions contained in this circular have been issued under sections 10 (4) and 11 (1) of the Foreign Exchange Management Act, 1999 (42 of 1999).

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NBFCs – Revised Regulatory Framework

RBI has issued revised NBFC regulatory framework as per this circular i.e. http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=9327&Mode=0.

Salient features are

1) Net Owned Funds of Rs.2 crores required for all NBFCs even those old ones

2) Systemically Important NBFCs now above Rs.500 crores revised from Rs.200 crores

3) All Asset Finance Companies to get themselves rated with Investment grade rating before accepting deposits or renewing deposits

4) Prudential norms eased for NBFC-NDs i.e. non deposit taking ones not required to maintain KYC, Fair Practices Code etc.

5) Board Committee requirements streamlined for different categories of NBFCs.

6) Fit and proper criteria introduced for Directors in SI and D category of NBFCs i.e. Systemically Important and deposit taking

The detailed copy of the circular is given below:

All NBFCs (excluding Primary Dealers)

Dear Sirs,

Revised Regulatory Framework for NBFC

The NBFC (Non-Banking Finance Company) sector has evolved considerably in terms of its size, operations, technological sophistication, and entry into newer areas of financial services and products. NBFCs are now deeply interconnected with the entities in the financial sector, on both sides of their balance sheets. Being financial entities, they are as exposed to risks arising out of counterparty failures, funding and asset concentration, interest rate movement and risks pertaining to liquidity and solvency, as any other financial sector player. At the same time there are segments within the sector that do not pose any significant risks to the system. There is therefore, a felt need to address the risks, without impeding the dynamism displayed by NBFCs in delivering innovation and last mile connectivity for meeting the credit needs of the productive sectors of the economy.

2. With the above background, a review of the entire regulatory framework for the NBFC sector has been undertaken with a view to transitioning, over time, to an activity based regulation of NBFCs. As a first step in this direction, certain changes to the regulatory framework are sought to be made to a) address risks wherever they exist, b) address regulatory gaps and arbitrage arising from differential regulations, both within the sector as well as vis-a-vis other financial institutions, c) harmonise and simplify regulations to facilitate a smoother compliance culture among NBFCs, and d) strengthen governance standards.

3. In doing so, certain important recommendations made by the Working Group on Issues and Concerns in the NBFC Sector (Chairperson: Smt. Usha Thorat) and the Committee on Comprehensive Financial Services for Small Businesses and Low Income Households (Chairman: Dr. Nachiket Mor), have been drawn upon. The changes now introduced to the regulatory framework are delineated below.

4. Requirement of Minimum NOF of Rs. 200 lakh

4.1 NBFCs are required to obtain a Certificate of Registration (CoR) from the Bank to commence/carry on business of NBFI in terms of Section 45-IA of the RBI Act, 1934. The said section also prescribes the minimum Net Owned Fund (NOF) requirement. In terms of Notification No.DNBS.132/CGM(VSNM)-99 dated April 21, 1999, the minimum NOF requirement for new companies applying for grant of CoR to commence business of an NBFC is stipulated at Rs. 200 lakh. Although the requirement of minimum NOF at present stands at Rs. 200 lakh, the minimum NOF for companies that were already in existence before April 21, 1999 was retained at Rs. 25 lakh. Given the need for strengthening the financial sector and technology adoption, and in view of the increasing complexities of services offered by NBFCs, it shall be mandatory for all NBFCs to attain a minimum NOF of Rs. 200 lakh by the end of March 2017, as per the milestones given below:

  • Rs. 100 lakh by the end of March 2016
  • Rs. 200 lakh by the end of March 2017

4.2 It will be incumbent upon such NBFCs, the NOF of which currently falls below Rs. 200 lakh, to submit a statutory auditor’s certificate certifying compliance to the revised levels at the end of each of the two financial years as given above.

4.3 NBFCs failing to achieve the prescribed ceiling within the stipulated time period shall not be eligible to hold the CoR as NBFCs. The Bank will initiate the process for cancellation of CoR against such NBFCs.

5. Deposit Acceptance

5.1 As per extant NBFCs Acceptance of Public Deposit (Reserve Bank) Directions, 1998, an unrated Asset Finance Company (AFC) having NOF of Rs. 25 lakh or more, complying with all the prudential norms and maintaining capital adequacy ratio of not less than fifteen per cent, is allowed to accept or renew public deposits not exceeding one and half times of its NOF or up to Rs. 10 crore, whichever is lower. AFCs which are rated and complying with all the prudential regulations are allowed to accept deposits up to 4 times of their NOF.

5.2 In order to harmonise the deposit acceptance regulations across all deposit taking NBFCs (NBFCs-D) and move over to a regimen of only credit rated NBFCs-D accessing public deposits, existing unrated AFCs shall have to get themselves rated by March 31, 2016. Those AFCs that do not get an investment grade rating by March 31, 2016, will not be allowed to renew existing or accept fresh deposits thereafter. In the intervening period, i.e. till March 31, 2016, unrated AFCs or those with a sub-investment grade rating can only renew existing deposits on maturity, and not accept fresh deposits, till they obtain an investment grade rating.

5.3 It has been decided to harmonise the limit for acceptance of deposits across the sector by reducing the same for rated AFCs from 4 times to 1.5 times of NOF, with effect from the date of this circular. While AFCs holding deposits in excess of the revised limit should not access fresh deposits or renew existing ones till they conform to the new limit, the existing deposits will be allowed to run off till maturity. It must be mentioned here that the data available with the Reserve Bank indicates that most AFCs are already complying with the revised norms and very few NBFCs have deposits in excess of 1.5 times of the NOF. Also, in cases where this limit is exceeded, the excess is not substantial. It is therefore expected, that this harmonization measure will not be disruptive.

6. Systemic Significance

6.1 Currently, NBFCs are categorized into three groups for the purpose of administering prudential regulations namely, NBFCs-D, non-deposit taking NBFCs (NBFCs-ND) with assets less than Rs.100 crore and NBFCs-ND-SI with assets Rs.100 crore and above, (categorised as non–deposit taking systemically important NBFCs, vide circular DNBS.PD/CC.No.86/03.02.089/2006-07, dated December 12, 2006). The current prudential regulation mainly comprises the following elements: a) Norms relating to Income Recognition, Asset Classification and Provisioning norms; b) Capital to Risk Weighted Assets Ratio (CRAR); and c) Credit Concentration Norms [norms at b) and c) are applicable to only NBFCs–D and NBFCs-ND-SI].

6.2 The threshold for defining systemic significance for NBFCs-ND has been revised in the light of the overall increase in the growth of the NBFC sector. NBFCs-ND-SI will henceforth be those NBFCs-ND which have asset size of Rs. 500 crore and above as per the last audited balance sheet.

6.3 With this revision in the threshold for systemic significance, NBFCs-ND shall be categorized into two broad categories viz.,

  1. NBFCs-ND (those with assets of less than Rs. 500 crore) and
  2. NBFCs-ND-SI (those with assets of Rs. 500 crore and above).

7. Multiple NBFCs

7.1 NBFCs that are part of a corporate group or are floated by a common set of promoters will not be viewed on a standalone basis. The total assets of NBFCs in a group including deposit taking NBFCs, if any, will be aggregated to determine if such consolidation falls within the asset sizes of the two categories mentioned in para 6.3 above. Regulations as applicable to the two categories will be applicable to each of the NBFC-ND within the group. For this purpose, Statutory Auditors would be required to certify the asset size of all the NBFCs in the Group. However, NBFC-D, within the group, if any, will be governed under the Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Direction 1998 and Non-Banking Financial (Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007 and other applicable Directions.

7.2 The definition of the word “group” will be the same as per Accounting Standards. “Companies in the Group”, shall mean an arrangement involving two or more entities related to each other through any of the following relationships:

  • Subsidiary – parent (defined in terms of AS 21),
  • Joint venture (defined in terms of AS 27),
  • Associate (defined in terms of AS 23),
  • Promoter – promotee [as provided in the SEBI (Acquisition of Shares and Takeover) Regulations, 1997],
  • For listed companies, a related party (defined in terms of AS 18), common brand name, and investment in equity shares of 20% and above.

8. Prudential Norms

8.1 One of the main objectives of prudential regulation is to address systemic risks. The systemic risks posed by NBFCs functioning exclusively out of their own funds and NBFCs accessing public funds cannot be equated and hence cannot be subjected to the same level of regulation. Hence, as a principle, enhanced prudential regulations shall be made applicable to NBFCs wherever public funds are accepted and conduct of business regulations will be made applicable wherever customer interface is involved.

8.2 In conformity with the above principles, the regulatory approach in respect of NBFCs-ND with an asset size of less than Rs. 500 crore will be as under:

(i) They shall not be subjected to any regulation either prudential or conduct of business regulations viz., Fair Practices Code (FPC), KYC, etc., if they have not accessed any public funds and do not have a customer interface.

(ii) Those having customer interface will be subjected only to conduct of business regulations including FPC, KYC etc., if they are not accessing public funds.

(iii) Those accepting public funds will be subjected to limited prudential regulations but not conduct of business regulations if they have no customer interface.

(iv) Where both public funds are accepted and customer interface exist, such companies will be subjected both to limited prudential regulations and conduct of business regulations.

(v) Irrespective of whichever category the NBFC falls in, registration under Section 45 IA of the RBI Act will be mandatory.

(vi) All of the above will also be subjected to a simplified reporting system which shall be communicated separately.

8.3 All NBFCs-ND with assets of Rs. 500 crore and above, irrespective of whether they have accessed public funds or not, shall comply with prudential regulations as applicable to NBFCs-ND-SI. They shall also comply with conduct of business regulations if customer interface exists.

Note: For the purpose of this circular, the term ‘public funds’ includes “funds raised directly or indirectly through public deposits, commercial papers, debentures, inter-corporate deposits and bank finance, but excludes funds raised by issue of instruments compulsorily convertible into equity shares within a period not exceeding 5 years from the date of issue”.

Prudential Regulations Applicable to NBFCs-ND with Assets less than Rs. 500 crore

8.4 Consequent to the redefining of ‘systemic significance’ the NBFCs-ND with asset size of less than Rs. 500 crore, are exempted from the requirement of maintaining CRAR and complying with Credit Concentration Norms.

8.5 A leverage ratio of 7 is being introduced for all such NBFCs-ND to link their asset growth with the capital they hold. For this purpose, leverage ratio is defined as Total Outside Liabilities / Owned Funds.

Prudential Regulations Applicable to NBFCs-ND-SI (asset of Rs. 500 crore and above) and all NBFCs-D

Tier 1 Capital

8.6 At present, all NBFCs-D and NBFCs-ND with asset size of Rs.100 crore and above are required to have minimum CRAR of 15%. Consequently, Tier 1 capital cannot be less than 7.5%. For Infrastructure Finance Companies (IFCs), however, Tier 1 capital cannot be less than 10%. Similarly, NBFCs primarily engaged in lending against gold jewellery have to maintain a minimum Tier 1 capital of 12% w.e.f. April 01, 2014.

8.7 Given the business activities of NBFCs, being generally ‘niche’ in nature, concentration risk associated with such businesses, and on account of the re-definition of systemic importance, all NBFCs-ND which have an asset size of Rs. 500 crore and above, and all NBFCs-D, shall maintain minimum Tier 1 Capital of 10%. The compliance to the revised Tier 1 capital will be phased in as follows:

  • 8.5% by end of March 2016.
  • 10% by end of March 2017.

Asset Classification

8.8 At present, an asset is classified as Non-Performing Asset when it has remained overdue for a period of six months or more for loans; and overdue for twelve months or more in case of lease rental and hire purchase instalments, as compared to 90 days for banks. In the interest of harmonisation, the asset classification norms for NBFCs-ND-SI and NBFCs-D are being brought in line with that of banks, in a phased manner, as given below.

8.9 Lease Rental and Hire-Purchase Assets shall become NPA:

  1. if they become overdue for 9 months (currently 12 months) for the financial year ending March 31, 2016;
  2. if overdue for 6 months for the financial year ending March 31, 2017; and
  3. if overdue for 3 months for the financial year ending March 31, 2018 and thereafter.

8.10 Assets other than Lease Rental and Hire-Purchase Assets shall become NPA:

  1. if they become overdue for 5 months for the financial year ending March 31, 2016;
  2. if overdue for 4 months for the financial year ending March 31, 2017; and
  3. if overdue for 3 months for the financial year ending March 31, 2018 and thereafter.

8.11 For all loan and hire-purchase and lease assets, sub-standard asset would mean:

  1. an asset that has been classified as NPA for a period not exceeding 16 months (currently 18 months) for the financial year ending March 31, 2016;
  2. an asset that has been classified as NPA for a period not exceeding 14 months for the financial year ending March 31, 2017; and
  3. an asset that has been classified as NPA for a period not exceeding 12 months for the financial year ending March 31, 2018 and thereafter.

8.12 For all loan and hire-purchase and lease assets, doubtful asset would mean:

  1. an asset that has remained sub-standard for a period exceeding 16 months (currently 18 months) for the financial year ending March 31, 2016;
  2. an asset that has remained sub-standard for a period exceeding 14 months for the financial year ending March 31, 2017; and
  3. an asset that has remained sub-standard for a period exceeding 12 months for the financial year ending March 31, 2018 and thereafter.

8.13 For the existing loans, a one-time adjustment of the repayment schedule, which shall not amount to restructuring will, however, be permitted.

Provisioning for Standard Assets

8.14 At present, every NBFC is required to make a provision for standard assets at 0.25% of the outstanding. On a review of the same, the provision for standard assets for NBFCs-ND-SI and for all NBFCs-D, is being increased to 0.40%. The compliance to the revised norm will be phased in as given below:

  • 0.30% by the end of March 2016
  • 0.35% by the end of March 2017
  • 0.40% by the end of March 2018

Credit / Investment Concentration Norms for AFCs

8.15 As a step towards meeting the broad objective of harmonizing regulations to the extent possible within the NBFC sector, the credit concentration norms for AFCs are now being brought in line with other NBFCs. This will be applicable with immediate effect for all new loans excluding those already sanctioned. All existing excess exposures would be allowed to run off till maturity.

9. Corporate Governance and Disclosure norms for NBFCs

9.1 The need for adoption of good corporate governance practices continues to engage the regulator and stakeholder attention. In this connection, in continuation of previouscirculars DNBS(PD) CC. No.61/02.82/2005-06 dated December 12, 2005, DNBS(PD) CC. No.94/03.10.042/2006-07 dated May 8, 2007 and DNBS(PD) CC. No.104/03.10.042/2007-08 dated July 11, 2007 on Corporate Governance, certain amendments to the Corporate Governance guidelines are made as given below.

9.2 In terms of the above mentioned circulars, NBFCs-D with deposits of Rs. 20 crore and above, and NBFCs-ND with asset size of Rs. 50 crore and above are required to constitute an Audit Committee; NBFCs-D with deposits of Rs. 20 crore and above, and NBFCs-ND with assets of Rs. 100 crore and above are advised to consider constituting Nomination Committee to ensure ‘fit and proper’ status of proposed/ existing Directors and Risk Management Committee. Further, NBFCs-D with deposits of Rs. 50 crore and above were advised that it was desirable that they stipulate rotation of partners of audit firms appointed for auditing the company every three years.

Board Committees

9.3 As part of harmonisation, the constitution of the three Committees of the Board and instructions with regard to rotation of partners have now been made applicable to all NBFCs-ND-SI, as also all NBFCs-D. Other NBFCs are encouraged to observe such practices, if already being followed.

9.4 In addition, the Audit Committee of all NBFCs-ND-SI, as also all NBFCs-D must ensure that an Information Systems Audit of the internal systems and processes is conducted at least once in two years to assess operational risks faced by the company.

Fit and Proper Criteria for Directors

9.5 With the increasing integration of NBFCs in the financial sector and their growing systemic significance, it has become important that the Directors and shareholders who are responsible for steering the affairs of the companies are fit and proper, besides having the necessary qualifications. In view of this, the following additional requirements are being put in place, which shall be applicable to all NBFCs-ND-SI, as also all NBFCs-D, with effect from March 31, 2015.

  1. NBFCs shall ensure that there is a policy put in place for ascertaining the fit and proper criteria at the time of appointment of Directors and on a continuing basis. The policy on the fit and proper criteria should be on the lines of the Guidelines contained in Annex 1.
  2. A declaration and undertaking shall be obtained from the Directors by the NBFC, the draft of which is given in Annex 2.
  3. In addition, the Directors shall sign a Deed of Covenant as given in Annex 3.
  4. NBFCs shall furnish to the Reserve Bank a quarterly statement on change of Directors certified by the auditors and a certificate from the Managing Director that fit and proper criteria in selection of directors have been followed. The statement must reach the Regional Office concerned of the Reserve Bank within 15 days of the close of the quarter.

Disclosures in Financial Statements – Notes to Account

9.6 A reference is invited to DNBS.(PD)C.C.No.25/ 02.02/ 2002-03 March 29, 2003 and DNBS(PD).CC.No.125/ 03.05.002/ 2008-2009 August 1, 2008 under which NBFCs with assets of Rs. 100 crore and above were required to make additional disclosures in their balance sheets from the year ending March 31, 2009 relating to CRAR, exposure to real estate sector (both direct and indirect), and maturity pattern of assets and liabilities respectively. The above disclosures are now applicable for NBFCs-ND-SI (as redefined) and for all NBFCs-D. However, other NBFCs already disclosing the above are encouraged to continue to do so, in line with prudent practice.

9.7 The extant disclosures are however far from comprehensive. There is need for greater transparency to provide enhanced information to the market and retain stakeholder confidence. It has hence been decided that in addition to the above disclosures, all NBFCs-ND-SI (as redefined), as also all NBFCs-D shall additionally disclose the following in their Annual Financial Statements, with effect from March 31, 2015:

  1. Registration/ licence/ authorisation obtained from other financial sector regulators;
  2. Ratings assigned by credit rating agencies and migration of ratings during the year;
  3. Penalties, if any, levied by any regulator;
  4. Information viz., area, country of operation and joint venture partners with regard to Joint Ventures and Overseas Subsidiaries; and
  5. Asset liability profile, extent of financing of parent company products, NPAs and movement of NPAs, details of all off-balance sheet exposures, structured products issued by them as also securitization/ assignment transactions and other disclosures as given in Annex 4.

10. Off-Site Reporting

In view of the revised regulations, NBFCs-ND, with assets less than Rs. 500 crore, including investment companies, shall henceforth be required to submit only a simplified Annual Return, the details of which shall be separately communicated. Till such time, they may continue to submit the existing Returns. NBFCs-ND-SI (as redefined), as also NBFCs-D, shall continue to submit the existing Returns.

11. Exemptions

11.1 In the circular dated March 21, 2014 on Early Recognition of Financial Distress, Prompt Steps for Resolution and Fair Recovery for Lenders: Framework for Revitalizing Distressed Assets in the Economy, ‘Notified NBFCs’ in the circular shall henceforth be defined as a) NBFCs with assets of Rs. 100 crore and above, b) NBFCs-D, and c) all NBFC-Factors.

11.2 The revisions brought through this circular shall be applicable to NBFCs-MFI also except wherever in conflict with the provision of Non-Banking Financial Company- Micro Finance Institutions (Reserve Bank) Directions, 2011, in which case the Directions ibid will be followed.

11.3 The minimum Tier 1 capital requirement for NBFCs primarily engaged in lending against gold jewellery remains unchanged for the present. This shall be reviewed for harmonization in due course.

11.4 The above revisions shall be applicable to registered Core Investment Companies except wherever contrary with the provisions of Core Investment Companies (Reserve Bank) Directions, 2011, in which case the Directions ibid will be followed.

Application of other Laws not barred

12. The provisions of these Directions shall be in addition to, and not in derogation of the provisions of any other law, rules, regulations or directions, for the time being in force.

13. The RBI may, if it considers necessary for avoiding any hardship or for any other just and sufficient reason, exempt any NBFC or class of NBFCs, from all or any of the provisions of these Directions either generally or for any specified period, subject to such conditions as the RBI may impose.

14. The Notifications in this regard shall follow.

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CLSS 2014 extended upto 31/12/2014

The Ministry of Corporate Affairs has vide its circular no. 44/2014 dated 14th November 2014 extended the Company Law Settlement Scheme upto 31st December, 2014. The Company Law Settlement Scheme is a one time opportunity for those companies who have not filed their mandatory annual documents like the audited financials, annual returns, compliance certificates and for auditors to file their appointments for the past years other than the current financial year. The belated filings can be done by paying only 25% of the additional filing fees. The company thereafter has to also file the form CLSS 2014 seeking immunity from prosecution from the government for its default in not filing the said forms/ documents within the stipulated time.

So, therefore, companies should avail of this opportunity and file the belated documents on or before 31st December, 2014.

Click to access General_Circular_44-2014.pdf

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