NBFCs approach RBI, govt over new companies Act

Non-banking finance companies (NBFCs) have approached the Reserve Bank of India (RBI) and the Ministry of Corporate Affairs to amend regulations under the new companies Act. These companies fear the stiff reserve requirements and norms on investment in government bonds will hit them hard.

NBFCs are, however, yet to raise the matter with the ministry in a formal manner.

Rules under the new companies Act make it mandatory for NBFCs to create a corpus (debenture redemption reserve account) to meet repayment obligations for debentures maturing within a year. Also, they have to invest 15 per cent of their resources in government bonds.

While building buffers for repayment is good for financial discipline, the provisioning would eat into the funds to be deployed into business. And, this will be a huge burden on the already stretched balance sheets of NBFCs, say executives at such companies.

Under the old companies Act (of 1956), financial companies were exempted from such a corpus.

Mahesh Thakkar, director-general of Finance Industry Development Council, said the new Act could make the situation acute. The entity will take up the matter with the ministry and RBI, the regulator for financial companies. Thakkar said the new Act could make fund-raising through debentures unviable.

The effect of the norms on financial companies will vary according to degree of their dependence on debentures - while those using bank lines to source funds won't see much impact, companies using medium-term (two-three-year) debentures will be under pressure to keep a substantial portion of their funds in the redemption reserve.

Sanjay Agarwal, managing director of Au Financiers, said an exemption was allowed in the old companies Act, adding perhaps, it was left out in the new Act due to oversight. NBFCs have already urged the government to reintroduce the exemption. For AU Financers, the share of bonds/debentures in the total funds raised is about 20 per cent, and this might deal a 10-basis-point impact on costs.

Vibha Batra, senior vice-president (financial sector rating), Icra, said now, the cost of business would rise.

Fewer funds will be available for deployment and amounts kept in reserves will have a 'negative carry', she said, adding this would, however, not impact the ratings of the instruments floated by NBFCs. Many well-run companies already maintained liquidity buffers to meet redemption obligations; these could be in the form of bank credit lines, she said.