Fresh Registration Made Mandatory For Existing Nbfcs

In a major tightening of norms for non-banking finance companies, the Reserve Bank of India yesterday directed even the registered NBFCs to seek a fresh registration before July 8.

The Reserve Bank of India (Amendment) Act, 1997, which comes into immediate effect, has stated that carrying on business without a certificate of registration is an offence punishable with imprisonment or fine.

The NBFCs have also been asked to create a reserve fund and transfer to it not less than 20 per cent of the net profit annually. Appropriations from the fund will be controlled by the RBI.

The RBI has also been given powers to commence winding-up proceedings against defaulting NBFCs.

 

The RBI has been empowered to raise the minimum net-owned funds (NOF) limit for NBFCs to Rs 2 crore in accordance with the RBI (Amendment) Act.

NBFCs with NOF below the prescribed limit of Rs 25 lakh as on January 9, 1997, will have to attain the levels in three years. An extension beyond three years may be granted by the RBI if it receives prior intimation from the NBFC.

NBFCs have to invest on a daily basis 5 per cent of their deposits outstanding at the end of the last working day of the second preceding quarter in unencumbered approved securities valued at market price. The RBI may also prescribe a higher percentage of liquid assets not exceeding 25 per cent. It can fix different percentages of investment for different types of companies.

If an NBFC does not maintain the required percentage of liquid assets in the prescribed manner,

the RBI can impose a penalty at the rate of three per cent per annum above the bank rate on the amount of shortfall.

The RBI has also been empowered to issue directions to get the NBFCs books of accounts to be inspected by their auditors. The auditors remuneration will have to be borne by the NBFC.

The new Act prevents unincorporated bodies involved in the activities of financing, including individuals, firms and other associations, from accepting deposits with effect from April 1, 1997. The deposits will have to be repaid within three years.

NBFCs which were already in existence before January 9 this year would be allowed to carry on business till a fresh registration is allowed. If an NBFC carries on business without a certificate of registration, it will be fined up to Rs 5 lakh or twice the amount involved in such contravention, where the amount is quantifiable, whichever is more. A continual default involves a further penalty of up to Rs 25,000 every day after the first day of such default. For any other contravention, a fine not exceeding Rs 5,000 can be imposed by the RBI.

CHANGES AT A GLANCE

Existing NBFCs to apply for registration by July 8, 1997, but can carry on business until registration refused

NBFCs with net owned funds of less than Rs 25 lakh given three years to reach that level

Firms to create reserve fund and transfer not less than 20 per cent of their net profit to reserve fund every year

RBI can even file wind-up petition against an NBFC if it fails to repay debt or is disqualified from carrying on business

Unincorporated bodies cannot issue ads for soliciting deposits the RBI can impose a penalty at the rate of three per cent per annum above the bank rate on the amount of shortfall. The RBI has also been empowered to issue directions to get the NBFCs books inspected by their auditors.

The new Act prevents unincorporated bodies involved in financing activities from accepting deposits with effect from April 1, 1997.NBFCs which were already in existence before January 9 would be allowed to carry on business until a fresh registration is refused.

If an NBFC carries on business without a certificate of registration, it will be fined up to Rs 5 lakh or twice the amount involved in such contravention, where the amount is quantifiable, whichever is more. A continual default involves a further penalty of up to Rs 25,000 every day after the first day of such default.