NBFC Master Directions 2016: An Analysis

[The following guest
post is contributed by Surbhi Jaiswal
of Vinod Kothari & Co. She can be reached at
surbhi@vinodkothari.com.]
On 1 September, 2016, the Reserve Bank of India (RBI)
issued two new sets of master directions, namely the Master
Direction – Non-Banking Financial Company – Non-Systemically Important
Non-Deposit taking Company (Reserve Bank) Directions, 2016
and the Master
Direction – Non-Banking Financial Company – Systemically Important Non-Deposit
taking Company and Deposit taking Company (Reserve Bank) Directions, 2016

(Collectively referred to as “Master Direction”) for Non-Banking
Financial Companies (NBFCs) wherein the RBI has compiled all its earlier fragmented
regulations, namely prudential norms, fair practice codes, registration
requirements, and so on that are applicable to an NBFC, so as to place them under
one umbrella.
A few days earlier, the RBI had come out with a
similar direction for Core
Investment Company (CIC), namely the Master Direction – Core Investment
Companies (Reserve Bank) Directions, 2016)
(CIC Directions 2016) wherein it
had consolidated all regulations applicable to a CIC under one roof.
Likewise, with the Master Directions in place, it
will not be necessary to navigate across various circulars to understand the
various regulations applicable to an NBFC. One will not have to look beyond
these new directions. 
The Consolidation not only aids in more easily tracing
the diverse regulations applicable to an NBFC, but it has also addressed the
confusion pertaining to asset aggregation of multiple NBFCs in a group for
determining the SI status. The same has been dealt below.
Multiple
NBFCs
Pursuant to para
7.1 of the revised regulatory framework issued through a circular, CC No. 002
dated November 10, 2014
, the concept of multiple NBFCs was introduced
wherein 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 viz., NBFCs-ND (those with assets of less
than
500 crore) and
NBFCs-ND-SI (those with assets of

500 crore and above). The consequence of this consolidation was far-reaching.
Where the total of the assets of all NBFCs in the group would go beyond Rs. 500
crores, prudential norms as applicable to an NBFC-ND-SI would become applicable
to all small NBFCs in the group as well. This meant that such small NBFCs had
to comply with the stringent norms of capital adequacy, credit concentration
norms etc. The introduction of this requirement was carried out with the
purpose of curbing the malpractice of various corporates, who would float
various NBFCs carrying on the same business merely to escape the rigid
requirements laid down by the RBI. The consolidation was faced with various
hurdles, of which one pertained to the inclusion of assets of CICs in the
group. Following were the views taken by the companies:
1.         Aggregation of assets of NBFCs and all
CICs (SIs and Non-SIs):

The rationale behind this approach is that CICs in their very foundation are
nothing but NBFCs, therefore they are to be included in the asset aggregation
process.
2.         Aggregation of assets of NBFCs and only
CIC-SIs:

The rationale was same as above, however, RBI by way of its FAQs on NBFCs
clarified that CICs that were exempted from registration shall not be included
in the asset aggregation process. The text of FAQs is as follows:
“Q
82. In terms of para 7.1 of the revised regulatory framework issued vide CC No.
002 dated November 10, 2014, 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 viz., NBFCs-ND (those with
assets of less than

500 crore) and NBFCs-ND-SI (those with assets of

500 crore and above). Regulations as applicable to the two categories will be
applicable to each of the NBFC-ND within the group. Will this aggregation of assets apply to exempted category of CICs in
the group?
Ans. No, the group requires to aggregate
total assets of only those NBFCs which have been granted Certificate of
Registration by the Bank. However, it must be ensured that the capital of the
exempted category of CIC has not come, directly or indirectly, from an entity/
group company which has accessed public funds.” (Emphasis Supplied)
           
Therefore, companies
only included the assets of CIC-SIs.
3.         Aggregation of assets of only NBFCs in
the group:

The rationale behind this approach was that CICs, even though are NBFCs, but
are governed by different set of directions, therefore are not to be included
in the asset aggregation process.
Master
Directions clear the fog
The Master Directions have cleared the ambiguity
regarding inclusion of CICs in the asset aggregation process. Para 2 of the
Master Directions deals with the applicability of these Directions. It clearly
spells out the category of NBFCs to which these are applicable. For ease of
reference the text of the directions has been reproduced below.
Para 2 of the Non-Banking Financial Company –
Systemically Important Non-Deposit taking Company and Deposit taking Company
(Reserve Bank) Directions, 2016 states the following:
“2.
Applicability
(1)
The provisions of these Directions shall apply to the following:
(i)
every Systemically Important Non-Deposit taking Non-Banking Financial Company
(NBFC-ND-SI) registered with the Bank under the provisions of RBI Act, 1934;
(ii)
every Deposit taking Non-Banking Financial Company (NBFC-D) registered with the
Bank under the provisions of RBI Act, 1934;
(iii)
every NBFC-Factor registered with the Bank under section 3 of the Factoring
Regulation Act, 2011 and having an asset size of ` 500 crore and above;
(iv)
every Infrastructure Debt Fund – Non-Banking Finance Company (IDF-NBFC)
registered with the Bank under the provisions of RBI Act, 1934;
(v)
every Non-Banking Finance Company – Micro Finance Institutions (NBFC-MFIs)
registered with the Bank under the provisions of RBI Act, 1934 and having an
asset size of ` 500 crore and above;
(vi)
every Non-Banking Finance Company – Infrastructure Finance Company (NBFCIFC)
registered with the Bank under the provisions of RBI Act, 1934 and having an
asset size of ` 500 crore and above.
(2)
The Category of NBFCs as mentioned at
points (i) to (vi) above are hereafter referred to as ‘applicable NBFCs’, for the
purpose of these Directions
. Specific directions applicable to specific
categories of NBFCs registered as NBFC-Factors, 5 IDF-NBFCs and NBFC-MFIs are
as provided for under respective Chapters in these Directions (Emphasis Supplied)
XXX”
Further, para 2 of the Non-Banking Financial Company
– Non-Systemically Important Non-Deposit taking Company (Reserve Bank)
Directions, 2016 states the following:
“2.
Applicability
 (1) The provisions of the Directions shall
apply to the following:
(i)
every non-banking financial company not accepting / holding public deposits
which is not systemically important (as defined in paragraph3 (xxviii) of the
Directions;
(ii)
every NBFC-Factor registered with the Bank under section 3 of the Factoring
Regulation Act, 2011 and having an asset size of below ` 500 crore;
(iii)
every Non-Banking Finance Company – Micro Finance Institution (NBFC-MFI)
registered with the Bank under the provisions of RBI Act, 1934 and having an
asset size of below ` 500 crore;
(iv)
every Non-Banking Finance Company – Infrastructure Finance Company (NBFCIFC)
registered with the Bank under the provisions of RBI Act, 1934 and having an
asset size of below ` 500 crore.
(2)
The Category of NBFCs as mentioned in
points (i) to (iv) above are hereinafter referred to as ‘applicable NBFCs’, for
the purpose of these Directions
. Specific directions applicable to specific
categories of NBFCs registered as NBFC-Factors, NBFC-IFC and NBFC-MFIs are as
provided for under respective Chapters in these Directions.
XXX” (Emphasis Supplied)
On reading the applicable section, it is apparent
that CICs do not come under these Regulations at all. Further, Para 15 of the
Master Direction lays down the requirement of asset aggregation of NBFCs in the
group. It states that:
“15.
Multiple NBFCs
Applicable NBFCs
that are part of a corporate group or are floated by a common set of promoters shall not be viewed on a standalone basis.
The total assets of the NBFCs in a group including deposit taking NBFCs, if
any, shall be aggregated to determine if such consolidation falls within the
asset sizes of the two categories i.e. those with asset size of below

500 crore and those with asset size of

500 crore and above. Regulations as applicable to the two categories shall be
applicable to each of the non-deposit taking NBFC within the group. For this
purpose, Statutory Auditors are required to certify the asset size of all the
NBFCs in the Group. However, NBFC-D, within the group, if any, shall be
governed under the Non-Banking Financial Companies Acceptance of Public
Deposits (Reserve Bank) Direction, 2016 and Prudential Norms and other
Directions as applicable to deposit taking NBFCs.”
On reading the above it is clear that the assets of
only Applicable NBFCs are required to be aggregated and Applicable NBFCs have
been defined and the same does not include CICs.
It is only correct as CICs have their own set of
directions which covers the Regulations applicable to a CIC. Further, inclusion
of CICs in the aggregation process meant that where the total asset size would
go beyond Rs. 500 crores, prudential norms, as applicable to SIs would become
applicable to CIC as well. This was very counter-intuitive as CICs have to
follow a different set of directions wherein they have to comply with their own
specific requirements pertaining to capital, leverage etc. Moreover, they were
specifically exempted under the earlier SI directions from complying with
various prudential requirements, so the intention of RBI was definitely not to
bring CICs within the purview of SI directions. Therefore, the inclusion of
CICs in asset aggregation process of NBFCs was completely unwarranted as they
would do nothing but inflate the asset size. The Master Directions have
therefore made the position very clear.
Further, there was a minor change in para 4.7 of
Annex XII of the Master Direction pursuant to which disclosure of the impact of
prior period items on the current year’s profit and loss would have to be made
in the notes to accounts. Previously, disclosure of impact was not mandatory;
however the same is mandatory now.
Conclusion
As stated earlier, the nature of the Master
Directions is largely a consolidating one, so there are no major changes in the
regulations. The RBI is merely following the trend of consolidating the provisions
under one umbrella. This is nothing but beneficial, since with these new
directions in place one will not have to look beyond them to understand the
provisions applicable to an NBFC.
– Surbhi Jaiswal

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

1 comment

  • Reserve Bank of India vide Notification no. RBI/2016-17/245 DNBR (PD) CC.No.086/03.10.001/2016-17 dated March 09, 2017 has made amendment in Master Directions dated September 01, 2016 by providing that all the NBFCs shall ensure compliance to the provisions of section 269SS and 269T of the Income tax Act, 1961 with regard to Disbursal of Loans.
    As can be interpreted from the circular, all the NBFCs are now required to Disburse the loans amounting to Rs.20,000 or more by Cheque/Demand Draft or through other Banking Channels.
    RBI has also directed NBFCs to ensure compliance with regard to Section 269T which provides for repayment of loan along with interest amounting to Rs.20,000 or more. The said amendment has come into effect w.e.f. March 9, 2017.
    As per the amendment, NBFCs are to ensure compliance of 269SS and 269T which strictly means that giving of loans in cash to borrowers and repayment of installments in cash by borrowers to NBFC, the penal provisions of 269SS and 269T do not apply to NBFCs. However, the intention of amendment is that NBFCs should not disburse loans in cash amounting to Rs.20,000 or more in cash. If the same analogy is applied for 269T, NBFCs will not be able to take repayment of instalments of loans outstanding with interest amounting to Rs.20,000 or more. please give your comments.

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