News and views on Non-Banking
Financial Services
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JANUARY 2012
SAMPADA
2
In this Issue:
S.No. Content
Page No.
1. Factoring Bill: Blow to receivables financing : Article by Vinod Kothari
3-5
2. collective investment schemes for real estate investment : Article by Nidhi Jain
6-11
3. Basic Instinct: 12
Foreign direct Investment by NBFCs – Eligible Sectors and conditions
4. Market Watch:
13
5. Contact Us 14
Editorial:
NBFCs perform an important role in our
financial system. The finance sector has
undergone significant reforms in the
recent times. We are pleased to present
before you a new issue of Sampada. Our
endeavor is to keep you updated with
everything in the NBFCs sector.
The current issue contains article on the
Factoring Bill. We also tried giving an
informative write-up on Collective
Investment Schemes for real estate
investment. Also we have tried giving
eligibility norms and sectors for foreign
direct investment by NBFCs.
We hope you would be able to
appreciate that our notes, updates and
views are timely, informative, articulate
and useful and we vow to continue
providing industry information which
would be a value-add to our readers.
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contribution to make, we welcome your
suggestions. We are open to changes.
Abhijit Nagee [email protected]
JANUARY 2012
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3
The Parliament recently passed the Factoring Regulation Bill 2011 (“Factoring Bill” or “Bill”). Given the fact that several other important bills have taken years to ascend into the statute book, the Factoring Bill has really been commendably quick to progress. No one would perhaps know what the urgency was for the Bill – it is not as if factoring business was a mushrooming business which needed regulation. On the contrary, factoring is an idea that the RBI has been meaning to promote over decades, and there has not been any substantial pick up in factoring volumes over the years. If at all factoring business needed anything – it was support and promotion. But the tone of the Bill is far from promotion – it is full of a regulatory slant. This is exactly the model that RBI used when passing the Securitisation Act – with the idea to promote securitisation, and it ended up in regulating securitisation to the extent that no securitisation transaction has ever happened so far under the Act.
The regulatory tone of the Bill apart, the Bill seeks to enact the provisions of the UNCITRAL model law on assignment of trade receivables1, which itself, 11 years after its proposition, has been affirmed only by 4 countries in the world.
Factoring: a slow starter
The government’s efforts at promoting factoring date back to 1988 when the RBI appointed the Kalyansundaram Committee. Subsequently, the RBI allowed banks to enter factoring by a notification in 1991. Some banks did respond by starting dedicated factoring companies – SBI Factors, Canbank Factors etc were started.
However, factoring has obviously not been something to attract the fascination of either the banks or the NBFCs. The factoring volumes in India have not been significant enough, and unlike other facets of NBFC activity, factoring business has not drawn foreign players to any appreciable extent, except recently when some foreign banks seem to have begun factoring services.
Receivables financing:
While factoring might have picked up much, receivables financing has continued to grow with the growth of the NBFC sector. The NBFC sector today views receivables as much as a part of asset-based financing as other tangible assets. And lot of investments in happening today in the infrastructure as well as IT sector where the basis of investment is receivables. To give instances – a PSU/ government department goes for a massive system upgradation where equipment and services are provided by an aggregator, who in turn finances himself based on the receivables committed by the client. Receivables discounting is also common as a mode of sales-aid financing –several software and hardware vendors provide the facility of installment or deferred payments to their clients and in turn sell the receivables to finance companies. None of this is factoring in the real sense, because none of the so-called receivables financiers are going anywhere beyond pure financing. Besides receivables financing, strands of activity are also going in the field of export receivables factoring.
The Factoring Bill: bringing receivables financing into regulatory ambit..
First of all, was there a case at all that a factoring company was not covered by the regulatory ambit prior to the enactment of the new law? If the factoring activity was being carried out as a true acquisition of receivables by the factor, it is possible to argue that what is a purchase of receivables cannot be a financing transaction, and hence, a factor is not a non-banking finance company under existing definition in the RBI Act.
DECEMBER 2011
Factoring Bill: Blow to
receivables financing
- Vinod Kothari [email protected]
ARTICLE
JANUARY 2012
4
However, most factors actually carry out full recourse factoring – with features that hardly imply an intent of purchase of receivables – hence, such activities nothing but lending on the security of receivables, and hence, would still amount to a “financial business” for being regulated as an NBFC. Therefore, if the law is based on the premise that factors were not regulated so far, and the idea is to regulate them, the basis is misplaced. As regards receivables financing - admittedly, this is a financing activity and hence, the business is a “financial business”, bringing the business under RBI supervision. However, the key feature of the existing NBFC regulation is that financial business needs to be the “principal” business to bring an entity into NBFC domain. If a non-banking, non-financial entity carries financial business, it may still retain its status as a non-financial business as long as the business remains “non-principal”. The RBI has been using a percentage of assets and income as the criteria for determining principality.
.. even if it is not the principal business
If the idea of the Bill is to bring entities engaged in factoring business into the regulatory ambit, let us examine to what extent does the law go in meeting this objective. First of all, the Bill defines “factoring business” to include both acquisition of receivables as well as receivables financing. That is to say, any financial transaction where receivables are accepted as a security. Clearly, the definition is thoughtlessly inserted and can be stretched to completely unintended extent. For example, if someone gives a loan against a machine, and accepts receivables as a collateral security, it is certainly not a transaction of financing of receivables, but looking the way the definition is worded, the transaction will amount to “factoring business”. The biggest problem lies in the language of sec. 3 which says – no factor shall commence or carry on the business of factoring without RBI registration. The word “factor” is defined in sec. 2 (i) as a non-banking financial company, a body corporate, or any other company. Sec 3 (2) and its proviso pertain to an NBFC presently carrying out, as its principal business, on the date of commencement of the Act. However, sec 3 (1) nowhere says that the provision will be applicable only where the factor carries on factoring as its principal business. That is to say, if the language of sec. 3 is taken as it is, every company carrying on factoring business, whether as a principal business or not, needs to apply for RBI registration. The only exception to this will be banks, and statutory corporations, in term of sec 5 of the Bill. This brings a completely over-stretched arm of the Bill which requires mandatory registration, and RBI supervision, in case of non-financial companies which may be engaged in acquisition or security interest over receivables as a non-principal activity. Several manufacturing/trading companies do so. Several IT companies may also be doing the same. There is an exception specifically made in case of securitisation transaction, further reinforcing the assumption that whether or not the business of factoring is the main business, registration under the Bill becomes mandatory. Thus, NBFCs will need registration under the law only if their principal business in factoring, but other companies, excluding banks, will come under the registration requirements irrespective of whether factoring business is principal business or not. If it is a business, it will come under the law.
ARTICLE
JANUARY 2012
5
Substantive provisions:
The substantive provisions of the law inclusively pertain to giving effect to an assignment agreement. Section 7 provides that an assignment shall be effective between assignor and assignee on the execution of the agreement, and section 8 provides that no right shall exist against the debtor unless the debtor has been served with the notice of assignment. This is exactly the common law position understood through more than a century. Sec 130 of the Transfer of Property Act provides for the same thing and common law jurisdictions all over the world work on the same principle. This was the law before; this remains the law after the Bill. To put the point in perspective, several assignment of receivables are “silent” assignments – meaning, the fact of the assignment is not notified to the debtor. This is the universal practice in case of securitisation transactions. In case of financing transactions also, the lender typically does not need to, and hence does not, notify the obligor. However, section 17 of the Bill makes silent assignments completely fragile and almost impossible. This section says that in case of silent transfers, the assignee will be bound by any such modification of the original contract that the assignor may make with the debtor. It is only after the notification of the assignment that such modifications become ineffective. That is to say, unless the assignee gives immediate notice of the assignment to the debtor, the assignee is virtually at the mercy of the assignor. This provision is borrowed from UNCITRAL model law on international assignment of trade receivables, but will certainly give major jolt, particularly those who lend money against receivables. By way of saving grace, the provisions of the Bill have been excluded in case of securitisation transactions, but what is a securitisation transaction itself will remain queer.
Registration provisions
The Bill mandates registration of all assignment transactions, and also satisfaction of claims of the assignee. Non-registration does not affect the validity of the assignment; registration does not amount to a notice to the debtor. However, non-registration is punishable with a fine upto Rs 5000 per day. The registry office is the Central Registry under the SARFAESI Act, currently being run by NHB. The way the language of the law is, filing notice of satisfaction or realisation of a debt may, in case of instalment or partial payments, notifying innumerable events. In case of trade receivables, factoring transactions involve revolving lines of credit, with numerous receivables getting assigned in succession.
Hence, the mandatory registration requirement, with no advantage as to validity or deemed notice to the obligor, only impose an added administrative burden.
Conclusion:
In conclusion, the Factoring Bill does not fill any legislative gap; does not take further the common law provisions which were any way flexible enough. It does not answer the needs of trade. It is not something that was urgent in terms of regulating something that was growing unwieldy. It was nobody’s need. And it fills nobody’s needs either.
ARTICLE
JANUARY 2012
6
Collective
investment
schemes for real
estate investment
- Nidhi Jain [email protected]
Real estate sector in India is growing and is becoming attractive to various investors. The growth in real estate market is seen in both commercial as well as residential field. The attractiveness of the Indian real estate sector is also decorated by a report ‘Emerging trends in Real Estate in Asia Pacific 2011’ published by PriceWaterhouseCoopers and Urban Land Institute1. According to this report, India leads the pack of top real estate investment markets in Asia for 2010. As per a report by Ernst & Young, “the long-term view for the Indian real estate sector is positive since its fundamental demand drivers - increasing urbanisation, favourable demographics, growth of the services sector and rising incomes are still intact.”1 The real estate sector is getting more and more organized and transparent witnessing various regulatory reforms like Government of India supporting the repeal of Urban Land Ceiling Act, rationalization of property taxes in various states, modifications in Rent Control Act for greater protection of owners wishing to rent out their properties. This organization and transparency has added a lot to the development of the sector including greater demand for residential, commercial and retail real estate all across India. At the same time, the foreign investments in real estate are also increasing. According to the Department of Industrial Policy and Promotion India (DIPP), during April-November 2011-12, the Indian real estate and housing sectors received US$ 509 million in foreign direct investment (FDI) accounting for 7% of total FDI inflows.1 Further, the cumulative inflow from April 2000 to November, 2011, on account of FDI in real estate and housing is US$ 10891 million. Real estate also emerged as the popular sector for private equity (PE) funds, which witnessed investments worth US$ 1,700 million in the sector during 2011. Collective investment schemes are coming up in the mind of various investors for entering into the real estate industry. Some of the examples which can be quickly cited are of Sahara India, PACL India Ltd. This article talks about various possible structures under which a real estate business can be carried out. Introduction to REITs: The ideal way to launch any scheme for real estate business would have been a real estate investment trust (REIT). A REIT is a fund that holds real estate or mortgage using capital pooled from investors. It is a tax transparent, collective investment device to channelize investments into income-producing real estate. REITs could be listed on stock markets or could be unlisted but has to be regulated through a regulatory board. However, REITs derive their tax transparency from specific legislations. No such legislation exists in India. In fact, REITs have been considered on various occasions, but it seems that the regulators are currently not in favour of permitting REITs. Hence, there is a need to look up for alternative structures which can run as a REIT. Constraints and applicable laws: The constraints/applicable law within which a real estate scheme has to operate are the following:
1. It is very apparent that there will be commingling of funds, as investment in properties has to be pooled together to form any practical ticket size. If there is commingling of funds, apparent implication is the Collective Investment Scheme regulations of the SEBI.
ARTICLE
JANUARY 2012
7
2. Yet another implication on commingling is the formation of Association of person (AOP) and loss of tax transparent status to the pool. On prima facie basis, a pass through or see through treatment is applicable to an investing vehicle only if the vehicle rateably distributes all that it receives and does not vest any discretion in the manager of the pool, so that the income of each participant is nothing but a rateable proportion of the income. However, in most of the cases, the manager of the scheme will continue to invest and reinvest the funds in a discretionary manner. Based on recent rulings, particularly in case of M/s Gammon India Ltd. v. Commissioner of Customs (Civil Appeal No. 5166 of 2003)1, the apparent view is that an AOP will come into existence in the eye of tax authorities. AOP taxation does not result into double taxation, but one has to bear in mind an entity-level taxation of the AOP.
The possible forms/ structure for the real estate business are discussed below:
III. Collective Investment Scheme (CIS)
Any scheme or arrangement made or offered by any company under which the contributions, or payments made by the investors, are pooled and utilised with a view to receive profits, income, produce or property, and is managed on behalf of the investors is a CIS. Investors do not have day to day control over the management and operation of such scheme or arrangement.
The three critical features of a CIS are: (a) pooling of money; (b) entrustment of money to someone such that the investors are not the ones who are managing their own money; and (c) sharing of returns from a specified investment.
The Companies whose object is to organise, operate and manage a CIS need to be registered with SEBI under the SEBI (Collective Investment Schemes) Regulations, 1999 and it will be known as Collective Investment Management Company (CIMC). A registered CIMC is eligible to raise funds from the public by launching schemes.
Apart from the comprehensive registration and constitutional requirements, the scheme should be rated by a rating agency and appraised by an appraisal agency. A copy of the offer document of the scheme has to be filed with SEBI and if no modifications are suggested by SEBI within 21 days from the date of filing then the CIMC is entitled to issue the offer document to the public for raising funds from them.
The inflexibility and rigidity of the regulations has made it very difficult for any CIS schemes to suo-moto come under the SEBI regulations. However, the real estate schemes floated by many companies which are satisfying the features of CIS have been mandatorily required by SEBI to be compulsorily registered and prosecution have been initiated by SEBI against companies that are not complying with its directions in this regard. As on 31st March, 2011, there are 552 companies against which prosecution cases were launched for violation of CIS Regulations1.
IV. Alternate Investment Fund (AIF)
Recently in August, 2011, SEBI has come up with a concept paper on setting up an Alternate Investment Fund (AIF), however with the regulators it may not be likely that the final regulations would be published soon. Hence, the funds regulated by SEBI under this banner may seem futuristic and may not be of immediate relevance.
Once the regulations come into existence, based on the recent concept paper, the investors can consider setting up a Real Estate Investment Fund as an Alternate Investment Fund (AIF). In that case, there are certain regulatory requirements as per the proposed guidelines on AIF; few of them are listed below:
1. Mandatory registration with SEBI. 2. Funds to be formed as Company, trusts, LLP or body corporate. In case of a company or LLP, the number of
shareholders or partners should not be more than 50. 3. Funds shall be close ended. 4. There is no upward limit for revision of fund size, although this is possible only after SEBI’s permission on the
same. But, minimum investment amount would be specified as 0.1% of fund size subject to a minimum floor of Rs. 1 Crore.
5. The size of units issued will not be less than Rs.10 lakhs. 6. Units may not be transferable immediately or only after lock‐in period amongst institutional/HNI investors which
may be listed after lock‐in period or after specific duration at the choice of the funds. For Real Estate Funds, investment could be in Real Estate Projects or shares in the SPVs undertaking Real Estate Projects.
JANUARY 2012
ARTICLE
8
ARTICLE
V. Limited Liability Partnership (LLP)
Real estate investment business can be done under the form of LLP. LLP structure is attractive mainly because of the limitation on the liability of the partners to their investment in the LLP and not beyond. It is also easier to set up and operate with relaxed reporting structures unlike the traditional incorporation laws governing companies under the Companies Act, 1956.
As per the latest data available from the government’s site for LLP, 7337 LLPs are registered as on 20.12.2011, out of which 751 are engaged in real estate activities.1 So, it can be easily seen that despite of being a new legal structure, people are considering LLP for investing in real estate. Particularly because of the following benefits:
1. The sponsors can be designated partners; with the investors being limited partners.
2. The partnership agreement may provide for such manner of sharing the profits of the partnership as may be fixed therein. That is to say, it is not necessary that the limited partners will have the same share of profits as designated partners.
Talking about the limitations of this structure,
1. One of the limitations is that the share in partnership is not freely transferable. However, provisions may be incorporated in the Partnership agreement for: - Transfer of partnership interest by a partner to a person selected by
him, subject to resolution of managing partners. - Buy back of partnership interest by the partnership.
2. Another limitation in this structure is that though there is no limit on maximum number of partners, if investors are to be taken as partners; partnership deed needs to be amended every time when a new investor comes in.
It can therefore be said that practically, an LLP may virtually be run as a REIT. However, one needs to look into the other side as well i.e. the applicable laws and regulation.
Applicability of SEBI (Collective Investment Schemes) Regulations, 1999:
A Collective investment scheme is any scheme or arrangement, which satisfies the conditions, referred to in sub-section (2) of section 11AA of the SEBI Act. Section 11AA (2) of SEBI Act is only applicable for companies and LLP is not a company. Hence, CIS Regulations will not be applicable on LLPs.
However, since LLP is a new concept in India and there have been regular amendment in various laws for LLPs, as and when there is an amendment in SEBI Regulations for incorporating LLPs under its purview, then the compliances under CIS Regulation will be required.
Taxation of LLP:
LLP is treated as Partnership firms for the purpose of Income Tax and is taxed like a partnership firm. Alternate Minimum Tax (AMT) will be applicable on LLPs if there is a taxable loss. The share of a partner in the total income of a LLP shall be exempt from tax u/s 10(2A) of the Income Tax Act.
So, virtually there will not be any double taxation under LLP structure, but again the taxes will be levied on entity level and not on investors’ level.
JANUARY 2012
9
I. Issue of redeemable bonds linked with performance return Issue of bonds linked with performance returns (herein after referred to as ‘Bonds’) can be considered as another option by investors willing to invest in real estate. These Bonds can carry a floating coupon based on the return on the real estate and can be redeemed from the sale proceeds of the real estate. The Bonds will become attractive to investors as they are backed-up with real estate. Moreover, there is always an exit route for the investor as they can transfer the Bond easily and exit. The issue of Bonds can be done through private placement or public issue depending on the number of investors.
1. Private issue of Bonds If the Bonds are to be issued to less than 50 investors and are not to be listed, no guidelines have been prescribed as such. However, if the issue is to be listed, guidelines as applicable to listing of public issue, shall apply.
2. Public issue of Bonds
Along with other compliances as mentioned in SEBI (Issue and Listing of Debt Securities) Regulations, 2008, public issue of bonds is required to be listed on one or more recognized stock exchange in terms of the said Regulations.
Further, SEBI through Guidelines on Issue and Listing of Structured Products/Market Linked Debentures (issued vide circular no. Cir. /IMD/DF/17/2011 dated 28th September, 2011) has prescribed additional disclosures and other requirements in the offer documents for issue of structured products/ market linked debentures seeking listing on stock exchanges for issuers having net worth of at least Rs. 100 Crores. The issue of Bonds linked with performance return can be highly beneficial for small group of investors (i.e. less than 50 investors) particularly because of the following benefits:
i) If such bonds are issued on private placement basis, no compliance with any guidelines is required.
ii) No additional tax implication as normal provisions of taxation of bonds will apply.
iii) There is no question of treating the entire scheme as Collective Investment Scheme since the Bonds will be secured and hence will not be treated as deposits.
iv) High level of liquidity as Bonds being a marketable security is easily transferable.
v) Issue of bonds will not attract the provisions of section 58A of the Companies Act, 1956, if the issue is fully secured by mortgage of immovable property, provided the amount of such bonds does not exceed the market value of such asset.
II. Real Estate Mutual Fund Scheme (REMFs) The keen investors can consider setting up REMFs that will invest directly or indirectly in real estate assets or other permissible assets in accordance with SEBI (Mutual Funds) Regulations, 1996 (“Regulations”). In which case, the highlights of the regulation that hold relevance are mentioned below:
1. A mutual fund may invest into such real estate assets in India or a special economic zone which shall:
a) Be in usable form and the construction shall be complete (i.e. which is not under construction, a vacant or deserted property and is not an agricultural land);
b) Have a legal and valid title document and is legally transferable; c) Neither be under any dispute or litigation nor shall reserved or attached by
the government or the acquisition of which is otherwise prohibited by the government; and
d) Not have any encumbrance.
JANUARY 2012
10
Taxation of REMFs: 1. Tax in the hand of MFs:
a) The entire income of the MF registered under SEBI Act, 1992 or any regulations made thereunder is exempt from
income-tax in accordance with the provisions of section 10(23D) of the IT Act.
Further, as per Section 196(iv) of the IT Act, the income received by such MF is not liable for deduction of income tax at source.
b) Tax on distribution of income by the Mutual Fund to the Unit holders:
As per section 115R of the IT Act, income distribution by MF will attract distribution tax at the following rates:
In case of Equity Oriented Fund - Proviso (b) to Section 115R(2) of the IT Act provides exemption to equity oriented mutual funds from paying distribution tax on income distributed. In case of Money Market Mutual Fund or Liquid Fund - @ 25%/ 30% plus surcharge on such income-tax @ 10% and education cess and secondary and higher education cess @ 3% on the amount of tax and surcharge in case income is distributed to individuals and HUFs/ persons other than individuals respectively. In case of other than Equity Oriented Fund, not being a Money Market Mutual Fund or a Liquid Fund - @ 12.5% / 30% plus surcharge on such income-tax @ 10% and education cess and secondary and higher education cess @ 3% on the amount of tax and surcharge, in case income is distributed to individuals and HUFs/ persons other than individuals respectively.
2. Tax in the hand of investors i.e. unit holders:
a) Under the provisions of section 10(35) of the Act, any income (other than income arising from transfer of units)
received by any person in respect of the units of the mutual fund is exempt from income tax. b) Long-term capital gains arising on the transfer of units of an ‘equity oriented’ mutual fund is exempt from income
tax u/s 10(38) of the IT Act, if the Securities Transaction Tax (STT) is paid. c) Short-term capital gains arising on such transactions are taxable at a rate of 15% (plus surcharge as applicable, and
education cess of 2% and secondary and higher education cess of 1%), if STT is paid. d) If STT is not paid, the long-term capital gain tax rate would be 10% without indexation or 20% with indexation. e) Short-term capital gains on such transactions are taxable at normal rates.
JANUARY 2012
JANUARY 2012
11
We have done a comparative analysis to analyze the most tax transparent structure
among the options discussed above.
Comparative analysis of the options from tax perspective:
Particulars AOP LLP Issue of Bonds REMFs
Tax at entity level: Tax on total
income at
MMR.
Tax on total
income at 30%
plus cess.
Interest expenditure
allowable in the
hands of issuer
company. Tax on
total income at 30%
plus surcharge plus
cess.
Income exempted u/s
10(23D) of IT Act.
Income distribution tax
u/s 115R @12.5% /
30%.
Tax at investor
level:
Share of
profit
exempted as
per proviso
to section 86
of IT Act.
Share of partner
shall be exempt
u/s 10(2A) of
the IT Act.
Interest income will
be taxable in the
hands of investors.
Income from MFs
exempted u/s 10 (35)
of IT Act.
Applicability of
section 14A –
expenses incurred
in relation to
income not
includible in total
income.
Section 14A
will apply.
Interest on
borrowings
will be
disallowed
in the hands
of investors.
Section 14A will
apply. Interest
on borrowings
will be
disallowed in
the hands of
investors.
Section 14A will not
apply. Investors can
take leverage by
claiming interest on
borrowings against
interest income.
Section 14A will apply.
Interest on borrowings
will be disallowed in
the hands of investors.
Our Comments: Tax is levied
on total
income and
interest
expense
cannot be
claimed,
hence not
tax efficient.
Tax is levied on
total income and
interest expense
cannot be
claimed, hence
not tax efficient.
Tax is on total
income as compared
to MFs but interest
expense can be
claimed by
investors.
Tax is levied on
distributed income
only. Highly beneficial
for investors who are
falling under the
highest tax bracket.
Summing up:
The real estate sector has become a lucrative investment sector; hence these options will be put to test by the market players in the recent times to come.
JANUARY 2012
12
JANUARY 2012
Non-Banking Financial Companies in the following sectors/activities are eligible for FDI upto 100%
subject to certain conditions:
Merchant Banking Underwriting
Portfolio Management Services Investment Advisory Services Financial Consultancy Stock Broking Asset Management Venture Capital Custodial Services Factoring Credit Rating Agencies Leasing & Finance Housing Finance Forex Broking Credit card Business Money changing business Micro credit Rural credit
Conditions to be satisfied for FDI by NBFCs:
Minimum Capitalization norms
Fund based NBFCs Non-fund based NBFC activities
FDI up to 51% - US$ 0.5 million
FDI above 51% and up to 75% - US$ 5 million to be brought upfront
FDI beyond 75% and up to 100% - US$ 50 million out of which US$ 7.5 million to be brought upfront and the balance in 24 months
US$ 0.5 million, subject to the condition that such company would not be allowed to set up any subsidiary for any other activity nor it can participate in the equity of NBFC holding / operating company.
Non-fund based activities would include Investment Advisory services , Financial consultancy, Forex Broking , Money changing Business and Credit Rating Agencies.
Foreign investors - can set up 100% operating subsidiaries without the condition to disinvest a minimum of 25% of its equity to Indian entities subject to bringing in US$ 50 million without any restriction on number of operating subsidiaries without bringing additional capital.
JV operating NBFCs having 75% or less than 75% foreign investment - allowed to set up subsidiaries for undertaking other NBFC activities subject to the subsidiaries also complying with the applicable minimum capital inflow.
Compliance with RBI guidelines
Foreign direct Investment by NBFCs – Eligible Sectors and conditions:
13
JANUARY 2012
AU Financiers in talks with PE investors for funds
Au Financiers (India) Pvt. Ltd, a Jaipur-headquartered non-banking financial company (NBFC), is in talks with private equity (PE) investors for a third round of primary funding, said three people familiar with the development. “The company has initiated talks with Warburg Pincus India Pvt. Ltd, Carlyle India Advisors Pvt. Ltd and other investors,” said one of the persons. Ernst and Young Pvt. Ltd has been given the mandate, confirmed the second person. Two of them are directly associated with the company, while the third person is a potential investor who has examined the assets of the NBFC. The International Finance Corporation (a member of the World Bank Group), Motilal Oswal Private Equity Advisors Pvt. Ltd and other promoters infused Rs.60 crore in the NBFC in the second round of funding in 2010. The NBFC raised Rs.20 crore in the first round of funding in 2008, which came from Motilal.
In 2011, 34 investments worth $691.76 million were made. In 2009, there were 33 investments worth $267.35 million in NBFCs, which increased to 48 deals worth $895.2 million in 2010.
Source : http://www.dnaindia.com/money/report_mf-exposure-to-nbfcs-jumps-30pct-in-six-months_1641825
MARKET WATCH
MF exposure to NBFCs jumps 30% in six months:
Mutual funds’ exposure to non-banking finance companies (NBFCs) has shot up 25-35% in certain categories over the last six months. While the move could help fetch higher yields, it could also adversely impact the funds’ liquidity and credit risk, suggest some. The exposure of liquid and ultra short term schemes to NBFCs increased from Rs29,303 crore in June 2011 to Rs37,991 crore as of end-December, translating into a jump of 29.64% in six months. The main concern is related to asset-liability mismatch, wherein the asset financing loans are for 2-3 years to some of the riskier sectors while the borrowing is on short-term basis from mutual funds, said Deepak Sharma, CEO, Sarthi Advisors. This creates a kind of credit risk and liquidity risk for mutual fund schemes having high exposure to asset funding NBFCs. Liquid funds’ exposure to NBFC paper rose 35%, or by Rs4,927 crore, while their assets under management fell by Rs34,468 crore. The exposure of ultra short term funds rose 25%, or by Rs3,762 crore, even as the assets under management reduced by Rs9,817 crore. These papers formed the majority of the portfolio for a number of schemes.
Source: http://www.dnaindia.com/money/report_mf-
exposure-to-nbfcs-jumps-30pct-in-six-
months_1641825
Manappuram raising deposits illegally says RBI
Reserve Bank of India has issued a warning to the general public against placing deposits with Manappuram Finance or a group company. The central bank has said that acceptance of deposits either by Manappuram Finance or by Manappuram Agro Farms (MAGRO) is punishable with imprisonment. Manappuram Finance has been accepting deposits from the public in its branches and offices and has been issuing deposit receipts in the name of Manappuram Agro Farms (MAGRO), a sole proprietary concern of V P Nandakumar, who is the executive chairman of the company. "In terms of Section 45-S of the RBI Act, acceptance of deposits from the public by MAGRO, which is an unincorporated body, is also prohibited. Thrissur-based Manappuram is one of the largest 'gold loan' companies - a company which provides personal loans against the security of gold jewellery. RBI has separate sets of rules for finance companies that raise deposits from the public and those which do not. Deposit taking companies are subject to a very high level of scrutiny and face stringent capital norms. Manappuram Finance, Thrissur, Kerala (earlier known as Manappuram General Finance and Leasing), was earlier registered as a deposit taking NBFC. However, it chose to become a non-deposit taking, non-banking financial company with effect from March 22, 2011.
Source:http://business-standard.com/india/news/promoters-to-infuse-rs-300-cr-in-bajaj-finance-by-march/462261/
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