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NBFC’s (Non Banking
Financial Companies) are reported periodically to be under the RBI (Reserve Bank
of India) lens for one reason or the other. Under the circumstances, any effort
by RBI to rationalize the regulatory framework of NBFC’s is highly welcome. Of
particular concern to RBI appears to be the exposure of those NBFC’s that even
while not accepting deposits from the public are still raising resources banks
and financial institutions and diverting to the stock market. The evolution of
RBI as the banking sector regulator to also being the regulator for NBFC’s has
not been well planned. A particularly manifest evidence of this is the confusion
in legislation and in policy reflected in the multiplicity of overlapping and
irrational classifications of the various types of NBFC’s. The most apt
illustration of this is the fact that whereas the ‘Reserve bank of India Act
1934’ does itself define the term NBFC, there is a different definition of the
same term viz. NBFC in the ‘Non-Banking Financial Companies Acceptance of Public
Deposits (Reserve Bank) Directions, 1988’ that the RBI itself has issued under
sections 45 J, 45K, 45M and 45MA of the aforesaid Act of 1934. Why has RBI made
NBFC a house divided unto itself by adopting an incongruous definition of an
already defined term in its own parent statute?
NBFC under the RBI Act
Under section 45-I(a) of the RBI Act,1934 ‘business of non banking financial
institution ’, is defined in terms of the business of a financial institution
and NBFC.
Sec: 45-I(a) : "business of
a non-banking financial institution" means carrying on of the business of a
financial institution referred to in clause (c) and includes business of a
non-banking financial company referred to in clause (f);]
The Act defines ‘Financial
Institution’ (FI) u/s 45-I(c) as
"financial institution"
means any non-banking institution which carries on as its business or part of
its business any of the following activities, namely :-
(i) the financing, whether by way of making loans or advances or otherwise, of
any activity other than its own;
(ii) the acquisition of shares, stock, bonds, debentures or securities issued by
a government or local authority or other marketable securities of a like nature;
(iii) letting or delivering of any goods to a hirer under a hire-purchase
agreement as defined in clause (c) of section 2 of the Hire-Purchase Act, 1972
(26 of 1972);
(iv) the carrying on of any class of insurance business;
(v) managing, conducting or supervising, as foreman, agent or in any other
capacity, of chits or kuries as defined in any law which is for the time being
in force in any State, or any business, which is similar thereto;
(vi) collecting, for any purpose or under any scheme or arrangement by whatever
name called monies in lump sum or otherwise, by way of subscriptions or by sale
of units, or other instruments or in any other manner and awarding prizes or
gifts, whether in cash or kind, or disbursing monies in any other way, to
persons from whom monies are collected or to any other person,
The definition of FI uses
the definition of a Non Banking Institution. (NBI) and NBI has been defined
under the Act as follows:
Sec.45-I(e) : "non-banking institution" means a company, corporation or
co-operative society.
‘NBFC’, itself is defined
under sec. 45-I(f) of the Act, as under
Sec. 45-I(f): ) "non-banking
financial company" means-
(i) a financial institution which is a company;
(ii) a non banking institution which is a company and which has as its principal
business the receiving of deposits, under any scheme or arrangement or in any
other manner, or lending in any manner;
(iii) such other non-banking institution or class of such institutions, as the
bank may, with the previous approval of the Central Government and by
notification in the Official Gazette, specify.]
An analysis of forgoing
provisions reveals that except for specifically notified categories, a company
that is a FI, or a NBI receiving deposits, alone would qualify as an NBFC. A
further reading of the definitions of FI and NBI reveals that for a company to
be an NBFC it should either carry on any of the businesses as enumerated in (i)
to (vi) of Sec. 45-I(c) or it should otherwise receive public deposits in any
manner.
Regulatory Framework of
NBFC’s
Section 45-IA of the Act
requires registration of NBFC with RBI and maintenance of minimum NOF.
Sec 45-IA : (1) Notwithstanding any thing contained in this chapter or any other law for the
time being in force, no non-banking financial company shall commence or carry on
the business of non-banking financial institution without-
(a) obtaining a certificate of registration issued under this chapter ; and
(b) having the net owned fund of twenty-five lakh rupees or such other amount,
not exceeding two hundred lakh rupees, as the Bank may, by notification in the
official Gazette, specify ;
(2) Every non-banking financial company shall make an application for
registration to the Bank in such form as the Bank may specify.
RBI is entrusted with the
responsibility of regulating and supervising NBFC by virtue of powers vested in
Chapter IIIB and by sections 45J, 45K and 45 MA of the RBI Act, 1934 (2 of
1934). The regulatory and supervisory objective is to;
# ensure healthy growth of financial companies;
# ensure that these companies function as a part of the financial system within
the policy framework, in such a manner that their existence and functioning do
not lead to systematic aberration; and that
# the quality of surveillance and supervision exercised by the Bank over the NBFCs is sustained by keeping pace with developments that take place in this
sector of the financial system.
Accordingly, the RBI has issued directions from time to time. Of particular
relevance to NBFCs is the APD direction, where the RBI has adopted another
definition of NBFC.
NBFC under Acceptance of Public Deposits (Reserve Bank) Directions, 1998 (APD
Directions)
Para 2(1)(xi) of APD directions defines NBFC as
Non-banking financial company means only the non-banking institution which is a
loan company or an investment company or a hire-purchase finance company or an
equipment leasing company or a mutual benefit financial company.
The terms used in the above cited provisions are also defined in the APD
directions, as under:
Loan company [ para 2(1)(viii) of APD directions]
Loan company means a company which is a financial institution carrying on as
it’s principal business the providing of finance whether by making loans or
advances or otherwise for any activity other than its own but doesnot include an
equipment leasing company or a hire-purchase finance company.
Investment company [ para 2(1)(vi) of APD directions]
Investment Company is a
company which is a financial institution carrying on as it’s principal business
the acquisition of securities.
Hire-purchase Finance Company [ para 2(1)(iv) of APD directions]
any company which is a
financial institution carrying on as its principal business the activity of hire
purchase transactions.
Equipment Leasing Company [ para 2(1)(ii) of APD directions]
means a company which is a
financial institution carrying on as it’s principal business, the activity of
leasing of equipment.
Mutual Benefit Financial Company [ para 2(1)(ix) of APD directions]
means a company which is a
financial institution notified by The Central Government under section 620A of
The Companies Act 1956
Each category of above
notified companies is an NBFC for the APD Directions. As per the definition
given in the APD directions, these companies are a kind of ‘financial
institution’. APD directions do not define financial institution. Therefore
‘financial institution’ mentioned under the APD directions imports its meaning
from the definition in section 45-I(c) of the RBI Act. This is consequent to
Para 2(2) of APD direction which states
Words or expressions used
but not defined herein are defined in The Reserve Bank of India Act, 1934 (2 of
1934), or in Companies Act, 1956 (1 of 1956) [ or Non-Banking Financial
Companies Prudential Norms (Reserve Bank) Directions 1998 or Residuary
Non-Banking Companies (Reserve Bank) Directions, 1987], shall have the same
meaning as assigned to them in those Acts
As a consequence, each of
these four categories of NBFC’s under the APD Directions are also within the
statutory meaning under the Act of the term NBFC. Thus, NBFC’s under the APD
Directions are a subset of the NBFC’s under the Act.
Comparison of the
two definitions
APD directions cater to a certain type of NBFCs. It is not clear as to why RBI
has chosen to define NBFC in a way different from the definition in the RBI Act.
It is clear that NBFC as defined in the APD directions is subsumed fully in the
statutory definition of NBFC in the Act. In this scenario, it would have been
easy and simple enough for the RBI to refer to the statutory definition of NBFC
as in the Act and then narrow it down for its purposes. In framing of the APD
directions, RBI defines NBFC’s anew and thereupon goes on to identify
subcategories such as Loan company , Investment company, Hire-purchase, Finance
company or Equipment leasing company and Mutual benefit financial company, so as
to attract different paragraphs of the Directions. Needless confusion has been
created by RBI as it would have been simpler easier and more rational to use the
definition already available in the Act.
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The author can be reached at :law_arijit@legalserviceindia.com
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Why
is NBFC a House Divided unto Itself?
