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All about NBFC and Housing Finance Company: Its Filing & Exemptions

Navdisha Sehgal

| Updated: Mar 18, 2021 | Category: Housing Finance Companies, NBFC

Filing & Exemptions of NBFC and Housing Finance Company

In this article, we will be talking about the various provisions of the Companies Act, 2013 related to NBFC and Housing Finance Company, its filing procedure and exemptions, along with the amendments.

Section 186 of the Companies Act, 2013 talks about the loan and investment provisions by a company.

To understand the scope of Section 186 of the Companies Act, 2013, let us first understand the meaning of investment.

What does the term “investment” mean in respect of NBFC and Housing Finance Company?

According to Section 186(1) of the Act, the following will be considered as an investment with a few exceptions:

  • The subscription or purchase of shares;
  • The subscription or purchase of warrants; and
  • The subscription or purchase of debenture bonds or similar debt securities.

Exceptions:

  • The making of loans or advances; and
  • Any financial transactions such as the purchase of receivables, lease or other credit facilities.

Why Companies (Amendment) Act, 2017 required for NBFC and Housing Finance Company?

To resolve the rise in concerns after the 2013 Act, an amendment in the year 2017 was made to incorporate the missing provisions. The MCA (Ministry of Corporate affairs) constituted a CLC (Companies Law Committee) to bring in the changes in the Companies Act, 2013.  Therefore, the Companies (Amendment) Act, 2017 was enacted after taking into consideration the suggestions made by the CLC.

Amongst all the changes made in the Act, one of the significant changes was brought in Sections 186 of the 2013 Act.

What is the Amendment Analysis of Section 186?

Certain relaxations have been introduced in Section 186 of the 2013 Act[1].

Section 186 (2)

It states that no company can (directly or indirectly) give any:

  • Loan to any person or body corporate;
  • Guarantee or security in connection with a loan to any person or body corporate; and
  • Acquire via subscription, purchase or otherwise, the securities of any other body corporate.

Exceeding 60% of its paid-up share capital along with free reserves & securities premium account, or 100% of its free reserve and securities premium account, whichever is more.

The Board can only give a loan, guarantee or provide security & make an investment under section 186(2) by passing a board resolution at the company’s meeting.

What are the requirements under Section 186?

What is the Amendment Analysis of Section 186? - For NBFC and Housing Finance Company
  • Approval of Board
    1. The Board’s approval is required irrespective of the amount of the loan, investment, guarantee or security.
    2. The Board’s approval must be unanimous at the Board meeting.
    3. Mere resolution by the circulation or of the committee of directors is not enough.
  • Approval of members via special resolution
    • Prior approval by special resolution is necessary when the aggregate of the loan, investment, security or guarantee exceeds the limit specified under section 186(2).
    • The limit must be higher from:
      1. 60% of the paid-up capital & free reserves & premium securities account; or
      2. 1000 % of free reserves & premium securities account.
    • The special resolution must contain the total amount upto which Board can authorize the said loan, investment, security or guarantee.
    • Exceptions:
      1. The company gives a loan to its wholly subsidiary company (WOS) or joint venture (JV);
      2. The company give guarantee or security to its wholly subsidiary company (WOS) or joint venture (JV);and
      3. The holding company acquire the securities of its wholly subsidiary company (WOS) via subscription or otherwise.
  • Approval of PFI (Public Financial Institution)
    • Prior approval must be taken from the PFI from which it has taken a loan.
    • Exceptions:
      1. The aggregate of loan, investments, security, or guarantee does not exceed the limit given.
      2. There is no default in repayment of loan instalments.
  • Rate of Interest

The rate of interest should be more than the prevailing revenue of Government Security closest to the loan period.

  • No existing default with respect to deposits

When a company fails to repay the deposits or interest on the due date, then the company can make a loan, investments, security or guarantee, only after the default is paid.

  • Disclosures in Financial Statement

The company must disclose all the particulars of investments made; a loan is given, a guarantee or security is given, and the purpose to be utilized by the recipient; in its financial statement.

Section 186(11): Non Applicability of Section 186

The provisions of Section 186 of the Companies Act, 2013 is not applicable, as stated in section 186(11), where:

  • A loan or guarantee or any security or investment is made by:

In the ordinary course of business of the companies instituted to engage in the financial-industrial enterprises or infrastructural facilities.

  • To any investment made:
    1. by an investment company;
    2. Shares allotted pursuant to Section 62(1) (a) or right issues made by the body corporate.
    3. in respect of lending or investment activities, by NBFC, whose principal business is shares acquisition and registered under the RBI Act, 1934

“The investment company” means a company that deals or deems to deal in the business of acquiring shares, debentures or other securities. If the company’s assets are in the form of shares, debentures or other securities for not less than 50% of its total assets or if its income is from the investment business constitutes not less than 50% of its gross income.

In the next segment, we will discuss the NBFC, and the Housing Finance Company is exempted from the Chapter IIIB of the Reserve Bank of India Act, 1934.

Exemptions to NBFC and Housing Finance Company by RBI

RBI has rescinded certain exemptions approved for HFCs (Housing Finance Companies) and bringing them to the same level as the NBFCs (Non-Banking Financial Companies). This has happened due to the new development in Finance Act, 2019, that allows RBI to regulate HFCs (Housing Finance Companies).

RBI has cleared that NBFC and Housing Finance Company are exempted from the Chapter IIIB of the Reserve Bank of India Act, 1934. As of 13th August 2019, RBI has announced that the housing finance companies will be treated as a category of non-banks.

Conclusion

The 2017 Amendment Act is by far the most significant change by the MCA in consultation with CLC. The changes in Section 186 of the 2013 Act were needed regarding NBFC and Housing Finance Company. Along with these amendments, RBI also announced the withdrawal of certain exemptions from the Housing Finance Companies and declared that it would be treated as a category of non – banks.

Read our article:Special Liquidity Scheme for NBFCs and HFCs through SPV

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Navdisha Sehgal

Completed BA LLB from JEMTEC, School of Law, Greater Noida (Affiliated to GGSIP University, New Delhi). I have an experience of about 2 years in various fields of corporate laws, but I have a keen interest in researching on legal issues and to gain knowledge. I always strive to bring the best to work on what I do.

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