NBFC

Rules regarding operations of multiple NBFCs by a common set of promoter

The Reserve Bank of India and the Companies Act of 2013 control the operations of multiple Non-Banking Financial Companies (NBFCs) by a common group of promoters in India. The RBI has reporting and compliance requirements for NBFCs in India. This blog will discuss the rules regarding the operations of multiple NBFCs by a common set of promoters.

Common Set of Promoters

When discussing Non-Banking Financial Companies (NBFCs), the term “common set of promoters” refers to a group of individuals or entities that have jointly founded or promoted multiple NBFCs. Promoters are the individuals or entities in charge of establishing and promoting NBFCs, as well as providing initial capital and managing their operations.

Definition of a Group

The Reserve Bank of India defines the scope of a group of firms and includes the entities in any of the following arrangements;

• Parent Company-Subsidiary Company 
• Promoter-Promotee in accordance with the SEBI (Acquisitions of Shares and Takeover) Regulations of 1997 for listed companies
• Joint Venture 
• Associate Companies 
• Related parties 
• Brand name in common and equity shares of 20% or above.

The NBFCs that fit within the aforementioned categories are grouped together, and their assets can be combined for scale-based regulation classification. The grouped entity can be advanced into the middle tier using consolidated assets.

Classification Mechanism for NBFCs

The apex bank’s circular on scale-based regulations for NBFCs states that the regulatory framework for NBFCs will be divided into layers depending on factors like activity, size, and perceived riskiness. The NBFCs must be divided into the following categories:

• NBFC-Base Layer (NBFC-BL) : The base layer is made up of Non-Deposit-taking Financial Companies with assets below Rs.1000 crores and carrying out the following activities:
• Peer-to-Peer Lending Platforms, 
• Account Aggregators, 
• Non-Operative Financial Holding Company (NOFHC) and
• NBFCs that do not avail of public funds and not having any sort of customer interface.

• NBFC- Middle Layer (NBFC-ML): The NBFCs that accept deposits are all part of the middle layer. Regardless of asset size, NBFCs that do not accept deposits and have assets worth more than Rs.1000 crores must engage in the following activities:
• Standalone Primary Dealers (SPDs)
• Infrastructure Debt Fund – Non-Banking Financial Companies (IDF-NBFCs)
• Core Investment Companies (CICs)
• Housing Finance Companies (HFCs) and 
• Infrastructure Finance Companies (NBFC-IFCs).

• NBFC- Upper Layer (NBFC-UL): The NBFCs in the upper layer, which include NBFCs that the apex banks have designated, will be periodically announced by the RBI. The NBFCs on this list will be scored according to criteria and their sophisticated regulatory framework. 

• NBFC- Top Layer (NBFC-TL): If systematic risks from NBFCs in the upper layer increase, they will be transferred to the Top Layer; otherwise, they will remain vacant. 

Multiple NBFCs in a Group and their Classification in Middle Layer

This RBI circular on the subject of several NBFCs in a group aims to clarify where NBFCs that are part of a single group should be listed in the Scale Based Regulations. The goal of this classification is to make it simpler to separate Group NBFCs.

The applicable NBFCs that are part of a common Group or were floated by a common set of promoters shall not be viewed on a standalone basis, according to paragraph 16 of the Master Direction – NBFC-Systemically Important Non-Deposit taking Company and Deposit taking Company (RB) Directions 2016. The total assets of all NBFCs in the group must be consolidated per the current policy on NBFC asset consolidation to establish the cut-off point for their classification in the Middle Layer. 

Each Investment and Credit Company (NBFC-ICC), Micro Finance Institution (NBFC-MFI), NBFC-Factor, and Mortgage Guarantee Company (NBFC-MGC) lying in the group shall be classified as an NBFC in the Middle Layer.

The circular also emphasised the group’s NBFCs’ annual certification by statutory auditors of their financial assets on March 31. The same must be delivered to the RBI’s relevant department of supervision, where the registered entities are. This classification structure does not apply to the NBFCs in the Upper Layer, as stated in the most recent RBI circular.

The situation explained by RBI

There are 7 NBFCs in the group, including an Investment & Credit Company (NBFC-ICC) with Rs. 300 crores in assets, a Housing Finance Company (HFC) with Rs.300 crores in assets, an Infrastructure Finance Company (NBFC-IFC) with Rs.500 crores in assets, a Micro Finance Institution (NBFC-MFI) with Rs.100 billion in assets, an NBFC-Peer to Peer Lending Platform (NBFC-P2P) with Rs.50 crores in assets, and an NBFC with no public funds and customer interface with Rs.70 crores. How will these NBFCs be grouped into different layers? 

HFCs and IFCs will, by default, be included in the Middle Layer according to the Scale-Based Regulatory Framework. However, depending on the supervisory filtering process, they may shift to the Upper Layer. 

As their asset size is less than 1000 crores in the example, NBFC-ICC and NBFC-MFI will be placed in the Base Layer. The Base Layer will, by default, contain NBFC-P2P, NBFCs without public financing, and client interface. 

When the assets of all the NBFCs in the group are combined, the total asset size of the group rises to 1320 crore, above the asset size requirement of 1000 cores for the Middle Layer classification. As a result, the Middle Layer will be used to classify NBFC-ICC and NBFC-MFI. In this illustration, HFC and IFC will still be categorised as belonging to the Middle Layer. The Base Layer will continue to include NBFC-P2P, NBFCs without public financing, and NBFCs without client interface.

Para 16 of the Master Direction – Non-Banking Financial Company-Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions 2016

Multiple NBFCs – It is forbidden to consider applicable NBFCs on a standalone basis from other NBFCs that belong to the same business group or were founded by the same group of promoters. To assess if a consolidation fits within the asset sizes of the two categories:

Type I NBFC-ND, as stated in the RBI press release dated June 17, 2016¹, the total assets of the NBFCs in the group, including deposit-taking NBFCs, if any, must be added up. Those with assets size less than Rs.500 crores and those with assets size Rs.500 crore or more. Each NBFC in the group that does not accept deposits must abide by the rules that apply to the two categories. 

Statutory Auditors must certify the asset size of each NBFC in the group in order to serve this function. The Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Direction 2016 and the Non-Banking Financial Company – Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016, which apply to deposit taking NBFCs, will, however, govern any NBFC-D within the group.

Conclusion

It is important to verify adherence to legal requirements imposed by the RBI. In India, the NBFCs are subject to regulatory monitoring by the RBI. It performs audits, evaluations, and inspections to ensure regulations are followed. Common promoters ought to work with the RBI and grant it access to essential information as needed.

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1. https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=37253