First we discuss regulatory norms under chapter IIIB.
Certificate of Registrations: With effect from January, 1997, in order to commence (new company)/ carry on (existing company) the business of a Non- banking financial institution, and NBFC must obtain a certificate of Registration from RBI. The prerequisite for eligibility for such a CoR is that the NBFC should have a minimum Net Owned Fund (NOF) of Rs. 25 Lakh (which has been raised to Rs. 2 Crore from April 21, 1999 for any new applicant).
The RBI, while considering an application for registration, would consider that the NBFC fulfils the following conditions (u/s 45-IA of the RBI Act) :
The NBFC is/ would be in a position to pay its present/ future depositors in full as and when their claims accrue.
Its affairs are not being/ likely to be conducted in a manner detrimental to the interests of its present/ future depositors.
The general character of the management/ proposed management would not be prejudicial to the public interest/ interest of the depositors.
It has adequate capital structure and earning prospects.
The public interest would be served by the grant of the certificate to commence/ carry on business in India.
Grant of the COR would not be prejudicial to the operations/ consolidation of the financial sector consistent with the monetary stability and economic growth considering such other relevant factors specified by the RBI.
Any other condition fulfillment of which, in the opinion of RBI, would be necessary to ensure that the commencement/ carrying on business in India would not be prejudice to the public interest or the interest of the depositors.
The RBI may impose conditions while granting registration.
Cancellation of Registration: RBI may cancel COR, if the NBFC:
Ceases to carry on the business in India.
Has failed to comply with any condition subject to which the certificate was issued.
At any time fails to fulfill any of the above conditions which the RBI considered while granting registration.
Fails to (a) comply with any directions issued by the RBI under the provisions relating to registration, (b) maintain accounts in accordance with the requirements of any law/ directions/ order issued by the RBI under these provisions and (c) submit/ offer for inspection its books of accounts/ other relevant documents when so demanded by an inspecting authority of the RBI, and Has been prohibited from accepting deposits by an order of the RBI under those provisions which have been in force for a period of a least three months. Net Owned Funds : NOF mean (a) paid up capital and free reserves as per the latest balance sheet minus the accumulated losses, if any, deferred revenue expenditure and other intangible assets, and (b) (i) less investment in shares of subsidiaries/ companies in the same group/ all other NBFCs and (ii) the book value of debentures/ bonds/ outstanding loans and advances including hire purchase and lease finance made to and deposits with subsidiaries/ companies in the same group in excess of 10% of (a) above.
Maintenance of Liquid Assets: NBFCs have to invest in unencumbered approved securities, valued at a price not exceeding current market price, an amount which at the close of business on any day, shall not be less than 5.0 percent but not exceeding 25.0 percent, specified by RBI, of the deposits outstanding at the close of business on the last working day of the second preceding quarter. The RBI may, however specify different percentages of investment in respect of different classes of NBFCs.
Here approved securities mean the securities of any State/Central Govt. and bonds unconditionally guaranteed by them as regards the payment of interest as well as the repayment of principal. These securities are valued at current market price.
Reserve Fund: Every NBFC shall create a reserve fund and transfer thereto a sum not less than 20% of its net profit every year as disclosed in the profit and loss account and before any dividend is declared. Such fund is to be created by every NBFC, irrespective of the fact whether it accepts public deposits or not. Further, no appropriation can be made from the fund for any purpose without the prior written approval of RBI. The Central Govt. may on the recommendation of the RBI, exempt any NBFC for a specified period from the above requirements, having regard to the adequacy of the paid-up capital and reserves in relation to deposit liabilities. But such exemption can be granted only if the reserve fund together with the share premium account of the NBFC is not less than its paid-up capital.
Under Chapter III-B, RBI has comprehensive powers to seek any information from NBFCs, to impose penalties and penal interests in case of any default by NBFCs to provide required information or other default.
Provisions of Chapter III-C is mainly for non-corporate bodies. Non-corporates are not permitted to accept deposits after April 1, 1997. However, individuals can accept deposits from (i) relatives (ii) any other individual for his personal use, but not for lending or business purpose. The non-corporate entities, which hold deposits, should replay it immediately after such deposit becomes due for repayment or within two years from the date of such commencement whichever is earlier. They are prohibited from issuing or causing to be used any advertisement in any form for soliciting deposits.
If certain documents relating to the acceptance of deposits in contravention of the requirements are secreted in any place, a court on application by an authorized officer of the RBI/ State Government may issue a warrant to search for such documents. Such warrants would have the same effect as one issued under the Code of Criminal Procedure.
If a person contravenes any of the above provisions, he would be punishable with imprisonment for a term which may extend to two years or with a fine up to twice the amount of deposit received or Rs. 2000 whichever is more or with both. Generally, the imprisonment and the fine would not be less than one year and Rs. 1000 respectively. A fine exceeding Rs.2000 may be imposed in special circumstances.