1. NBFC & Notified Entities
Regulations 2007
Tahmeen Ahmad (ACA)
2. Transitions History
CATEGORY REGULATOR FRAMEWORK
NBFCs SECP NBFC Rules 2003
Modarbas SECP Modarba Companies
Ordinance 1980 & rules
DFIs SBP PRs
In November, 2002 The NBFIs were divided into:
April 2003 NBFC 2003 rules notified
2004 PRs for NBFCs notified
Nov 2007 NBFC and NE Regulations, 2007 notified
3. The Scope of the Framework
Establishment of NBFC
Operations of NBFC & N.ENBFC &
NE Regulations,
2007
NBFC
Rules,
2003
4. Transition from 2003 Framework
NBFC Rules 2003
Prudential Regulations
for NBFCs
issued by SECP
NBFC & NE
Regulations,
2007
Regulates
Establishment of NBFCs
Regulates
operations
Now
superseded
5. What are NBFCs?
Under
section
282 A (a)
Leasing
Investment
Finance
Housing
Finance
Asset
Management
Discounting
Services
Investment
Advisory
Services
VCI
Same
license
6. And Notified Entities?
“A Company or class of companies or
corporate body or trust or person as notified
by the Federal Government”
These entities are engaged in business not
covered by 282 A (a)
New!
7. The Finance Act 2007
Introduced the Notified Entities
SEC Powers enhanced:
to make regulations under 282 B (2)
to impose penalty upto Rs 50 million for violation
of Section VIIIA of the Ordinance
For Rehabilitation of NBFCs and NE
9. Summary of changes
The operating requirements (rules 12 to 86) moved
to regulations
Terminology
Scope of work of investment advisor changed
Fit and proper criteria introduced
External and internal audit and compliance
requirements strengthened
Restrictions on certain investments and transactions
imposed
Bar on acquiring controlling interest withdrawn
10. Terms excluded
The following terms have been excluded
from the rules and the regulations:
Administrator
Liquid Net worth
Net capital
Risk Assets
Small Entrepreneurs
11. Terms Defined
The following terms are now defined in the
2003 regulations:
Brokerage business
Discounting services
Major shareholder
Promoter / sponsor
Regulations
12. Expanded Terms
Asset management services extended to
collective investment schemes
Connected persons include:
The managing NBFC to the Collective investment
scheme
The trustee/custodian to the collective inv scheme
Custodian now includes
Trust Co that is subsidiary of Banking Co
NBFC engaged in IFS & approved by SEC
Other Co. approved by SEC
13. Expanded Terms contd.
Equity now includes
subordinated loans
Redeemable preference shares
Less: accumulated losses
Leasing definition expanded from IAS
definition to include any mode admissible by
SEC
14. Revised Terms
Housing finance Services restricted to
Loans (as compared to financial services previously)
Residential (as compared to residential and
commercial previously)
Investment Advisor services changed from
management of closed-end funds to
discretionary and non discretionary client
accounts for indiv &institutional investors
Investment company is a notified entity
15. Important amendments
RULE TITLE AMMENDMENT
3 Eligibility
criteria
It now refers to the Fit and Proper Criteria
5 Condition
to form
NBFC
Licensing of AMS / IA/ both – no other business
IFC/HFC/LC/DH cant obtain any other license
IA cannot manage closed-end funds
Conditions of:
Minimum tiers of capital, 25% capital allotted to
promoters, Promoters / directors to hold shares
in blocked CDC a/c,
16. Important amendments contd.
RULE TITLE AMMENDMENT
6 Commencement of
Operations
License cancelled if no
operations within 1 year of
issue
7 Conditions applicable to
NBFCs
Of Management:
CFO experience requirement
now 3yrs
1/3 directors to be independent
2 directors (ex-CEO) with Sr.
Management experience
CEO / directors/executives to
meet fit and proper criteria
17. Important amendments contd.
RULE TITLE AMMENDMENT
7 Conditions
applicable
to NBFCs
Of Compliance officers:
Auditor to be appointed from approved list
Internal auditor
Compliance officer
Of investments:
Investment in unquoted securities limited to 20% of
NBFC equity
Invest. in subsidiary allowed from excess equity
Of Records & accounts:
Minutes of credit, investment & audit committee
Annual a/c filing period for all NBFCs 3 months
18. Important amendments contd.
RULE TITLE AMMENDMENT
7 Conditions
applicable to
NBFCs
Of Transactions
One broker < 10% of total annual brokerage
exp
Restriction on transactions, except as notified
by SEC:
Real estate on its own account
Unsecured facilities
Raise funds from individuals
Restricted the encumbrance of client
securities for own benefit
Transactions with directors, employees can be
allowed by BoD policy (director transactions
would need prior approval of SEC)
19. Important amendments contd.
RULE TITLE AMMENDMENT
7A Monitoring Fee An NBFC engaged in deposit taking shall,
Payable annually to SEC within 3 months of yr
end
8 Opening/ closing
of bank a/c,
broker a/c or
branch
Previously only dealt with opening of branches
Approval of BoD required with notice to SEC
9 Insurance cover SEC power of specifying nature/limit
withdrawn
11 Bar on acquiring
controlling
interest
Withdrawn
12-86 Operating rules Moved with amendments to 2007 regulations
21. The Scheme of Regulations
MAIN SECTIONS ABOUT
Part I All forms of business
Part II NBFCs engaged in Leasing, Investment
Finance Services, Housing Finance Services
Part III (i) NBFC in Venture Capital Investment &
(ii) Venture Capital Funds
Part IV (i) NBFC engaged in Asset Management
Services /Investment Advisory Services,
(ii) Collective Investment Schemes managed
by such NBFC and
(iii) Investment Companies
22. Minimum Equity Requirement (All
NBFCs)
Form Of
Business
Min
Equity
Time line
From June 30,
’08
June
30, ‘09
June 30, ‘10
IFS 1,000 300 500 700 1,000
Leasing 700 200 350 500 700
AMS 200 30 100 150 200
IAS 50 30 35 40 50
HFS 700 100 300 500 700
VCI - 50 - - -
-All amounts in Millions of Rupees-
23. Aggregate & Contingent
Liabilities (All NBFCs)
0
1
2
3
4
5
6
7
8
9
10
YR 1 YR 2 YR 3 YR 4 YR ~
AL
CL
•Where the X column represents No. of years of operation, &
•Y column represents the number of times of equity of the NBFC
•Aggregate liabilities exclude contingent liabilities and security deposits
24. Other Provisions (All NBFCs)
Internal audit department mandatory.
Reporting to BoD
Compliance with NBFC rules/regulations/company policy
Periodic returns as specified by SEC
Compliance with code of conduct of Association
Steps to be taken to comply with Money laundering regulations
including:
Account Opening forms in name of each new a/c holder
KYC, verify identities
Avoid illegal money transactions
Monitor customer status, account movement
Cash payment / receipt for one transaction <Rs 50,000
Appointment/ change in directors / CEO to be approved by SEC
– Complete application to be received 14 days before change
– Any deficiency to be completed within 14 days of intimation
New
26. Minimum investment by NBFC
having multiple licenses
Leasing
IFS
HFS
Other
•Investment of assets in Leasing /IFS/ HFS business should be at least 20%
•Exclude Cash& bank, unquoted shares, *(govt. securities, listed investment
that a PF can make)
New
27. Raising funds
1. Certificate of Deposits (CoIs excluded)
NBFC Criteria
2 years of profitable operations
NBFC/directors lawful conduct
Annual credit rating exceeds minimum Inv. Grade
Disclosure statement to accompany application for permission
Credit rating to be published in all ads
No CoD if credit rating falls below criterion
Issuance conditions:
CoD in specific name
Maturity >30 days
Rate fixed /floating
Deposits from individuals < 3Xequity of NBFC
>15% of funds raised from CoD to be invested in *
Return for different CoDs can be different eg. based on maturities
2. Commercial paper, foreign debentures, redeemable capital, Lines of Credit,
rediscounting
28. Exposure Limits
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Single Group Aggregate
Clean
Funded
Total
•Column Y represents the maximum limit of exposure as % of NBFC equity
•Exposure excludes liquid collateral subject to margins
•No exposure against NBFCs’/borrowers’ own shares, unsecured credit for
financing share floatation, director personal guarantee
•No exposure to directors without approval of majority of NBFC directors
New
29. Conditions for Grant of Facilities
CIB report Exposure> Rs 1,000,000
F/s Exposure >Rs 1,000,000
Loan application form & basic fact sheet
Margins applicable to all securities
Borrower’s:
total exposure< 10 X equity of borrower
Current ratio 1:1 (may be relaxed to 0.75:1)
New
30. Provisioning
Time based Classification into:
Substandard(90 days),
doubtful(180 days); and
Loss (1 yr, TBs 180 days, Credit Card 180 days)
Provisioning @ 25%, 50% & 100%
No provisioning for Govt. guaranteed exposure
Additional subjective evaluation
Declassification of rescheduled loans
FSV ( other than realizable assets)
In case of leasing & IFS:
Discounted for yr 1, 2 & thereafter as 80%, 70% & 50%
Revaluation every 3 years by independent valuer
In case of HFS
Discounting @ 70%
Revaluation every 10 years by independent valuer
Types of charges
Quarterly credit review by NBFCs, annual by Auditors
Reversal of provision Cash receipt> 20%, 50%, 100% of NPL)
Quarterly list of delinquent / rescheduled accounts to SEC
New
31. (I) Leasing
An NBFC engaged in Leasing shall meet the
following conditions:
Assets invested > 70% of total assets
Investment in Shares < 50% equity of NBFC
Investment in shares
Of one company < 10% equity of NBFC/Co
Lease period > 3 years
May not engage in land / residential building leases
33. Scope of work and Inv. Limits
Scope of work includes:
Money market activities,
Capital market activities (including managing client portfolios)
Project financing activities; &
Corporate finance services
General activities
Investment limits %age of NBFC equity
Shares < 100
Shares of1 company < 10
Equity futures < 100
Single future < 10
Reverse Repo & CFS < 250
Single CFS security < 25 (i.e. 10% of above)
Margin Loans
Total < 50
To 1 client < 10
(Margin shall be at least 30% of loan)
Margin loans approved according to pre-defined BoD policy
Underwriting commitments fully backed
34. Managing Client Portfolios
Both discretionary and non-discretionary
Conditions include:
Must inform SEC
Eligible investors only
Separate management and disclosure
Compliance with SEC regulations
35. (III) Housing Finance Services
Additional functions w.r.t property:
Mortgage finance to purchase/construct/alter property
Surveys and valuation
Arrange insurance
Manage mortgage investments
Investment in: Limit
HFS > 70% total assets
Shares < 50% NBFC equity
Shares of 1 co < 10% -do-
Financing:
One party < Rs 20 million
Total Monthly Installments
–Consumer loan < 60% NDI
DE ratio < 85:15
Period of Mortgage loan < 20 years
Appoint Lawyer, valuer
Review market every quarter
36. (IV) Venture Capital Investment
& VCF
Venture Capital Company
Exposure by NBFC to one person/group of Cos. <
40% of equity
Raise funds by: shares issue and private placement
for VP
Venture Capital Fund
VCF conditions:
A Company, engaged solely in VPs with equity of Rs 50 m &
managed by VCC
Exposure to one person/grp of Cos. < 40% of equity
Exposure to director < 10% of total exposure
Each investor to invest at least Rs 1,000,000
Registration can be suspended by SEC for 60 days. Can
lead to cancellation
39. Asset Management services-
Terms and conditions
Designation of qualified fund manager to manage
upto 3 CIS
At least 1 investment Committee, formed by BoD
Comprise fund manager, Chief Investment Officer other
Key Personnel of AMC
Reportable to CEO
Quorum for investment decisions is 2/3
Ensure compliance with constitutive documents/policies
AMC to fulfill SEC conditions for managing multiple
CIS
Shari’a appointed for Islamic CIS
40. Trustee of a Scheme
Appointed with SEC approval for each open and closed end
scheme
Trustee to be a
Scheduled bank
Trust company
Foreign bank
CDC
NBFC engaged in IFS
Other SEC approved trustee
Obliged to take custody of, manage, a/c for loss of property of
scheme
Issue trustee report to form part of annual report
Ensure AMC/ IA has arranged for a diverse panel of brokers
Ensure units of open end scheme issued after sub money received
Review adequacy of AMC/IA unit value calculation
May retire or be removed by the NBFC
Will be independent of the AMC
41. Asset Management Companies-
Restrictions & obligations
Restrictions:
Acquiring control of an investee through CIS
Transaction with 1 broker>10% annual brokerage exp
Accepting deposits from CIS
Loans from CIS assets
Undertake brokerage services
Enter underwriting contracts, invest in CIS except as
allowed
Compliance required within 12 months of notification of Regulations
Obliged to manage assets in good faith and a/c to trustee for
losses, maintain records, prepare a/cs, appoint auditor
Annual report within 3 months of yr end, including No. of unit
holders and details of personnel of AMC
Quarterly reports in 1, 2 and 1 month of qtr end
Rating of scheme done annually.
42. Open & Closed End Schemes
Registration as a notified entity
Application to be accompanied also by undertaking of AMC
guaranteeing investment
3 months notice for winding up by AMC / Cancellation by SEC
Ads to be approved by SEC & circulated within 60 days of
approval
Offering document / prospectus to include investment policy,
type of securities it will invest in and the risk associated.
Closed end schemes: securities offered at par if investment is
arranged by IA and the offer is underwritten
Open end schemes:
Investment made after conclusion of issue of units
4 regular dealings per week
Offer price and redemption price
Redemption to be completed in 6 working days
43. Exposure Limits for CIS
Limit
By CIS to1 person < 10% Net Assets of scheme/
10% of issued capital of person
By all CIS to 1 person < 49% of issued capital of the person
By CIS in 1 sector < 25% of net asset value of scheme
By CIS in one group < 35% of net assets of CIS
By CIS in listed group
Cos. Of AMC < 10% of net assets of CIS
Invested by equity based
CIS in non listed securities < 0% (Pre-IPO 15%)
44. Open & Closed End Schemes
(contd)
Limitations on AMC of scheme include short selling, forward purchase contracts,
real estate dealing, delisting without SEC approval, lend/ borrow.
No transactions by AMC of scheme with connected persons
Direct transactions b/w CIS of 1AMC notified to SEC in 2 days
IA(AMC) to bear all inc. exp. Of closed (open) end scheme
NAV notified to SE,SEC& self regulatory association 14 days of month end
Discretionary and non discretionary a/cs:
DESCRIPTION BY TO AMOUNT
AMC
remuneration
CIS AMC 5yrs: 3% of Avg. annual
net assets of CIS
Afterwards, 2%
Annual fee AMC SEC 0.1% of AANA
Dividend AMC Shareholders
of CIS
90% income
45. (VI) Investment Companies &
IAs
Investment company
(closed end fund)
Investment Advisor Custodian
Discretionary Client
Portfolio
Non discretionary
portfolio
External auditor-
SEC panel
46. Investment Companies
Registered as a Notified Entity
A public co with Rs 250m equity & directors of integrity
Application for registration can be cancelled if operations don’t
start in 6 months
Investment Advisor
Appointed with SEC approval, for a period of upto 10 years
Change of IA requires prior approval of SEC
Custodian:
Appointed with SEC approval
scheme of custody of assets settled with IC
Custodian not to be AMC or IA
Custodian to be independent of IC and IA
IC to report annually and qtrly to shareholders and SEC.
The P&L of the IC will include that of the IA
Auditor
Appointed from the SEC approved list
Auditor rotation after 5 years
Auditor of IC different from auditor or custodian or IA
47. Open & Closed End Schemes-
(contd.)
Discretionary and non discretionary a/cs:
Notice to SEC
Due diligence
Separate management & disclosure
Conversion of closed end fund to open end scheme:
By Special resolution of certificate holders
5 years after fund launch
Cert. holders not in favor can sell @ discount<3% of NAV
Approval of SEC
Editor's Notes
Administrator (Closed-end Fund /VCF)
Liquid Net worth
Net capital (Net current position)
Risk Assets ( marketable securities)
Small Entrepreneurs (fixed assets other than L&B less than 20m)
Cfo was 5 yrs
Indep directors were 25%
1 director was to have sr mgt experience