CHAPTER IV. FUNCTIONING OF PFIs AND THEIR ROLE IN MANIPUR

Transcription

1 CHAPTER IV FUNCTIONING OF PFIs AND THEIR ROLE IN MANIPUR 4.1 EVOLUTIONARY HISTORY OF PFIs (NBFCs) IN INDIA 4.2 A GENESIS OF PFIs IN MANIPUR 4.3 REGULATION OF PFIs 4.4 FUNCTIONS OF PFIS IN MANIPUR 4.5 ROLE OF PFIS IN SOCIO-ECONOMIC DEVELOPMENT OF MANIPUR 4.6 PROBLEMS FACED BY PFIs IN MANIPUR 4.7 PROSPECTS OF PFIs IN MANIPUR

2 4.1 EVOLUTIONARY HISTORY OF PFIS (NBFCS) IN INDIA: Till recently NBFCs and Unincorporated Bodies have been competing and complementing the services of commercial banks all over the world. While, the financial system in a country generally develops through a process of gradual evolution, it has been observed that here is a stage in the evolutionary process wherein the growth of NBFCs is more pronounced than other components of the financial system. Further, they take different forms and sizes depending upon the needs of their clientele. Thus, in the United States of America, the growth of NBFCs was more pronounced during the first three decades of this century and two of the top five commercial lenders are NBFCs and three of the four top providers of consortium finance are non-bank firms at present. In India such marked growth in the non-bank financial sector was noticed in the last two decades. The NBFCs, as a group, have succeeded in broadening the range of financial services rendered to the public during this period. The evolution, growth and proliferation of financial intermediaries are essentially the reflection of the different forms of savings (resource) flows and different types of investment (uses) of such funds whether for current working capital needs or for capital investments and as between different sectors of the economy. They serve different clientele in their role both as repositories of the community s savings and as purveyors of funds for investment needs. The nineteenth and early 20 th Centuries witnessed rapid urbanization, both in Europe and America. The growth of cities created a tremendous need for

3 mortgage finance. To fill this need, various private groups began to organize building and loan associations (called building societies in England and Canada). 1 However, installment credit in the USA took off with the beginning of the mass marketing of automobiles around Automobile companies set up specialized subsidiaries called finance companies to provide installment credit to car buyers and to finance the inventories of dealers and suppliers. The automobile companies were soon followed by retailers and manufacturers of consumer and producer durables. The idea spread from the United States to many other countries. 2 Raymond W. Goldsmith traces the existence of Chit Funds and nidhis in India before World War I, that such institutions were more common in Western and Southern India. According to Goldsmith, Whatever the fragmentary material exists points to the small size of these institutions, which seems to have originated in the mid-nineteenth century, and indicates fairly clearly a rapid decline in their size and importance relative to that of financial institutions of the western type, which developed in India during the 19 th century. 3 Banking Commission (1972) has noticed the rapid progress made by Finance Corporation in states like Gujarat and Mysore, (present Karnataka State). These finance corporations are petty finance outlets formed under the Partnership Act of India and their capital was always less than Rs.1 lakh. However, literature on non-banking financial sector reveals that the major NBFIs!"#$%"& '(() *+,-+..!# / )'" 0##*+). ) + 1$"2)"'3#"45,6(7789:4 ;3 $ (5+)*+

4 7 in India are concentrated in six states West Bengal, Maharashtra, Tamil Nadu, Uttar Pradesh, Karnataka and Delhi. 4 Among the NBFIs, hire-purchase finance companies have been some of the oldest and most prominent institutions. They have played an important role in the finance of the road transport sectors; one estimate puts about per cent of all civilian commercial vehicles sales having been financed by hire-purchase companies. 5 Some NBFIs have started out as support companies for industrial houses. Their purpose was to act as Fixed Deposit Collection front and at best, work out leasing deals for clients of these industrial houses. 6 Year Table No. 4.1 Number of Non-Banking Financial Companies ( ) No. of Financial Companies Year No. of Financial Companies , , , , , , , , , , , , , , , ,849 Source: RBI Bulletin, LI (8), Aug P: 591 and RBI Bulletin, LII (2), Feb P: 71 The last two decades witnessed a phenomenal growth in the number of NBFIs. Table 4.1 shows the number of NBFIs which stood at 7,063 in 1981, 1# 42 #$<##$=>$ $4!"#81??%@7A/$((5) *.5) & ""!""1# <$"((<?!)&')* ) 1B! "8C:# 3"2')5(()*

5 5 increased to 33,520 in 1991 and further to 55,995 in The reason for such phenomenal growth of NBFIs was the liberalization led boom. NBFIs entered merchant banking activities in addition to fund-based business. With huge demand for finance and low entry barriers almost everyone wanted to start and own a financial service company. Table 4.2 The Number of NBFIs Registered with the RBI ( ) End June All NBFIs NBFIs Accepting Public Deposits , , , , , , , , , , , , Source: Report on Trend and Progress of Banking in India, Note: Figures relating to 1997 and 1998 are not available. The number of NBFIs declined to 51,929 in the year After the failure of CRB Capital Markets Ltd. and subsequent failure of NBFIs in 1997, RBI Act was amended on 9 th January The Amendment Act made registration compulsory for every NBFI. The Table 4.2 below shows the number of NBFIS registered with the RBI after the Act was amended. The Table 4.2 shows that the number of NBFIs has been drastically reduced from 51,929 in 1996 to 7,855 as on June The sudden decline in the

6 ( number of NBFIs is mainly because of the new regulatory measures introduced by the RBI. Out of the 7,855 NBFIs registered with the RBI during 1999, only 624 were permitted to accept deposits. By the end of June 2009, the number of NBFIs registered with the RBI stood at 12,740, of which 336 were accepting public deposits. Table 4.2 also shows that there has been an increase in the number of NBFIs registered with the RBI from 1999 to 2002, after which there has a marginal decrease in the number of NBFIs registered. 4.2 A GENESIS OF PFIs (UIBs) IN MANIPUR: If we really trace back into the origin of Private Financial Institutions in Manipur, it was during when some group of youths started an institution dealing with finance which is known as Chaokhat Khongthang Marup in local name at a place called Thambalkhong, in Imphal East district of the state, which later on started taking the shape of Private Financial Institution at present. Those financial institutions of those days which were known as Marup in local terms (whose working nature is just like that of ROSCA) started providing different services and schemes like hire-purchase, installment-purchase and stoppayment. The main emphasis was given on stop-payment system which provides the opportunities to get two-wheelers, household items and even Maruti car at the time based lottery system where winning the lottery depends upon the luck of the people taking part in it. These financial institutions were established by some group of friends and by individuals having surplus money with them by employing some manpower for performing these different activities. Most of them were non-registered firms.

7 ., Different names were given to these financial institutions according to the wishes of the groups or individuals starting them like Chaokhat Khongthang Marup ; in the name of the clans or surnames of the individuals like Ningthouja Traders, Khundrakpam Finance, etc. In the eyes of law, these non-registered firms do not have the right to perform all these financial services and they have not been given the permission and authority to run such financial institutions. In simple words, whatever the business they were running was illegal. Even the government of the state never investigated into this and never thought of enforcing law upon them. From 1990 to 1993, there was a stage of mushroom growth of these financial institutions in different parts of the state, particularly in Imphal district before the division of Imphal East and West. Many other small functions were also added by them like Fixed Deposit, Recurring Deposit, etc. Most of the PFIs of those days were quite successful for a period of 4-5 years. But due to different reasons like mismanagement of funds, conflicts among the members, increased number of defaulters and some strict supervision and restriction from state government and RBI, many of them get failed in business and get set back on a mass scale during the period of 1994 to During this period most of them get failed and stop functioning. Since 1998 onward, they started coming up again and stated functioning once again providing various financial services. This time, these PFIs started registering themselves under Manipur Societies Registration Act, 1989 as a social organisation which is totally different from the functions being performed by

8 . them. Some of them were also registered in the right path under the Manipur State Co-operative Societies Act, 1976 as a Thrift and Credit Co-operative Societies Ltd. But since 2004 onward, the State Government has given them instructions to get registered themselves under Bombay Money Landers Act, 1946 and they are allowed to indulge in the business of lending with the license provided under this Act. Till now there are 78 registered private financial institutions. Besides the license holders under Bombay Money Lenders Act, 1946 (which has been subsequently replaced by Manipur Money Lenders Act), there are a number of unregistered as well as registered organisations under Manipur Societies Registration Act, 1989, which are not permitted to indulge in such financial activities, and a large number of cooperative societies known as Thrift and Credit Cooperative Societies Ltd. which are registered under Manipur Cooperative Societies Act, They also provide these financial services to a large extent. But, they are not being covered under this study. 4.3 REGULATION OF PRIVATE FINANCIAL INSTITUTIONS (NBFCs AND UIBs): Evolution of Regulations In the sixties, a sharp increase in the volume of deposit held by Nonbanking companies [NBC] was noticed. The NBCs were not regulated then and several unhealthy features came to surface. The RBI Act was, therefore, amended by the Banking Laws (Miscellaneous Provisions) Act, 1963 and a new chapter IIIB containing provisions relating to Non-banking Institutions receiving deposits

9 .. and financial institutions, was inserted. It was then felt necessary to have statutory control over acceptance of deposits by NBFIs and vest RBI, as the custodian of the monetary and credit system of the country, with certain powers for enabling it to effectively supervise, control and regulate the deposit acceptance activities of such institutions. For text of Chapter IIIB of the RBI Act please refer to Appendix 5.I. In pursuance of the powers conferred under Chapter IIIB of RBI Act, separate Direction were issued to NBFCs and NBNFCs in 1966 relating to acceptance of deposits governing their period, quantum, rate of interest, etc. Later, these Directions were amended from time to time and in 1973, Directions were also issued to MNBCs conducting prize-chits and related business, after the definition of the term deposit was widened and that of insertion of Section 58A in the Companies Act and the Companies (Acceptance of Deposits) Rules, 1975 issued there under, RBI withdrew its Direction to NBNFCs and since then these companies were to be regulated exclusively by the Department of Company Affairs, Government of India. Although the provisions of Section 58A applied to all companies, NBFCs were exempted from its application [by notification issued under Section 57A(7). From 1977 onwards, RBI has been regulating NBFCs under NBFC Directions and MNBC Directions. The NBFC Direction regulated loan, investment, hire-purchase, finance, mutual benefit finance, miscellaneous financial and housing finance companies. The MNBC Directions applied to every company, other than banking or insurance company, which carried on any of the specified activities mentioned therein.

10 .+ In 1978, Banning Act was enacted by Parliament, in pursuance of the recommendation of the Raj Committee. This Act banned the conduct of prize chits, savings schemes and money circulation schemes, excluding the conventional chits. For the text of the Banning Act, please see Appendix 5.II in 1982, a legislation to regulate conventional chits viz. the Chit Fund Act, 1982, was passed by the Parliament and various States are adopting it on more or less similar lines. This enactment was also in pursuance. By Banking Laws (Amendment) Act, 1983, [1983 Act] certain major amendments were made with effect from February 1, 1984 in Chapter IIIB of RBI Act and a new Chapter IIIC was introduced in the Act of Prohibition of acceptance of Deposits by Unincorporated Bodies. Chapter IIIC was introduced in the RBI Act (for text see Appendix 5.1) for regulating the deposit acceptance by unincorporated bodies, the need for which was felt since long, especially since the Supreme Court, in the case of State of West Bengal Vs. Sapan Kumar, while quashing the investing under the Banning Act has stated and recommended at para 38, as under: The firm appears to be on the brink of economic crisis, as any scheme of this nature is eventually bound to be. Considering the manner in which the firm has manipulated its accounts and its affairs, I have no doubt that it will secret the large funds and destroy the incrementing documents if they are returned to it. The State Government, the Central Government and the Reserve Bank of India must be given a reasonable opportunity to see if it is possible, under the law, to institute and inquiry into the affairs of the firm and, in the meanwhile, to regulate its affairs. I consider such a step essential in the interests of countless small

11 . depositors who, otherwise, will be ruined by being deprived of their life s savings. The big black money bosses will take nay loss within their stride but the small man must receive the protection of the State, which must see to it that the small depositors are paid back their deposits with the agreed interest as quickly as possible. The amendments made by 1983 Act, included the following: (i) In Chapter IIIB, the definition of deposit was further modified and certain specified categories were excluded from the scope of the term deposit. (ii) In terms of provisions of Chapter IIIC, restriction were placed on the number of depositors from whom deposits could be accepted by unincorporated bodies, i.e., individuals, firms and unincorporated associations of individuals. Thus, while individuals were prohibited from accepting deposits from more than twenty-five depositors, (excluding deposits from relations as defined in the Act), the restriction on firms and associations was also twenty-five per partner and individual respectively, subject to the ceiling of 250 depositors per firm/association. It is to be noted that it was considered necessary to put a limit on the number of depositors rather than on the quantum of deposits as the aim was to protect small and unwary depositors. (iii) The Directions issued to NBFCs were also amended. An important amendment having been made to bring the equipment leasing companies within the ambit of NBFC Directions. In 1987, the Supreme Court held that the business of companies carrying on certain types of prize-chit Schemes, were not hit by Banning Act. The Court

12 . had ruled that since March 31, 1978, when the Residuary clause was introduced by inserting paragraph 19 in the Direction of 1977, the Reserve Bank has been vested with enough powers to control or regulate any business of the king run by such companies even if such business is not the business of prize-chits as defined by the Banning Act or as specified in paragraph 2(i) of NBFC Direction, which were not suitable to regulate this type of business, RBI considered issuing a separate set of Directions in Accordingly, RBI issued RNBC Directions, as the third set of Directions governing the NBFCs. These Directions were effective from May 15, 1987 and govern all the RNBCs which are not administered by either the NBFC Directions or the MNBC Directions. In 1987, the Parliament enacted the National Housing Bank Act (provisions where of came into force on different dates from July 1988 onwards) and established the NHB to operate as principal agency to promote HFIs both at the local and regional levels and to provide financial and other support to such FIs. Thereafter, on June 26, 1988, the NHB issued HFC Directions to regulate the deposit acceptance activities of HFCs as defined in section 2(d) of the NHB Act. Simultaneously, the RBI amended its NBFC Directions and excluded from its purview the HFCs since covered by the HFC Directions. Prudential Norms of NBFCs as per Narasimham Committee and Shah Committee Reports: The Narasimham Committee recommended in 1991 that regulatory framework for all Non-Banking Financial Companies which are broadly classified into loans, investment equipment leasing, hire-purchase, mutual benefit finance companies, residuary non-banking companies and housing finance companies,

13 . should be developed. The supervision of these institutions by the regulatory body/rbi should be confined to off-site supervision with on-site supervision whenever required. Accordingly Dr. A.C Shah Committee was constituted by the RBI which released its recommendation in the light of Narasimham Committee s above observation and also pursuant to the terms or reference made to it on The RBI accepted the recommendations of Shah Committee and issued guidelines as under as a first installment on With effect from , the maximum interest rate on deposits accepted by the NBFCs was increased from 14% to 15%. The new rates will be applicable to fresh deposits and renewals of existing deposits. The interest may be compounded at monthly rests. (1) The minimum period of deposits was brought down for all NBFCs to over 12 months from the present over 24 months. The maximum maturity period has also been reduced to 84 months for the residuary non-banking companies. However, in respect of the other categories of finance companies the maximum period continues to be 60 months. (2) All NBFCs including the residuary non-banking companies with net owned funds (NOF) of Rs 50 lakhs and above should compulsorily register themselves with RBI by filing an application in the prescribed from before 31 st July (3) As per the new RBI directive, inter-corporate deposits and borrowings and monies received from directors/shareholders of private limited companies will be treated as regulated deposits and will no longer be in the exempted

14 .7 category. Similarly monies rose though debentures and bonds secured immovable properties have also been removed from the exempted category. The companies have been given sufficient time to conform to these norms which have reduced the uncontrolled resources of the companies. (4) Hire-purchase and equipment leasing companies have to maintain a liquidity ration the revised definition of deposits from April 12, Earlier, it was 15 % of deposit excluding the exempted category. On , the RBI raised the liquidity ratio to 15%, of which 105 assets are to maintain in the form of Government Securities/bonds. (5) Earlier for loan and investment companies there was no stipulation of liquidity ratio. With effect from July 12, 1993, these were also required to maintain 5% liquidity ration out of which 2-1/2% would be invested in Government securities and bonds. On , the RBI raised the liquidity ratio to 15%. (6) In the case of residuary non-banking companies, with effect from October 12, 1993, they will have to invest 10% of their total deposits in Government Securities and bonds. The above guidelines issued by the RBI have met with the initial resistance by the NBFCs and other companies of similar nature as is normally the case whenever changes are brought about. Therefore RBI issued as a second step certain clarifications as under: (a) Inter-corporate deposit would not be subject to the interest rate ceiling and such deposits can be accepted provided the maturity does not exceed 12

15 .5 months. The total amount of such deposits raised should be subject to a ceiling of twice the NOF. This ceiling of twice the NOF would be within the overall ceiling of 10 times the NOF in the case of equipment leasing and hire-purchase companies and in the case of other financial companies the ceiling is outside the overall ceiling of 10 times the NOF. (b) For maintaining the liquidity ration time is given up to the end of March But those who have already maintained the ration should not slip down because of time given to those who are yet to maintain the ratio. (c) The minimum period of which financial companies can accept deposits is being altered from more than 12 months to 12months. (d) For premature withdrawal of deposits, the following rules have been framed: (1) Less than 3 months - No withdrawal. (2) 3 months but before expiry of 6 months - withdrawal without interest. (3) 6 months but before expiry of 12 month - Not Exceeding 10% per annum. (4) 12 months and thereafter but before the date of maturity - One percentage point less than the contracted rate. On 13 June 13, 1994 the RBI issued another set guidelines for development of NBFCs. Based on recommendations of Shah committee Report the new guidelines are applicable to all those companies which have net owned funds of Rs 50 lakhs and above.

16 .( Laws Relating to Private Financial Institutions: Truly speaking, the laws relating to Private Financial Institutions are in its developing stage. As the present research work covers both the Non-Banking Financial Institutions and the Unincorporated Bodies under the term Private Financial Institutions, all the laws relating to both the institutions are being discussed here (a) Extracts from Reserve Bank of India Act: Different Chapters in Reserve Bank of India Act are related to the regulatory laws for Non-Banking Financial Institutions and Unincorporated Bodies. Various powers have been given to RBI according to this Act and they are the main guiding principle for the functioning of Private Financial Institutions. The extracts of the Act are being presented here (a)(i) Provisions Relating to Non-Banking Institutions Receiving Deposits and Financial Institutions (Chapter IIIB): The provisions of this chapter shall not apply to the State Bank or a banking company as defined in section 5 of the [Banking Regulation Act,1949] (10 of 1949) or [a corresponding new bank as defined in clause (da) of section 5 of the Act or a subsidiary bank as defined in State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959) or [a Regional Rural Bank or a co-operative bank or a primary agricultural credit society or a primary credit society]: Provided that for the purpose of this Chapter, the [Tamil Nadu Industrial Investment Corporation Limited] shall not be deemed to be a banking company. 45-I. Definitions- In this Chapter, unless the context otherwise requires-

17 +, [(a) business of a non-banking financial institution means carrying on 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);] [(aa)] company means a company as defined in section 3 of the Companies Act, 1956 (1 of 1956), and includes a foreign company within the meaning of section 591 of that Act; (b) corporation means a corporation incorporated by an Act of any legislature; [(bb) deposit includes and shall be deemed always to have include any receipt of money by way of deposit or loan or in any other form, but does not include- (i) (ii) (iii) Amounts raised by way of share capital; Amounts contributed as capital by partners of a firm; Amounts received from scheduled bank or a co-operative bank or any other banking company as defined in clause(c) of section 5 of a Banking Regulation Act, 1949(10 of 1949); (iv) Any amount received form,- a) A State Financial Corporation, Any financial institution specified in or under section 6A of the Industrial Development Bank of India Act, 1964(18 of 1964), or b) Any other institution that may be specified by the Bank in this behalf; (v) Amounts received in the ordinary course of business, by way of a) Security deposit, b) Dealership deposit, c) Earnest money, or

18 + d) Advance against order for goods, properties or service; (vi) Any amount received from an individual or a firm or an association individuals not being a body corporate, registered under any enactment relating to money lending which is for the time being in force in any State; and (vii) Any amount received by way of subscriptions in respect of a chit. Explanation I Chit has the meaning assigned to it in clause (b) of section 2 of the Chit Funds Act, 1982 (40 of 1982). Explanation II- Any credit given by a seller to a buyer on the sale of any property (whether movable or immovable) shall not be deemed to be deposit for the purpose of this clause;] [(c) 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, debenture 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 hiree 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 insurances business;

19 +. (v) Managing, conduction or supervising, as foreman, agent or in any other capacity, of chits or kuries as defined a 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 king, or disbursing monies in any other way, to persons from whom monies or collected or to any other persons, [but does not include any institution, which carries on as its principle business,- (a) Agricultural operations; or (aa) industrial activity; or] [Explanation.- For the purpose of this clause industrial activity means any activity specified in sub-clauses(i) to (xviii) of clause (c) of section 2 of the Industrial Development Bank of India Act, 1964 (18 of 1964);] (b) The purchase or sale of any goods (other than securities) or the providing of any services; or (c) The purchase, construction or sale of immovable property, so however, that no portion of the income of the institution is derived from the financing of purchases, constructions or sales of immovable property by other persons;] (d) firm means a firm as defined in the Indian Partnership Act, 1932 (9 of 1932)]; (e) non-banking institution means a company, corporation, [or co-operative society];

20 ++ [(f) non-banking financial company means- (i) A financial institution which is 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 of 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.] 45-IA. Requirement of registration and net owned fund - (1) Notwithstanding anything contained in this chapter or in any other law for the time being in force, no non-banking financial company shall commence or carry on the business of a non-banking financial institution withouta) Obtaining a certificate or 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: Provided that a non-banking financial company in existence on the commencement of the Reserve Bank of India (Amendment) Act, 1997 shall make an application for registration to the Bank before the expiry of six months from such commencement and notwithstanding anything contained in sub-section (1) may continue to carry on the business of a non-banking financial institution until a

21 + certificate of registration is issued to it or rejection of application for registration is communicated to it. (3) Notwithstanding anything contained in sub-section (1), a non-banking financial company in existence on the commencement of the Reserve Bank of India (Amendment) Act, 1997 and having a net owned fund of less than twentyfive lakh rupees may, for the purpose, continue to carry on the business of a nonbanking financial institution- (i) For a period of three years from such commencement ; or (ii) For such further period as Bank may, after recording the reasons in writing for so doing, extend, subject to the condition that such company shall, within three months of fulfilling the requirement of the net owned fun, inform the Bank about such fulfillment: Provided that the period allowed continuing business under this sub-section shall in no case exceed six years in the aggregate. (4) The bank, for the purpose of considering the application for registration, may require being satisfied by an inspection of the books of the non-banking financial company or otherwise that the following conditions are fulfilled:- a) That the non-banking financial company is or shall be in a position to pay its present or future depositors in full as and when their claims accrue; b) That the affairs of the non-banking financial company are not being or are not likely to be conducted in a manner detrimental to the interest of its present or future depositors;

22 + c) That the general character of the management or the proposed management of the non-banking financial company shall not be prejudicial to the public interest or the interests of its depositors; d) That the non-banking financial company has adequate capital of registration to the non-banking financial company to commence or to carry on the business of India; e) That the public interest shall be served by the grant of certificate of registration to the non-banking financial company to commence or to carry on the business of India; f) That the grant of certificate of registration shall not be prejudicial to the operation and consolidation of the financial sector consistent with monetary stability and economic growth considering such other relevant factors which the Bank may, by notification in the Official Gazette, specify; and g) Any other condition, fulfillment of which in the opinion of the Bank, shall be necessary to ensure that the commencement of or carrying on of the business in India by a non-banking financial company shall not be prejudicial to the public interest or in the interests of the depositors. (5) The Bank may, after being satisfied that the conditions specified in subsection (4) are fulfilled, grant a certificate of registration subject to such conditions which it may consider fit to impose. (6) The Bank cancel a certificate of registration granted to a non-banking financial company under this section if such company-

23 + (i) Ceases to carry on the business of a non-banking financial institution in India; or (ii) Has failed to comply with any condition subject to which the certificate of registration and had been issued to it; or (iii)at any time fails to fulfill any of the conditions referred to in clauses (d) to (g) of sub-section (4); or (iv)fails a. To comply with any direction issued by the Bank under the provisions of this Chapter; or b. To maintain accounts in accordance with requirements of any law or any direction or order issued by the Bank under the provisions of this Chapter; or c. To submit or offer for inspection its books of account and other relevant documents when so demanded by an inspecting authority of the Bank; or (v)has been prohibited from accepting deposit by an order made by the Bank under the provisions of this Chapter and such order has been in force for a period of not less than three months: Provided that before cancelling a certificate of registration on the ground that the non-banking financial company has failed to company with the provisions of clause (ii) or has failed to fulfill any of the conditions referred to in clause (iii) the Bank, unless it is of the opinion that the delay in cancelling the certificate of registration shall be prejudicial to public interest or the interest of the depositors or the non-banking financial company, shall give an opportunity to such company on

24 +7 such term as the Bank may specify for taking necessary steps to comply with such provision or fulfillment of such condition: Provided further that before making any order of cancellation of certificate of registration, such company shall be given a reasonable opportunity of being heard. (7) A company aggrieved by the order of rejection of application for registration or cancellation of certificate of registration may prefer an appeal, within a period of thirty days from the date on which such order of rejection or cancellation is communicated to it, to the Central Government and the decision of the Central Government where an appeal has been preferred to it, or of the Bank where no appeal has been preferred, shall be final: Provided that before making any order of rejection of appeal, such company shall be given a reasonable opportunity of being heard. Explanations- For the purposes of this section,- I. net owned fund meansa) The aggregate of the paid-up equity capital and free reserves as disclosed in the latest balance-sheet of the company after deducting there fromi. Accumulated balance of loss; ii. Deferred revenue expenditure; and iii. Other intangible assets; and b) Further reduced by the amounts representing- 1) Investment of such company in shared ofi. Its subsidiaries;

25 +5 ii. Companies in the same group; iii. All other non-banking financial companies; and 2) The book value of debentures, bonds, outstanding loans and advances ( including hire-purchase and lease finance) made to, and deposits withi. Subsidiaries of such company; and ii. Companies in the same group, to the extent such book value exceeds ten per cent, of (a) above. II. subsidiaries and companies in the same group shall have the same meanings assigned to them in the Companies Act 1956, (1 of 1956).] [45-IB. Maintenance of percentage of assets: 1. Every non-banking financial company shall invest and continue to invest in India in unencumbered approved securities, valued at a price not exceeding the current market price of such securities, an amount which, at the close of business on any day, shall not be less than five per cent. or such higher percentage not exceeding twenty-five per cent. as the Bank may, from time to time by notification in the Official Gazette, specify, of the deposits outstanding at the close of business on the last working day of the second preceding quarter; Provided that Bank may specify different percentages of investment in respect of different classes of non-banking financial companies. 2. For the purpose of ensuring compliance with the provisions of this section, the Bank may require every non-banking financial company to furnish a return to it in such form, in such manner and for such period as may be specified by the Bank.

26 +( 3. If the amount invested by a non-banking financial company at the close of business on any day falls below the rate specified under sub-section(1), such company shall be liable to pay to the Bank in respect of such shortfall, a penal interest at a rate of three per cent. per annum above the bank rate on such amount by which the amount actually invested falls short of the specified percentage, and where the shortfall continues in the subsequent quarters, the rate of penal interest shall be five per cent per annum above the bank rate on such shortfall for each subsequent quarter. 4. (a) The panel interest payable under sub-section (3) shall be payable within a period of fourteen days from the date on which a notice issued by the Bank demanding payment of the same is served on the non-banking financial company to pay the same within such period, penalty may be levied by a direction of the principal civil court having jurisdiction in the area where an office of the defaulting non-banking financial company is situated and a such direction shall be made only upon an application made in this behalf to the court by the bank; and (b) When the court makes a direction under clause (a), it shall issue a certificate specifying the sum payable by the non-banking financial company and every such certificate shall be enforceable in the same manner as if it were a decree made by the court in a suit. 5. Notwithstanding anything contained in this section, if the Bank is satisfied that the defaulting non-banking financial company had sufficient cause for its failure to comply with the provisions of sub-section (1), it may not demand the payment of the penal interest. Explanation - For the purpose of this section,

27 , (i) approved securities means securities of any State Government or of the Central Government and such bonds, both the principal whereof and the interest whereon shall have been fully and unconditionally guaranteed by any such Government; (ii) unencumbered approved securities includes the approved securities lodged by the non-banking financial company with another institution for an advance or any other arrangement to the extent to which such securities have not been drawn against or availed of or encumbered in any manner; (iii) quarter means the period of three months ending on the last day of March, June, September or December.] [45-IC Reserve Fund: (1) Every non-banking financial company shall create a reserve fund the transfer therein a sum not less than twenty per cent of its net profit every year as disclosed in the profit and loss account and before any dividend is declared. (2) No appropriation of any sum from the reserve fund shall be made by the non-banking financial company except for the purpose as may be specified by the Bank from time to time and every such appropriation shall be reported to the Bank within twenty-one days from the date of such withdrawal: Provided that the Bank may, in any particular case and for sufficient cause being shown, extend the period of twenty-one days such further period as it thinks fit or condone any delay in making such report. (3)Notwithstanding anything contained in sub-section (1), the Central Government may, on the recommendation of the Bank and having regard to the adequacy of the paid-up capital and reserves of a non-banking financial company

28 in the relation to its deposit liabilities, declare by order in writing that the provisions of sub-section (1) shall not be applicable to the non-banking financial company for such period as may be specified in the order: Provided that no such order shall be made unless the amount in the reserve fund under sub-section (1) together with the amount in the share premium account is not less than the paid-up capital of the non-banking financial company.] 45J. Bank to regulate or prohibit issue of prospectus or advertisement soliciting deposits of money: The bank may, if it consider necessary in the public interest so to do, by general or special order,- (a) Regulate or prohibit the issue by any non-banking institution of nay prospectus or advertisement soliciting deposit of money from the public, and (b) Specify the condition subject to which any such prospectus or advertisement, if not prohibited, may be issued. [45JA. Power of Bank to determine policy and issue direction: (1) If the Bank is satisfied that, in the public interest of to regulate the financial system of the country to its advantages or to prevent the affairs of any non-banking financial company being conducted in manner detrimental to the interest of the depositors or in a manner prejudicial to the interest of the nonbanking financial company, it is necessary or expedient so to do, it may determine the policy and give directions to all or any of the non-banking financial companies relating to income recognition, accounting standards, making of proper provision for bad and doubtful debts, capital adequacy based on risk weights for assets and credit conversion factors for off balance-sheet items and also relating to

29 . deployment of funds by a non-banking financial company or a class of nonbanking financial companies or non-banking financial companies generally, as the case may be, and such non-banking financial companies shall be bound to follow the policy so determined and the direction so issued. (2) Without prejudice to the generality of the powers vested under subsection (1), the Bank may give directions to non-banking financial companies generally or to a class of non-banking financial companies or to any non-banking financial company in particular as to (a) The purpose for which advances or other fund based or non-fund based accommodation may not be made; and (b) The maximum amount of advances of other financial accommodation or invested in shares and other securities which, having regard to the paid-up capital, reserves and deposits of the non-banking financial company and other relevant consideration, may be made by that nonbanking financial company to any person or a company or to a group of companies.] 45K. Power of Bank to collect information from non-banking institution as to deposit and to give direction: (1) The Bank may at any time direct that every non-banking institution shall furnish to the Bank, in such form, at such intervals and within such time, such statements information or particulars relating to or connected with deposits received by the non-banking institution, as may be specified by the Bank by general or special order.

30 + (2) Without prejudice to the generality of the vested in the Bank under sub-section (1), the statement, information or particulars to be furnished under sub-section (1), may relate to all or any of the following matters, namely, the amount of deposits, the purposes and periods for which, and the rates of interest and other terms and conditions on which, they are received. (3) The Bank may, if it considers necessary in the public interest so to do, give directions to non-banking institution either generally or to any non-banking institution or group of non-banking institution in particular, in respect of any matters relating to or connected with the receipt of deposits, including the rates of interest payable on such deposits, and the periods for which deposits may be received. (4) If any non-banking institution fails to comply with any direction given by the Bank under sub-section (3), the Bank may prohibit the acceptance of deposits by that non-banking institution. (5) Every non-banking institution receiving deposits shall, if so required by the Bank and within such time as the Bank may specify, cause to be sent at the cost of the non-banking institution a copy of its annual balance-sheet and profit and loss account or other annual accounts to every person from whom the non-banking institution holds, as on the last day of the year to which the account relate, deposits higher than such sum as may be specified by the Bank. 45L. Power of Bank to call for information from financial institutions and to give directions: (1) If the Bank is satisfied for the purpose of enabling to it regulate the credit system of the country to its advantage it is necessary so to do, it may-

31 (a) Require financial institution either generally or any group of financial institutions or financial institution in particular, to furnish to the Bank in such form, at such intervals and within such time, such statements, information or particulars relating to the business of such financial institutions or institution, as may be specified by the Bank by general or special order; (b) Give to such institutions either generally or to any such institution in particular, direction relating to the conduct of business by them or by it as financial institutions or institution. (2) Without prejudice to the generality of the power vested in the Bank under clause (a) of sub-section (1), the statements, information or particular to be furnished by a financial institution may relate to all or any of the following matters, namely, the paid-up capital, reserves or other liabilities, the investments whether in Government securities or otherwise, the persons to whom, and the purposes and periods for which, finance is provided and the terms and conditions, including the rates interest, on which it is provided. (3) In issuing direction to any financial institution under clause (b) of subsection (1) the Bank shall have due regard to the condition in which, and the objects for which, the institution has been established, its statutory responsibilities, if any, and the effect the business of such financial institution is likely to have on trends in the money and capital markets

32 45M. Duty of non-banking institution to furnish statement, etc required by Bank: It shall be the duty or every non-banking institution to furnish the statements, information or particulars called for, and to comply with any direction given to it, under the provisions of this Chapter. [45MA. Power and duties of auditors: (1) It shall be the duty of an auditor of a non-banking institution to inquire whether or not the non-banking institution has furnished to the Bank such statements, information or particulars relating to or connected with deposits received by it, as are required to furnished under this Chapter, and the auditor shall, except where he is satisfied on such inquiry that the non-banking institution has furnished such statements, information or particulars, make a report to the Bank giving the aggregate amount of such deposits held by the non-banking institution. [(1A) The Bank may, on being satisfied that it is necessary so to, in the public interest or in the interest of the depositors or for the purpose of proper assessment of the books of accounts, issue directions to any non-banking financial company or nay class of non-banking companies or non-banking financial companies generally or to the auditors of such non-banking financial company or companies relating to balance-sheet, profit and loss account, disclosure of liabilities in the book of accounts or any matter relation thereto.] (2) Where, in the case of a non-banking company financial company, the auditor has made, or intends to make, a report to the Bank under sub-section (2) of

33 section 227 of the Companies Act 1956 ( 1 of 1956), the contents of the report which he has made or intends to make, to the Bank. (3) Where the bank is the opinion that it is necessary so to do in the public interest or in the interest of the non-banking financial company or in the interest of depositors of such company it may at any time by order direct that special audit of the accounts of the non-banking financial company in relation to any suchtransaction or class of transactions or for such period or periods, as may be specified in the order, shall be conducted and the Bank may appoint an auditor or auditors to conduct such special audit and direct the auditor or the auditors to submit the report to it. (4) The remuneration of the auditors as may be fixed by the Bank, having regard to the nature and volume of work involved in the audit and the expenses of or incidental to the audit shall be borne by the non-banking financial company so audited. [45MB. Power of Bank to prohibit acceptance of deposit and alienation of assets: (1) If any non-banking financial company violates the provisions of any section or fails to comply with any direction or order given by the Bank under any of the provisions of this Chapter, the Bank may prohibit the non-banking financial company from accepting any deposit. (2) Notwithstanding anything to the contrary contained in any agreement or instruments or any law for the time being in force, the Bank, on being satisfied that it is necessary so to in the public interest or in the interest of the depositors, may direct, the non-banking financial company against which an order prohibiting

34 7 from accepting deposit has been issued, not to sell, transfer, create charge or mortgage or deal in any manner with its property and assets without prior written permission of the Bank for such period not exceeding sex months from the date of the order.] [45MC. Power of Bank to file winding up petition: (1) The Bank, on being satisfied that a non-banking financial company- (a) Is unable to pay its debt; or (b) Has by virtue of the provisions of section 45IA become disqualified to carry on the business of a non-banking financial institution; or (c) Has been prohibited by the Bank from receiving deposit by an order and such order has been in force for a period of not less than three month; or (d) The continuance of the non-banking financial company is detrimental to the public interest or the interest of depositors of the company. may file an application for winding up of such non-banking financial company under the Companies Act, 1956 (1 of 1956). (2) A non-banking financial company shall be deemed to be unable to pay its debt if it has refused or has failed to meet within five working days any lawful demand made at any to its offices or branches and the Bank certifies in writing that company is unable to pay its debt. (3) A copy of every application made by the Bank under sub-section (1) shall be sent to the Registrar of Companies.