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  • 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


  • 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for NBFCs issued by SECP NBFC & NE Regulations, 2007 Regulates Establishment of NBFCs Regulates operations Now superseded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strengthened  Restrictions on certain investments and transactions imposed  Bar on acquiring controlling interest withdrawn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
  • 20. Non-Banking Finance Companies and Notified Entities Regulations, 2007
  • 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
  • 25. NBFCs engaged in Leasing, Investment Finance Services & Housing Finance Services
  • 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
  • 32. (II) Investment Finance Services
  • 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
  • 37. (v) Asset Management Services
  • 38. Asset Management services- Structure AMC Fund manager Investment Committee CIS CIS CIS Sharia If Islamic trustee trustee trustee
  • 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