NBFCs: SECP proposes regulatory amendments

The conditions for obtaining deposit taking permission by lending Non-Banking Finance Company (NBFCs) from the Securities and Exchange Commission of Pakistan (SECP) has been proposed to be made more stringent to protect the interest of the general public.
The SECP has proposed amendments in the Non-Banking Finance Companies and Notified Entities Regulations, 2008 to regulate NBFCs carrying out leasing, investment finance services, housing finance services, asset management services, investment advisory services and their business activities and also notified the entities being managed by the aforementioned NBFCs. The conditions for obtaining deposit taking permission have been made more stringent to protect the interest of the general public.
1) A Lending NBFC may apply to the Commission for permission to raise deposit, after complying with the following conditions, namely:
(a) the NBFC is undertaking activities as a Lending NBFC for a minimum period of three years and has been, as per the audited accounts, making profits for last two years; (b) the NBFC meets the minimum equity Requirements, as specified in these Regulations; (c) the NBFC complies with the Capital Adequacy Ratio as specified in these Regulations; (d) the NBFC, or any other NBFC in which its sponsors had a stake of more than 10%, has not defaulted on, or obtained write off on Finance availed from any financial institution or investor in any of its redeemable capital instruments within the last five years (e ) the NBFC, or any other NBFC in which its sponsors had a stake of more than 10%, has not defaulted on any obligation towards any of its depositors, which term shall include investors in any of its depository arrangements.
The instrument for deposit raising has been specified to curb camouflaged deposit raising. Moreover as per regulation 14A, prior approval of Commission is also required for instrument to be used for deposit raising. The Securities and Exchange Commission of Pakistan (SECP) has introduced the concept of micro-lending in the proposed Non-Banking Finance Companies (NBFCs) regulations.
Under the proposed amendments, micro-lending means finance provided to an individual whose total income during a year is less than or equal to Rs 600,000 or such other minimum limit as may, be prescribed by the Commission. Under the proposed changes in the rules, the current definition of open-end scheme is not comprehensive and therefore it deems appropriate to amend the definition in the light of international jurisdiction.
As per SECP, the requirement of independent registrar has been incorporated in the regulations therefore it is necessary to define the registrar. Under the proposed rules, the regulatory framework has been specified for discount houses in the amended regulations and SECP will issue separate licenses for discount houses.
In the proposed regulations, concept of expense ratio has been introduced. This will cap overall expense of collective investment scheme. Further, various type of expenses like selling, accounting, shariah fee has now been allowed to AMCs to be charged to fund , this would lead to certain additional costs / expenses to be charged to the fund. Thus there is a need for introducing the concept of Total Expense Ratio (TER), a practice being followed in multiple jurisdictions. This will enable investor to compare the charges of different funds, SECP said.
The SECP said that as mentioned in the rules, all appointments of directors and chief executive are with prior approval of SECP, therefore the word prior be deleted. The clarification issued in October 2013 regarding approval of reelected directors has been made part of regulations. Moreover, the inconsistency with the Ordinance (not later than 10 days before the notice of meeting called for the election of directors) has also been removed.