The Securities and Exchange Commission of Pakistan (SECP) has enhanced the capital requirement for the Non-Banking Finance Companies (NBFCs) and categorised NBFCs into two groups/clusters where first group would cover asset management companies (mutual funds) and second leasing, investment banking and housing finance units under new NBFCs Rules-2007.
The SECP on Thursday issued revamped "Non-Banking Finance Companies and Notified Entities Regulations, 2007". Sources told Business Recorder that one of the major changes in the NBFCs rules is the constitution of two groups under the new rules. Previously, there was no bifurcation in the NBFCs under the Non-Banking Finance Companies (Establishment and Regulation) Rules, 2003.
This resulted in conflict of interest as all of them tried to perform all functions under the old rules. Now, the NBFCs have to first decide that what specific role they have to play under the new rules.
If you want to operate an asset management company, then confine yourself to it without touching other functions. Similarly, if you intend to work in deposit taking activity, leasing or investment banking, then you have to confine yourself to this core business.
Sources said that another important change in the new rules is enhancement of capital requirements for the NBFCs. However, existing weak entities have been given three years to fulfil the revised capital requirements/ benchmark limit.
An NBFC seeking licence for undertaking investment advisory or asset management services or both shall not be eligible for seeking licence for any other form of business.
Similarly, an NBFC seeking licence for undertaking investment finance services or leasing or housing finance services or discounting services or all of the said forms of business shall not be eligible for obtaining licence for any other form of business. For minimum equity requirement, an NBFC licensed by the commission to undertake any form of business shall meet minimum equity for carrying out following forms of business:
The minimum equity requirement for obtaining fresh licence of investment finance services is Rs 1000 million; leasing Rs 700 million; asset management services Rs 200 million; investment advisory services Rs 50 million and minimum equity requirement for obtaining new licence for housing finances services is Rs 700 million. In case of venture capital investment, the existing equity requirement is Rs 50 million.
Sources said that NBFC financial regulations have been totally rationalised and modernised in view of international best practices. The commission has studied NBFCs regulations in 35 countries, held dialogues with 400-500 experts and incorporated viewpoints of associations representing mutual funds, leasing, Modaraba and others.
Sources said that the new rules have been bifurcated into two segments. The core principles have been merged into rules and day-to-day operations have been specified into regulations.
Meanwhile, the SECP announced that the amended rules take into account commission's experience with the NBFC sector since 2002. They are based on international best practices and extensive stakeholder consultation with individual regulated entities as well as all the relevant trade associations.
The new framework takes into account the enhanced powers of SECP (including the power to make regulations) which were incorporated in the Finance Act 2007. These powers are reflected in section 282 of the Companies Ordinance.
Consequently, the new regulatory framework is divided into 2 segments - ie, NBFC Rules 2003 (amended) and NBFC Regulations. The Rules contain the parameters for the formation of NBFC's and the Regulations comprehensively address all operational aspects and issues for NBFC's and their notified entities.
To facilitate regulated entities and new entities, all the existing Prudential Regulations for NBFCs issued on January 21, 2004 (with appropriate amendments) have been merged into the regulations, the SECP added.
The new rules have specified prevention of NBFCs involvement in money laundering and other illegal trades. The NBFCs shall follow guidelines issued to safeguard itself against involvement in money laundering activities and other unlawful trades.
The NBFCs shall make all such efforts to determine the true identity of the customer before extending its services and particular care shall be taken to identify ownership of all accounts and those using safe custody facilities, effective procedures shall be instituted for obtaining identification from new customers.
The NBFC shall establish procedures for ascertaining customer status and for monitoring of borrower accounts on a regular basis for checking identities and bona fide of remitters and beneficiaries of transactions and for retaining internal record of transactions for future reference.
The transactions, which are out of character with the normal operation of the account involving high deposits, withdrawals and transfers, shall be thoroughly scrutinised and properly investigated.
The SECP has notified restrictions on certain types of transactions. An NBFC shall not take exposure against the security of shares/TFCs issued by it; provide unsecured credit to finance subscription towards floatation of share capital and issue of TFCs; provide facilities against the non-listed TFCs or the shares of companies not listed on stock exchange; provide facilities to any limited company against the shares/TFCs of that company or its group companies; provide facilities against the shares/TFCs of listed companies that are not members of the Central Depository System; take exposure against unsecured TFCs or non-rated TFCs or TFCs rated below investment grade by a credit rating agency registered with the Commission.
An NBFC shall not take exposure against 'shares of the sponsor directors ' (issued in their own name or in the name of their family members) of banks; hold shares in any company whether as pledgee, mortgagee, or absolute owner, of an amount exceeding 10 percent of the paid-up share capital of that company or 10 percent of its own equity, whichever is less. Provided that this restriction shall not be applicable to the investments made by an NBFC in its own subsidiaries.