Money & Banking
NBFC-Factors: Ambiguities continue

The RBI issued directions but has not clearly spet out its intentions, which may give room to confusion in the mind of those who carry out factoring as an ancillary business

On Monday, the Reserve Bank of India (RBI) brought into force a new kind of Non Banking Financial Company—Factors (Notification DNBS. PD.No. 247/CGM(US)-2012, dated 23 July 2012). An NBFC-Factor has to comply with the requirements of the Factoring Regulation Act, 2011 (“Act”).  The RBI’s direction would be applicable to all the NBFC- Factors which are registered with the RBI under Section 3 of the Act, which mandates every factor to obtain a certificate of registration from the RBI for carrying out or commence the business of factoring. Factoring is a financial transaction where an entity sells its receivables to a third party called a ‘factor’, at discounted prices. A factor means an NBFC, a body corporate or any other company.

It is unclear whether only those entities which are primarily engaged in a factoring business, i.e. the financial assets in the factoring business constitute at least 75% of its total assets and its income derived from factoring business is not less than 75 % of its gross income, shall require classification as NBFC-Factors. The language under direction 4(i) of the Directions state that “every company intending to undertaking factoring business shall make an application for grant of certificate of registration (CoR) as NBFC- Factor to the bank as provided under Section 3 of the Act”. Even though the Directions highlight the requirements of factoring business as a principal business, the applicability of the Act and consequently the Directions for obtaining registration to carry out a factoring business, whether or not as principal business, is not free from doubt.

Therefore technically, any entity (being a factor) carrying out a factoring business is required obtain registration as an NBFC-Factor. The only exceptions to the requirement of registration are banks or any corporation established under any statute of the Parliament or the state legislature, government (such as RBI, IDBI, National Bank for Agriculture and Rural Development, etc.) and a government company as defined under Section 617 of the Companies Act.

Implications on the existing entities carrying out factoring business

The obvious implication is for the existing entities (being factors) to make an application for reclassification as NBFC-Factors. The time limit for making such application has been set at six months from the date of the Directions.

This would mean that the conditions applicable to an NBFC-Factor shall be satisfied by the existing entities carrying out factoring business prior to reclassification as NBFC-Factor. In the event of an existing registered NBFC carrying out factoring business, as its principal business, that constitute less than 75 % of total assets/income shall have to submit to the RBI within six months from the date of the Direction a letter of its intention either to become a factor or to unwind the business totally, and a road map to this effect. Therefore, the NBFC-Factor has to ensure to comply with this essential requirement of factoring business to constitute at least 75 % of total assets income. If the existing NBFCs fail to meet the said benchmark, they will be forced to unwind the factoring business.

Additional burden on the existing entities is to increase their net owned fund (“NOF”) to at least Rs5 crore, which in case of an NBFC, not being NBFC-Factor, is a maximum of Rs2 crore.

It is essential to obtain a certificate from a statutory auditor indicating that all conditions have been complied with by the entity for classification/registration as NBFC-Factor and that the certificate has been issued under Section 3 of the Act. If foreign direct investment (“FDI”) is applicable, the minimum capitalization norms under the extant FDI policy of the RBI shall also be complied with.

An NBFC-Factor is also subject to the provisions of Non-Banking Financial (Non-deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007 or Non-Banking Financial (Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007, as the case may be.

Where NBFC-Factors intends to deal in forex through export/import factoring, compliance with the Foreign Exchange Management Act, 1999, and the rules, regulations, notifications, directions or orders made there under from time to time, shall also be ensured.

Effect of the Directions

The ambiguity of applicability of the Act and consequently the Directions continues to prevail and there is no clarity on whether those entities not carrying out factoring business as their principle business are required to obtain registration as NBFC-Factor. Furthermore, language of the Directions also point towards a requirement for registration as NBFC-Factor even if the entity intends to go for a factoring business.

Going by the language of direction 6 of the Directions, which requires an NBFC-Factor to ensure that the financial assets in the factoring business constitute at least 75% of its total assets and the income derived from factoring business is not less than 75% of its gross income, clearly shows that the factoring business shall be a principal business of a factor.

In our view the RBI has not clearly spelt out its intention to this effect, which may give room to confusion in the mind of those who carry out factoring business as an ancillary business.

(The author is an associate at Vinod Kothari & Company and can be contacted at [email protected].)

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COMMENTS

Informed Investor

5 years ago

Kindly clarify whether capital adequacy requirement applicable for NBFC will also be applicable to NBFC_Factor with amount paid for goods recievable being treated as loan under assets?

BSE derivative trading volume nears Rs1 lakh crore

In just one day, BSE's trading volume in derivatives increased by Rs24,625.2 crore to reach near Rs1 lakh crore. But dealers seem baffled with this humungous number put out because retail trades is still overwhelmingly done in National Stock Exchange


Even as the third exchange is about to enter the fray, the equity derivative market which was almost entirely monopolised by the National Stock Exchange (NSE) until a few months ago, is witnessing serious competition from the BSE (formerly Bombay Stock Exchange).

 

After the exit of Madhu Kannan, its managing director and chief executive, the BSE has reached new heights in derivative trading volumes. As of Tuesday, its trading volume in derivative segment comes at Rs98,276.27 crore from Rs73,651.10 recorded yesterday. This is a whopping increase of Rs24,625.2 crore in just one day! The quality of this trading volume is not yet clear. What is however, is evident is that this segment has been kick started under Ashish Chauhan, its acting CEO, who was part of the original team that set up the NSE over a decade ago. He was also the first member of that team to quit NSE.

 

Just few days ago, NSE had a 100% market share, which is now down to 61% (its total turnover as of today is Rs1.51 lakh crore) and in just another month, when the MCX Stock Exchange (MCX-SX) start its equity trading business, there would be serious competition among the bourses. With BSE, the oldest among all bourses, showing huge increase in trading volumes, it will not be a smooth riding for MCX-SX, as anticipated.

 

According to a release by the Exchange, on Tuesday, there were 39.9 lakh contracts traded and the number of trades were about 1.9 lakh with a turnover of Rs98,276.27 crore compared with 28.5 lakh contracts and 1.5 lakh trades with a turnover of Rs73.651.1 crore yesterday.

Interestingly, BSE said that in the futures segment (current month) it's turnover is Rs757.3 crore compared with NSE's Rs8,141.43 crore day. BSE's market share in this segment comes to only about 8.5%. However, in Options (current month), BSE said it commands a market share of 52.7% with a turnover of Rs97.254.93 crore compared with NSE's Rs87,274.1 crore.

 

BSE’s average daily turnover was around Rs6,400 when Mr Kannan took over in 2009. During the tenure of Mr Kannan, BSE was saddled with a lop-sided pay structure and a deep divide between a tiny and extremely expensive top management team which had little expertise in running markets (far from turning around sinking bourses) and the rest of the staff.

 

After Mr Kannan left, BSE is being run by Mr Chauhan, who interestingly was one of the five top managers of NSE way back in the mid-90s. It remains to be seen how he has engineered such sudden massive jump in volumes. After all, even today, dealers report that the bulk of the orders for options in NSE.

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COMMENTS

Rajkumar Singh

5 years ago

In fact, I had conveyed through feedback that why such informative news and articles of Moneylife are not made to share like other news or media portals?

If this is done, I am sure many other unknown people would come to know about the painstaking efforts put up by Moneylife in their unique mission to educate the investors.

I hope this message will find its due place!

Kush Katakia

5 years ago

BSE's liquidity enhancement scheme introduced by Mr.Madhu Kannan initially kick started the derivatives volume on the exchange. Gradually, a unscrupulous coterie of broker members have effectively used this platform for huge gains. They are in effect circular trades, with the only intention being to garner lucrative incentives distributed by the BSE.

Kush Katakia

5 years ago

BSE's liquidity enhancement scheme introduced by Mr.Madhu Kannan initially kick started the derivatives volume on the exchange. Gradually, a unscrupulous coterie of broker members have effectively used this platform for huge gains. They are in effect circular trades, with the only intention being to garner lucrative incentives distributed by the BSE.

REPLY

Debashis Basu

In Reply to Kush Katakia 5 years ago

Need more info. Anybody willing to share? Remember, only Moneylife will dare to write :)

Kush Katakia

In Reply to Debashis Basu 5 years ago

Can i get an email address where i can write confidentially?

Kush Katakia

In Reply to Debashis Basu 5 years ago

Give me a couple of days..Shall surely give you more feedback..

Jindal Steel to buy Canada’s CIC Energy for over Rs600 crore

As per the agreement, CIC will be merged with JSPL's subsidiary, Jindal BVI and its existing shareholders would get CAD 2 per share

New Delhi: Jindal Steel and Power (JSPL) said it entered into a binding merger agreement to acquire Canadian coal firm CIC Energy for Canadian dollar (CAD) 116 million (over Rs600 crore) in an all cash deal, reports PTI.

 

As per the agreement, CIC will be merged with JSPL's wholly-owned subsidiary, Jindal BVI Ltd and its existing shareholders would get CAD 2 per share for their outstanding shares in the Canadian firm.

 

“The consideration values the total equity of CIC Energy at approximately CAD 116 million on 58 million shares (including all common shares and excluding all options and all unvested warrants),” the Canadian company said in a filing to the Toronto Stock Exchange (TSX).

 

Commenting on the deal, CIC's Chairman and CEO Warren Newfield said, “In the current challenging economic and capital markets environment, we believe that this offer provides fair value for CIC Energy shareholders.”

 

However, a JSPL spokesperson declined to comment on the deal.

 

The deal would provide the Naveen Jindal-led firm access to CIC's 2.6 billion tonnes of high quality thermal coal in Botswana, which will ensure long-term fuel security to JSPL's power ventures, including that of subsidiary Jindal Power.

 

Following the announcement, JSPL shares were up 0.76% at Rs417.35 apiece on the BSE in the late afternoon trade.

 

Stating that its Board has recommended the deal to company shareholders, CIC said that it will convene a meeting of its shareholders on or before 28 August 2012 to consider and approve the merger.

 

The price offered by JSPL at CAD 2 per share to CIC shareholders is a premium of 65% to the volume-weighted average trading price of the Canadian firm's shares on TSX for last one month.

 

“The merger agreement provides for an outside date of 9 October 2012 for the completion of the merger,” CIC said, adding that completion of the deal is subject regulatory approvals, including from government of Botswana -- where it operates the coal mine.

 

Shares of CIC has shot up by over 11% to CAD 1.570 per share on the TSX since 18 July 2012, when the Canadian firm had confirmed that it was in talks with JSPL for selling a controlling stake.

 

The Canadian firm has a mining-cum-power complex called Mmamabula Energy Complex in Botswana, Africa and its Mmamubala coal field is estimated to hold 2.6 billion tonnes of high thermal coal, mostly above 6,000 kcal/kg of calorific value.

 

According to the company website, CIC is working to begin production in next 3-4 years and thereafter, it will export up to 24 million tonnes of coal per year from the Mmamabula coal field.

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