RBI asks NBFCs to insist on disclosures by developers

Before sanctioning a loan, NBFCs should make sure that the developer should publicly disclose the name of the entity to whom the property is mortgaged. The rule is to create awareness among flat buyers

The Reserve Bank of India (RBI) has asked non-banking finance companies (NBFCs) to insist on disclosures by developers, builders, owners and companies while granting loan for housing or development projects. This is expected to bring greater transparency in the construction industry and create awareness among potential flat buyers.

Before sanctioning the loan, NBFCs should make sure that the developer, builder, owners and company should disclose the name of the entity to which the property is mortgaged, in all pamphlets, brochures and advertisements. Similarly, these entities should also indicate that if required they would provide a no-objection certificate (NOC) or permission of the mortgagee for sale of flats or property.
RBI\'s new guidelines for NBFCs are similar to those followed by banks. Earlier, in a case, the Bombay High Court observed that the bank granting finance for housing projects should insist on disclosure of the charge or any other liability on the plot in question or development project being duly made in the brochure or pamphlet etc which may be published by the developer or owner inviting the public at large to purchase flats and properties. The Court also added that this obviously would be part of the terms and conditions on which the loan may be sanctioned by the bank.

Many times, a buyer has found out that the property on which he bought his residential apartment is in fact mortgaged to some financial institution and he was kept in the dark by the developer. Although the RBI has made it mandatory for banks to make sure that the bank\'s name is mentioned as the mortgagee in the publicity material issued by the developer, the same rule was not applicable for NBFCs.


Weak Government?

Earlier, the Parliamentary standing committee used to command fear and respect among regulators and intermediaries

The Parliamentary Standing Committee on Finance headed by BJP leader, Murli Manohar Joshi, has expressed ‘annoyance’ over the SEBI-IRDA fracas and feels that the “key financial regulators appointed by government being at loggerheads on an issue concerning large number of investors and subscribers is very unusual and extremely disquieting.” Further, it has given the finance ministry a month to report back on the steps taken to resolve the dispute. But, so far, the two regulators still seem headed to court, with SEBI (Securities and Exchange Board of India) filing caveats in various jurisdictions.

A few years ago, the parliamentary standing committee used to command fear and respect among regulators and intermediaries. A few weeks from now, we will know if it still does. Even if the issue lands in court, there is a good chance that the court will ask them to sort out the issue among themselves. And when it comes to a negotiation, it seems clear that the Insurance Regulatory and Development Authority (IRDA) will have to yield some ground. After all, ULIPs have been around for a decade without SEBI showing any inclination to regulate them. It is only when IRDA refused to slash costs and commissions on ULIPs to ‘zero’, leaving SEBI looking foolish over its action against mutual funds, that the turf war began.

The insurance industry has now launched a campaign to educate the media about insurance and hold seminars to explain ULIPs. The product is rather difficult to defend; every financial advisor concedes this fact. IRDA is always far too slow to crack down on several dubious practices. For instance, Moneylife has reported several cases of insurance products of established entities such as LIC, Bajaj and SBI being sold through the shady multi-level or chain-marketing route. When contacted, these companies either feign ignorance or refuse to respond. IRDA does the same; its system of responding to media queries is selective and poor. IRDA regulates an industry whose products provide a safety net for individuals and their dependents and there must be no ambiguity about whether the regulators’ sympathies lie with the insurers or the insured. 

Rating Development
The global financial crisis has triggered a yet-inconclusive debate over how to regulate rating agencies and make them more accountable. The crux of the issue is who pays the rater and how to evolve a system where companies can no longer shop for the most benign rating agency. Nobel Prize-winning economist Paul Krugman, in a recent column, wrote about how the US government (probably deliberately) is focusing on emails from Goldman Sachs’ employees instead of those of credit-rating agencies that deliberately “skewed their assessments to please their clients.” He says, “Of AAA-rated subprime-mortgage-backed securities issued in 2006,  93 percent—93 percent!—have now been downgraded to junk status.” The solution? Prof Krugman talks about two possible proposals to prevent companies from shopping for the most pliable rater. Issuers of financial paper must not pay for the ratings; or that they pay for the ratings, but the Securities and Exchange Commission would decide which agency gets the business.

We, in India, had argued for a similar structure for IPO ratings. India fortunately has large chunks of investors’ money sitting in several big pools—the Investor Education and Protection Fund with the ministry of company affairs (nearly Rs400 crore) and several hundred crores each with the Bombay Stock Exchange and the National Stock Exchange. Investor associations strongly argued that IPO ratings must be paid for through these funds and that there must be a cap on what the rating agency could charge. Between them, there is already enough money to pay for rating every IPO that is likely to hit the capital market for the next few decades. The best part is that this money belongs to the investors and would have been used for their protection—it is not a dole from the government.

Yet, the SEBI board overruled such a recommendation by the primary market advisory committee and allowed companies to pay for ratings (the cost is substantially higher, because raters can name their price) and also shop for the most convenient rating agency. {break}

Ironically, the same people who, as part of the SEBI board, refused to experiment with a different fee model, even in a tiny segment like IPO ratings, have since commissioned multiple reports on regulating the raters. One of the reports requisitioned by the High Level Coordination Committee through SEBI has primarily concluded that there is no pressing need to tighten the regulation of rating agencies. Instead, it proposes a little tinkering with disclosures and payment receipts. It suggests better reporting of revenues from a particular issuer and from non-rating businesses, such as advisory services, and recommends having fewer rating symbols to make ratings more comprehensible. Given that the two global majors, namely, Standard & Poor’s and Moody’s control CRISIL and ICRA, respectively, account for a bulk of the business distributed among five firms, the report seems rather too complacent. If regulation of rating agencies in India is admittedly weak, how can they be unaffected when the basic issue, of who pays the fees and conflict of interest created by a growing advisory services business, remains untouched? This when the SEBI report admits that companies seek informal rating from multiple agencies and give the final mandate to the one that is most favourable. It also points out that raters rely excessively on audited financial reports, instead of doing an independent investigation, although it is known that governance reports are largely an eyewash.

Finally, Corp Filing
Readers of Moneylife are aware of our long campaign for a ‘statutory’ electronic filing system to centralise corporate information and make its accurate reporting mandatory. The listing agreement of stock exchanges requires companies to make a series of disclosures and announcements to bourses, but this has proved to be inadequate, cumbersome to search and most user-unfriendly. Firstly, stock exchange websites are not structured for filing, dissemination and retrieval of information required by investors, potential investors, academics and researchers in a consistent manner over a long period of time. Worse, although stock exchanges administer the listing agreement, they make no attempt to ensure compliance or even verify the statements made by companies. So a statutory, central, electronic filing system like EDGAR (of the US) was absolutely essential. But nearly a decade after it tried to put in place a similar system through EDIFAR (Electronic Data Information Filing and Retrieval system), SEBI has admitted failure and pulled the plug on this already defunct system from 1 April 2010. Instead, it has opted for Corporate Filing and Dissemination System (CFDS), a system jointly set up by the BSE and the NSE and maintained by a private company (www.corpfiling.co.in). This exercise was started even without killing the dysfunctional EDIFAR.

Interestingly, just a few months ago, a white paper prepared by a Hong Kong-based company had recommended merging CFDS with EDIFAR, but following the structure of EDIFAR to organise the information and make it more accessible. It also concluded that EDIFAR, with all its flaws, was better organised than CFDS which was also slow and frustrating to access. SEBI hasn't thought it fit to explain if, or how, CFDS is an improvement on EDIFAR. Only time will tell whether this works to the benefit of investors or goes the way of EDIFAR.




6 years ago

Present govt is proving that British rule or our DESI Rajwada rule was much better then todays -now no one fears law-so no one obeys laws-law is just in law books or acted verbally in court rooms-which is not implemented outside court-to implement law(judgement)-again a case has to be filed in same court-police works for those who pay ransom?where is our law and our govt?this country is heading towards more and more anarchy-only MONEY is sole criterio of success-
I think we need some DICTATOR to fix the things in right setup- who can deal with IRON hand to crush these anarchy forces-

FTIL group's Bahrain Financial Exchange starts membership campaign

The membership work will involve business development teams from the BFX meeting with key personnel from leading financial institutions in the MENA region to discuss opportunities on how they can participate in the BFX markets

India-based Financial Technologies India (FTIL) group's unit, Bahrain Financial Exchange (BFX) has started its membership campaign to concentrate liquidity across the Middle East and North Africa (MENA) region via its multi asset product portfolio. BFX is a multi-asset exchange in the MENA, which will be internationally accessible to trade cash instruments, derivatives, structured products and Shariah-compliant financial instruments.

Jignesh Shah, chairman and group chief executive, FTIL group said, “Asia, Middle East and Africa are among the fastest growing regions in the world and are expected to continue to grow annually at 6% to 10% over the next 25 years. The Financial Technologies Group is perhaps the first company in the history of modern civilization to successfully set up three greenfield regulated exchanges from ground up, which would go live in the same year. The scale of the vision is based on the ‘spice and silk routes’ that used to connect trading and financial communities from Africa, Middle East, India and Asia centuries ago with the rest of the world. Singapore, Bahrain and Mauritius are ranked among the top international financial centres and are equivalent of ‘New York and London and Tokyo’ of Asia, Middle East and Africa—the fastest growing economies in the world. The Financial Technologies Group is singularly positioned to proxy the growth of these economies.”   

The membership work will involve business development teams from the BFX meeting with key personnel from the leading financial institutions in the MENA region to discuss opportunities on how they can participate in the BFX markets.  This work will also involve activity outside the region in places such as the US, London and India.

"We have set ourselves very aggressive targets, which have been built from meeting over 200 market players and I am pleased that we can approach these directly to bring them on the BFX as members.  We are also seeing great interest from outside the MENA markets due to the attractiveness and economic development taking place across the MENA markets,”  said Arshad Khan, managing director and chief executive, BFX and BCDC.

The BFX is offering membership via four categories, each offering varying trading and clearing rights: Trading and Clearing Members, Trading Members, Clearing Members and Authorised Remote Members. Each category of membership infers different levels of access to the market and has been defined depending on the level of participation required by the financial institution and its clients.

As part of the membership facilities, the BFX will offer to its members fully serviced trading facilities on the BFX Trading Floor. This will include an in-house client services team on hand to respond to trader requirements, service managed trading and back office solutions for individual or corporate users, data and information vending, the BFX said in a release.

The BFX will go live in October. The FTIL group is planning to make its three greenfield international exchanges go live in this year. FTIL's Singapore Mercantile Exchange (SMX) is scheduled to go live in August, followed by Mauritius-based Global Board of Trade (GBOT) going live in September and BFX in October. 













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