World Trade Organization Organisation Mondiale du Commerce Organización Mundial del Comercio

Malaysia 7:

Report by the Secretariat (WT/TPR/S/249 05), page 148, paragraph 88

Non banking financial companies (NBFCs), which engage in lending, investment in shares and securities, hire purchase, chit fund, insurance or collection of monies, are regulated by the RBI and are open to foreign investment up to 100% of their capital. NBFCs do not have any cap on exposure to the capital market. They are classified according to the operations they are allowed to undertake by the RBI. As at March 2010 (latest available figures), there were 12,662 NBFCs, of which 311 were permitted to accept deposits and were classified as NBFC Ds; non deposit taking companies are classified as NBFC NDs.

We note the references made to Non banking financial companies (NBFCs) in paragraph 88. To further our understanding on NBFCs, please provide examples of financial entities which fall within this category. Do they include asset management companies and stock broking companies as well? Are NBFCs solely regulated by RBI or are there certain NBFCs which are co regulated by both RBI and SEBI.

Reply: Section 45I (c) of RBI Act 1934 lists out six activities namely financing, acquisition of shares and securities, hire purchase, insurance, managing chit funds, and collecting money under any scheme etc., as financial business. Companies which carry on such business are NBFCs unless their principal business is carrying on agricultural operations, industrial activities, trading in goods and services or construction and allied activities. Prior to being registered with RBI as NBFCs these entities have to first get themselves registered as companies under the Companies Act, 1956. This implies that they have to comply with the provisions of the Companies Act also which is under the jurisdiction of the Ministry of Corporate Affairs, Govt of India. Presently companies which carry on or principally engage in the financial activities as permitted under the above Act are classified as NBFCs. There are five categories of NBFCs, viz., asset finance companies (AFCs), investment companies (ICs), loan companies (LCs), infrastructure finance companies (IFCs) and systemically important core investment companies (CIC ND SIs). The regulation of asset management companies and stock broking companies does not fall within the purview of RBI. The RBI (in exercise of the powers conferred on it by Section 45NC of the RBI Act) has granted exemption from registration, maintenance of liquid assets and creation of reserve funds to NBFCs carrying on the business of stock broking and merchant banking provided they are not accepting deposits, are registered by SEBI and acquire securities as part of their merchant banking/stock broking activities. This exemption was given as they were undertaking predominantly non fund based activities. It was also perceived that these would not pose any risk or compromise depositors' interest, as they are non deposit taking entities and function directly under the oversight of SEBI. Hence dual regulation is avoided. Further, while insurance companies are regulated by IRDA stock brokers/stock exchange/sub brokers companies are regulated by SEBI. Chit fund companies are regulated under Chit Acts of the respective state Governments. Companies including NBFCs which are engaged in insurance business and chit business have to abide by the rules of their regulators. SEBI being a market regulator, the capital market issues and other market related matters pertaining to companies including NBFCs are regulated by it.