(2) the book value of debentures, bonds, outstanding
loans and advances (including hire-purchase and lease finance) made to, and
deposits with
(i) subsidiaries of such company; and
(ii) companies in the same group,
to the extent such amount exceeds 10% of (a) above.
Thus, the definition of Net Owned Funds excludes
investments in subsidiaries, companies in the same group.
RBI has vide Press Release 1998-99/1269, dated 8-4-1999
announced that any company will be treated as an NBFC if its financial assets
are more than 50% of its total assets (netted off by intangible assets) and
income from financial assets are more than 50% of the gross income, as per
latest audited financials. If both these tests are satisfied, then such
company’s principal business shall be regarded as that of an NBFC and the
aforesaid requirements or RBI registration and Net Owned Funds shall be required
to be complied with.
Status of Holding Companies as an NBFC :
As mentioned in opening para, a number of entrepreneurs float
a company which will hold all their investments in subsidiaries or group
companies. Such a company is commonly called as ‘Holding Company’ of that Group.
Thus, any holding company having subsidiaries and whose
latest audited financial statements represent the position as stated in the
above Press Note shall be regarded as an NBFC and it needs to approach RBI for
registration. (Rather it cannot carry out this activity without obtaining
registration with RBI.)
However, while calculating its Net Owned Funds, the
investment made by such company in its subsidiaries/group companies shall be
deducted.
The financial position of many companies makes them go for
RBI registration just because of their investments in subsidiaries. But this
investment in subsidiaries shall not be counted for Net Owned Funds criteria.
Therefore, the companies have no choice, but to bring in additional funds to
meet the Net Owned Funds requirement and have them invested in
companies/entities which are not within the same group.
It is an unfair compulsion on the holding companies to make
the investments in non-group entities. (Here we are particularly considering the
entities which do not carry out any business on their own except the holding of
investments in subsidiaries/group companies.)
There are a few entities e.g., stock brokers, asset
management companies exempted from obtaining registration with RBI as an NBFC.
However there is no such exemption granted to holding companies which have been
formed with the primary objective to route all investments of a group through a
single entity.
Conclusion :
It is unfair to deduct the investment made in subsidiaries
and group companies while calculating the Net Owned Funds of a company AND
making it mandatory for them to obtain NBFC registration with RBI.
To make the position fair in respect of such companies, the
RBI Act, 1934 needs to be amended suitably to :
1. exempt investment companies which are holding shares in
subsidiaries and group companies from the requirement of registration with RBI
as NBFC; or
2. include the investments in subsidiaries and group
companies while calculating the Net Owned Funds of such companies
It can be made mandatory for such companies to raise net
owned fund up to Rs.2 crore, if such company wants to make any investment in
non-subsidiaries/non-group companies.
Further, these regulations should exempt companies which do not accept
deposit from public, from the requirement of registering with RBI. However, such
companies may be required to file the requisite returns with RBI.
