Here's all you wanted to know about investing in NBFCs

What are Non-Banking Financial Companies (NBFCs)?

Non-banking-financial companies, or non-banking financial institutions, are companies registered under the Companies Act of the country and are under the control of the Reserve Bank of India. These companies have NBFC licence/registration certificate from the Reserve Bank. The companies can do business such as giving loans, making investments, hire purchasing and leasing.

What is the difference between deposit-taking NBFCs (Category A) and non-deposit-taking NBFCs (Category B)?

NBFCs registered with the Reserve Bank are classified into two categories. 1) Deposit-taking NBFCs (Category A) and 2) Non-deposit-taking NBFCs (Category B). Among these, only Category A NBFCs are allowed to accept deposits from the public. Most such NBFCs were registered before the year 2000. However, there are no legal restrictions on NBFCs falling under both Category A and Category B from raising money through means other than deposits (such as bonds).

What are the financial sources for the operation of NBFCs?

The main sources of finance for NBFCs are capital, bank loans, deposits, debentures (NCDs), commercial paper, subordinated debts and perpetual debt instruments (PDIs).

How is a deposit defined?

All deposits received by the company except those under subsections (a) to (m) of Section 3(xiii) of Reserve Bank Master Direction - Non-Banking Financial Companies (Acceptance of Public Deposits) Directions 2016 will be considered as deposits.

Securities, including NCDs, as per sub-section (f) of the above directions are outside the definition of deposits. Similarly, securities, including NCDs, under sub-section (vii) of section 2 (1) (c) of the Companies (Acceptance of Deposits) Rules also do not fall under the definition of deposits.

How are NCDs issued?

There is no legal impediment to the issuance of NCDs by NBFCs under Category B. Companies come out with a public issue of NCDs after seeking the permission of the Securities and Exchange Board of India (SEBI) by filing prospectus that includes details of their audited financial position, performance report and risk factors.

In addition, companies can legally issue bonds as a private placement, subject to conditions. Usually, the company’s assets are provided as collateral and registered with the company registrar for issuance of bonds.

It has to be mentioned that banks have recently invested in NBFCs' debts under the TLTRO scheme as per central directions.

Companies can also issue bonds without collaterals with certain conditions.

Who regulates the public issues of NCDs?

The public issues of NCDs are regulated by SEBI, the Registrar of Companies and the stock exchanges

Is it legal for Category B NBFCs to issue NCDs?

Category B NBFCs are prohibited from accepting deposits only. They are not prohibited from issuing NCDs that are legal. They can issue NCDs, it is completely legal.

What does a rating mean? Does this apply to NCD public issues?

Agencies such as CRISIL and CARE are authorised to certify the financial security of a company. Such agencies study the financial status and liquidity of the companies, determine the efficiency of the company's management, etc, and assign a rating for them.

In order to issue an NCD publicly, a company must get a rating and include that information in the prospectus.

What are nidhi companies? Can they accept deposits?

Nidhi companies are not under the control of the Reserve Bank. They are regulated by the Registrar of Companies. They can receive deposits from their members and lend to them.

What is a demat?

Demat refers to the certificates issued digitally by CDSL and NSDL depositories instead of paper investment certificates.

A demat statement gives details of investment certificates that have been issued in the demat form. It is similar to the bank statements obtained when depositing money in a bank.

Until 2018, companies were allowed to issue NCD certificates in the paper form. But, after that, companies are allowed to issue it only in the demat mode.