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Reserve Bank wants to regulate NBFC holding companies

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Anindita Dey Mumbai
Last Updated : Jan 20 2013 | 8:02 PM IST

The Reserve Bank of India (RBI) has decided “in principle” to bring under its regulatory ambit holding companies floated by business groups and companies that also own non-banking finance companies (NBFC).

Sources close to the development said the move was prompted by the fact that NBFCs had frequently complained of an acute shortage of funds and some had received liquidity support from the government in consultation with RBI as a result.

WHO QUALIFIES

  • Company should be of systemic importance if it fails or belongs to a group posing a systemic risk 
  • Investment companies with 90 per cent of their investments in shares of its own NBFC and other NBFCs 
  • Entities should derive more than 50 per cent of income as dividend from investments

But the central bank’s own inspection and tax reports from the income tax department and registrar of companies have shown that many of these NBFCs have transferred surplus funds earned in good times to their holding companies, which are currently regulated under the Companies Act, in the form of loans or dividends.

This mechanism, thus, acts as a tax haven for the income of the entire business group. Dividend is taxed as dividend distribution tax at 15 per cent in the hands of the company offering the dividend. If the same company retains the amount as profit, it will have to pay tax at 30 per cent. The tax department has also raised this issue in several court cases.

Once the excess income is transferred as dividend to the holding business entities, the NBFC balance sheet becomes eligible for liquidity support from the government or financial institutions.

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The RBI thinks such practices not only pose a systemic risk, they are also a clear example of funds being siphoned off. Thus, even if the holding companies are not linked directly to the financial system, they pose a risk to it.

The RBI has also laid down criteria for these companies to qualify for central bank regulation. Such a company on its own should be of systemic importance if it fails or should belong to a group posing a systemic risk. Systemic risk is caused when a failure of a financial entity not only affects its own existence, but also that of the entire financial system.

These companies are also classified as purely investment companies, with 90 per cent of their investments in shares of its own NBFC and other NBFCs and should derive more than 50 per cent of income as dividend from investments.

 

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First Published: Apr 01 2009 | 12:15 AM IST

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