We’ve mentioned before how NBFCs were hampered by the new Companies Act, 2013. The act, applicable from April 1, 2014, required NBFCs to keep 50% of all debentures outstanding into a debenture redemption reserve (DRR). This would not affect net profits, but after profits the distributable surplus (for dividends) would reduce substantially.
According to the act, the DRR was required to be created even for privately placed debentures, along with publicly traded debentures.
Additionally, NBFCs need to put 15% of debentures maturing in the year into government securities.
This seems to have changed now, with changes to rules only being announced yesterday (kept in abeyance due to the election code of conduct).
The new notified rules say:
- For NBFCs, only 25% of debentures are required to be placed in DRR, as applicable before the Companies act. This means business as usual.
- Privately placed debentures don’t need a DRR. This again means business as usual.
- However, for all non financial companies (i.e. not banks or NBFCs), the 25% DRR requirement applies to both listed and privately placed debentures. This is negative for all non-banks.
The 15% SLR Will Apply to NBFCs
- The 15% “SLR” - meaning investment into G-Secs for debentures maturing soon - applies to all debentures. This continues to apply to NBFCs as well.
This point is tricky - the wording says:
every company required to create Debenture Redemption Reserve shall on or before the 30th day of April in each year, invest or deposit, as the case may be, a sum which shall not be less than fifteen percent, of the amount of its debentures maturing during the year ending on the 31st day of March of the next year…
It means that if you need to create a DRR, you must put 15% of all maturing debentures, whether these are listed or unlisted. And it doesn’t matter if you’re an NBFC.
Of course, the only way out is if an NBFC has only unlisted debentures - such companies won’t need a debenture redemption reserve, and therefore won’t need to put 15% into G-Secs. This must include many NBFCs - I don’t currently know how many NBFCs have only unlisted debentures. The likes of HDFC, Shriram Transport, SREI, PFC, REC and such have a combination of both listed and unlisted debentures, so will have to do the 15% into G-Secs.
The 30th of April date has already gone by, so NBFCs who hoped for relief on the 15% G-Sec front will get none. They have, hopefully, already invested the amounts required.
The MCA is behaving strangely by changing things suddenly, and after the last date for action was past. There was an election that restricted what they could do, so let’s cut them some slack. But let’s also get real and say that these rules may change again, after the new government comes in, because the ministry will get a new head. Let’s hope the rules stay clarified!