As per the old norms, restrictions for FDI on the Non-Banking Financial Companies (NBFCs) have all been removed, understanding the importance attached to FDIs.

We have just started to realize that banks are not sufficient for meeting the loan requirements for individuals and small business communities. The Digital Marketplace Lending space is growing, at a tremendous pace.

In 2021, the World lending business will cross $290 billion. In India, alone we will have 10 Digital lenders. So, far as the startups are concerned, Eco-system Digital India and P2P lending is expected to play a significant role in financial inclusion.

There is a need for funds in the NBFC sector due to this Digital Lending platform. The traditional NBFCs are failing to compete with the banks on account of lower rate of interest.

We find that Fintech companies are now making use of Big Data, Social Algorithms and other use of technology in the lending process. They are adopting the alternative lending business model.

These marketplace lenders make use of tools like anti-fraud for user-friendly online and mobile interfaces as well as innovative credit models, thereby offering an entirely new value proposition, for the borrowers and the investors. Following are some of the changes in FDI norms for NBFCs in 2017:

Change #1: FDI in NBFC

FDI in NBFC has seen a liberal point of view as the demand for funding in this sector is huge. The venture capitalists and the foreign banks can now invest in NBFCs. This is important because the Fintech companies are growing at a rate of 30 to 40 %, thanks to the easy and secure process of lending.

Change #2: 100 % FDI in Automatic Route in NBFC

The new norm states 100 % FDI through the Automatic route for NBFC, under the Section 47 of the Foreign Exchange Management Act. Investment in the automatic route was restricted to the 18 specified NBFC activities. Furthermore, investment activities were not part of these 18 NBFC activities.

As per the new amendment, the investment is now subject to sectoral regulations and provisions for Foreign Exchange Management Regulations,2000 with all the amendments incorporated from time to time.

Change #3: Elimination of Minimum Capitalization Norms

The minimum Capitalization norms will now be eliminated as most of the regulators have now got the fixed minimum Capitalization norms in place. Moreover, the list on non-fund based activities are said to be subjected to minimum capitalization requirements.

Change #4: Regulatory Compliance and Risk Management for NBFC

There is a complex and strict regulatory environment under which marketplace lending operates. It is not easy to make NBFCs conform to compliance. Moreover, foreign funding in NBFCs must meet RBI compliance. However, RBI has now simplified the filing process with an online form through RBI portal.

Whether regulated on non-regulated, the aim of the Government is to encourage foreign investment in all sectors. The difference simply lies in the fact that the activities that are not regulated need prior Government approval.

We conclude, by saying that the new set of FDI norms is sure to bring a whole lot of foreign investments to the Indian shore.

It was rightly said by Ralph Waldo Emerson– “Every Wall is a Door”
Thus, take a step forward to open the door for the new FDI norms.

Shweta Gupta from MUDS MANAGEMENT is recognized amongst the most-respected, knowledgeable, and yes, pocket-friendly as well.

Why not give call right now at +91 9599653306 and start a conversation immediately.

The post Top 4 Changes in FDI Norms for NBFCs appeared first on MUDS.

Peer to Peer Lending Platform (P2P) is a non-banking institution which conducts its business activities through an electronic platform.  Such P2P platforms have gained great popularity and proved to be a better option to raise funds in India due to the perks attached to it.

During recession in 2008 saw popularity of the P2P lending companies, both for borrowing and lending. As banks started to refuse increased loan portfolios, small businesses were on the lookout for resources, somewhere else.

P2P lending emerged as another way for the common people and the small businesses, to find themselves a credit lender- offering a higher rate of return on investments.

Keeping all this in mind, the Reserve Bank of India issued a Notification dated August 24, 2017 in terms of sub-clause (iii) of clause (f) of section 45I of the Reserve Bank of India Act, 1934. 

This notification enumerates the Directions for compliance by every Non-Banking Financial Company that carries on the business of peer to peer lending after Peer to Peer lending registration. 

These Directions are known as the Non-Banking Financial Company – Peer to Peer Lending Platform (Reserve Bank) Directions, 2017 and came into force with immediate effect.

This notification is an extensive statement that outlines in detail the various rules and regulations that all existing and prospective entities carrying on or intending to carry on the business of Peer-to-Peer (P2P) lending, commonly known as NBFC-P2P, will have to comply with.

 The Master Directions thus provides a framework for the registration and operation of NBFC-P2Ps in India and some of the important disclosure, code and varied requirements to be followed by NBFC – P2P are mentioned below.

But, people are hesitant to use the platform, with the absence of a regulated environment. RBI has recently issued a notification to this effect in October 2017.  All the NBFC-P2P Companies will comply to these directions from RBI.

In this article, we will highlight some of the impacts that the RBI notification will have in the P2P lending space:

Impact# 1: Framework on Registration

The P2P lending companies were so far recognized by the Companies Act. RBI issued directions on a framework on registration and operations of NBFC-P2P companies in India. RBI stipulates that the general character of the management of the company will not be prejudicial of public interest.

For this, RBI speaks about a Certificate of Registration (CoR) from RBI, that will be necessary to carry out the business of these NBFC-P2P companies, which will serve public interest. Peer to Peer Lending Registration can only be granted by RBI to those NBFC-P2P companies, who have a net owned fund of 20 million or any other higher amount, as specified by the bank.

Impact# 2: Prudential Requirements

The P2P platform must not expand indiscriminately. To keep a control on this, RBI has prescribed a leverage ratio not exceeding 2. Furthermore, lending practices are usually resorted by all those uninformed lenders, who seek higher returns only.

In other words, RBI has imposed a cap on the maximum contribution that the lender can make towards a loan. A single lender to the same borrower must not be exposed to an amount more than Rs 50,000 as stated by RBI. There is a cap of Rs 10,00,000, as the aggregate exposure of a lender to several borrowers, across all P2P companies and at the same point in time.

Impact# 3: Higher Quality of Credit

At present, the P2P lending companies do not have the resources that are available to the banks. So, the onus of credit-worthiness of the borrowers rested on them. It was not easy for the companies, which have taken Peer to Peer lending registration, to ascertain the quality of credit.

The reason behind this is that the credit bureaus do not have access to all the borrowers, across the length and breadth of the country. The result was higher delinquencies and fraud. So, when RBI acts as the supervisory body, they will have more details on disbursed loans and the accounts that dishonored them. This will raise the quality of credit.

Impact# 4: Legal Accountability

The lending companies so far were withholding information on their borrowers- the individuals and the businesses. The P2P lending platforms will now onwards submit reports on their financial positions, on a regular basis to the bank.

Moreover, there will be quarterly reports on loans as well as complaints, which were outstanding or those which got disposed of, during a quarterly period.

In extreme situations, when the company fails to be diligent in submitting the above reports, RBI may impose penalties or even take away the business license.

This regulatory regime of RBI has undoubtedly left a positive impact on the credibility to the P2P sector.

Read Also: What Are Different Types of NBFC and Rules for Filing Returns?

How Peer To Peer Lending Platforms Work?

Peer to Peer lending companies fall under the category of NBFC and hence, for functioning as one, they need NBFC Peer to Peer lending registration with the RBI.

Before seeking Peer to Peer lending registration it is essential to understand the nitty-gritty of how these entities work:

1. a) On a Peer to Peer lending platform it is the individual investors, i.e. the lenders, who are willing to lend their money to the borrowers on an agreed rate of interest, extend loans to the borrowers.
2. b) It is not necessary to have any prior relationship between the lender and the borrower.
3. c) Here the profiles of the borrowers are displayed and by browsing through these profiles the lenders are free to select and take a decision on who to lend money.
4. d) On the P2P lending platform a proposed borrower may not necessarily receive full loan amount from an individual investor, he may get a part of it and the remaining amount of the desired loan may be given by other investors.

Thus, Peer to Peer (P2P) lending which is also known as cloud lending is a method to finance debt which enables individuals to lend and borrow money without the involvement of any official financial institution as an intermediary.

NBFC-P2P Pre-Registration Eligibility Requirement

Before applying for NBFC-P2P lending registration an entity must know about certain factors and be prepared for it:

• It must be a company incorporated in India
• The applicant must possess the necessary technological, entrepreneurial and managerial resources to get a NBFC Peer to Peer registration
• The applicant company must have adequate capital structure to carry the business as required by the RBI under Peer to Peer Lending Registration
• Before applying for NBFC Peer to Peer lending registration the company must ensure that the Directors are fit and proper
• Prior to applying for NBFC-P2P registration the applicant must have a plan submitted or implemented for efficient Information Technology System
• To ensure NBFC Peer to Peer Registration the applicant must submit a viable business plan
• The applicant must have the intent to serve in public interest

Eligibility Criteria For NBFC Peer To Peer Lending Registration

For NBFC Peer to Peer lending registration following is the list of things that must be obtained as per RBI:

1. a) Every entrant looking to start P2P lending activities shall procure a certificate of NBFC-P2P Registration before working on operations.
2. b) Every company wanting NBFC license from the RBI must have a net owned fund of not lesser than rupees twenty million, i.e., Rs 2 crore or a higher amount as specified by RBI.
3. c) After receiving the applications for NBFC Peer to Peer registration, the RBI may verify and grant NBFC status for providing P2P lending.
4. d) All P2Ps must avail Peer to Peer Lending Registration from the RBI as an NBFC.

NBFC-P2P Registration Procedure

1. First step towards the NBFC-P2P Registration with the RBI is filling up of the application form available online on the bank’s site.

2) After duly filling the form, the company desirous of NBFC-P2P Registration, must submit the form along with all required documents.

3) Further, the applicant of Peer to Peer Lending Registration is required to send the physical form addressed to the Department of Non-Banking Regulation, Mumbai branch of the RBI. 

4) The RBI verifies the other conditions of registration, submitted by the applicant of NBFC-P2P Registration, i.e. the required technological, managerial, and entrepreneurial capabilities of the applicant to do the business of P2P Lending Platform.

5) After verification and satisfaction of necessary conditions and plan of business submitted by the company requesting NBFC registration, the RBI gives in-principle approval.

6) This in-principle approval of NBFC Peer to Peer lending registration by the RBI comes with a validity of 12 months for setting up of Peer to Peer Lending Platform and to put in place all required technologies to start with the Business of NBFC-P2P.

Scope of Activities of P2P Companies

The P2P lending platforms are the Fintech Companies registered under the Companies Act and those that have taken license after NBFC-P2P Registration with the RBI. These companies help in creating a match between lenders and borrowers.

After registering a borrower on its platform, the entity performs the task of the borrower’s credit assessment. The candidates who fulfill the due diligence test with the criteria laid down by the platform are allowed to take part in the borrowing and lending process.

All P2P platforms can also provide certain additional services such as credit assessment, risk analysis, recovery etc. Even the documentation for the lending and borrowing is facilitated by the online portal.

A company desirous of NBFC-P2P registration must take a close look at these factors:

• Act as an intermediary
• P2P lending platform is not permitted to lend on its own
• Not permitted to arrange credit enhancement/guarantee
• P2P lending platform do not possess the power to permit any secured lending
• Any other financial product cannot be sold
• International flow of funds cannot be permitted
• It is mandatory to adhere all applicable legal norms

Limitations on NBFC-P2P Platforms

Following norms, as per directives issued by the RBI, should be strictly adhered to by all NBFC-P2P who have already taken Peer to Peer lending registration, provisional or otherwise.

• Maintenance of Leverage Ratio (Outside Liabilities/ Net owned fund) must not exceed 2 crore.
• A Lender shall not lend in excess of Rs. 50 lakh at any point of time across all platforms to all its borrowers.
• A Lender investing more than Rs. 10 lakh across all platforms shall produce to P2P Platform a certificate of Net worth from Chartered Accountant certifying minimum Net worth.
• A borrower shall not borrow more than Rs. 10 lakh at any point of time across all platforms.
• A single lender to a single borrower shall not lend for amounts in excess of Rs. 50,000 across all platforms.
• The maturity period of loan linked to the platform shall not exceed 36 months.

Reasons For Growing Popularity of NBFC P2P Companies

P2P lending works very differently from other financing tools and borrowing from these is not from a financial institution but it is from an individual or group of individuals who are willing to loan money to applicants who are found qualified as per the criteria set by them. 

The popularity of P2P lending platforms are growing day by day due to:

1. a) Easy Loan Process
2. b) Lower Cost of Borrowing
3. c) Helping to fund Micro and Small Sized Enterprises
4. d) Removal of offline Agents and Paperwork
5. e) Direct negotiation between Lender and borrower

The interest rate may be set by the platform or by mutual agreement between the borrower and the lender. Fees are paid to the platform by both the lender as well as the borrower. The borrowers pay an origination fee (either a flat rate fee or as a percentage of the loan amount raised) according to their risk category.

The lenders, depending on the terms of the platform, have to pay an administration fee and an additional fee if they choose to use any additional service (e.g. legal advice etc.), which the platform may provide. NBFC Peer to Peer Registration with the RBI is a mandatory clause for incorporation of such entities. 

We conclude, by saying that the regulatory regime of RBI will have a positive impact on the credibility to the P2P sector.

It was rightly said by Ralph Waldo Emerson– “Every Wall is a Door”
Thus, take a step forward to open the door for the new FDI norms.

Shweta Gupta from MUDS MANAGEMENT is recognized among the most respected, knowledgeable and yes, pocket-friendly as well.

Why not give them a call right now at +91 9599653306 and start a conversation immediately.

The post 4 Critical Impacts of Latest RBI Notification on P2P Lending Industry appeared first on MUDS.

(1) Related Parties

(2) Who are Relatives

1. Member of HUF
2. Father/Step-father
3. Mother/Step-Mother
4. Son/Step-son
5. Son’s Wife
6. Sister/Step-sister
7. Daughter
8. Daughter Husband

(3) Required of Related Party Disclosure/Approval Section 188(1) of the Companies Act, 2013

Except with the consent of the Board of Directors given by a resolution at a meeting of the Board and subject to such conditions as may be prescribed, no company shall enter into any contract or arrangement
with a related party with respect to —

1. sale, purchase or supply of any goods or materials;
2. selling or otherwise disposing of, or buying, property of any kind;
3. leasing of property of any kind
4. availing or rendering of any services;
5. appointment of any agent for above purpose
6. such related party’s appointment to any office or place of profit in the company, its subsidiary company or associate company; and
7. underwriting the subscription of any securities or derivatives thereof, of the company:

Provided that nothing in this sub-section shall apply to any transactions entered into by the company in its ordinary course of business other than transactions which are not on an arm’s length basis

Explanation

Such transactions may be prejudicial to the interest of Company or its stakeholders and hence require scrutiny. Even a related party relationship could have an effect on the financial position and operating results of a Company

1. office or place of profit” means any office or place—
   1. if the director is holding it then he receives from the company anything by way of remuneration over and above the remuneration to which he is entitled as director, by way of salary, fee, commission, perquisites, any rent-free accommodation, or otherwise;
   2. where such office or place is held by an individual other than a director or by any firm, private company or other body corporate, if the holder receives from the company anything by way of remuneration, salary, fee, commission, perquisites, any rent-free accommodation, or otherwise;
2. the expression “arm’s length transaction” means a transaction between two related parties that is conducted as if they were unrelated, so that there is no conflict of interest. Provided that no contract or arrangement, in the case of a company having a paid-up share capital of not less than such amount, or transactions not exceeding such sums, as may be prescribed, shall be entered into except with the prior approval of the company by a resolution:[Expl. 2 of Rule 15 of Companies (Meetings of Board and its Powers) Rules, 2014 – In case of wholly owned subsidiary, the resolution passed by the holding company shall be sufficient for the purpose of entering into the transactions between WOS and holding company.]Provided further that no member of the company shall vote on such resolution, to approve any contract or arrangement which may be entered into by the company, if such member is a related party: [Exempt for Pvt. Ltd. Cos. – MCA Notification dated June 5, 2015]

(4) Register of Contract:

Register(s) to be maintained in form MBP-4

To be placed before the next meeting of the Board and signed by all the directors present at that meeting. To be kept at the regd. office and shall be open for inspection during business hours and extracts may be taken therefrom, and copies thereof may be furnished to any member. The register to be produced at the commencement of every AGM and shall remain open and accessible during the continuance of the meeting.

No entry required to be made in Form MBP-4:

(a) for the sale, purchase or supply of any goods, materials or services if the value of such goods and materials or the cost of such services does not exceed five lakh rupees in the aggregate in any year; or
(b) by a banking company for the collection of bills in the ordinary course of its business.

(5) Internal Control of Related Party transactions:

1. Duties of Independent Director: pay sufficient attention and ensure that adequate deliberations are held before approving related party transactions and assure themselves that the same are in the interest of the company
2. 177(4) Every Audit Committee shall act in accordance with the terms of reference specified in writing by the Board which shall, inter alia, include approval or any subsequent modification of transactions of the company with related parties
3. Certification in form MGT-8 by a practicing Company Secretary
4. PCS to certify that with respect to the contracts / arrangements with related parties as specified in section 188 of the Act during the financial year, the Company has complied with provisions of the Act & Rules made there under.

(6) Related Party and Secretarial Standards

Secretarial Standard-1 (SS-1): Related Party transactions to be carried out in physical meetings of the Board only and NOT by circulation.

Secretarial Standard-2 (SS-2):A Member who is not entitled to vote on any particular item of business being a related party, if present, shall be counted for the purpose of Quorum.

(7) Proposed Change in Related Party Transaction

1. If 90% or more members, in number, are relatives of promoters or are related parties, they can vote on resolutions concerning related party transactions in General Meetings.
2. in sub-section (3), for the words “shall be voidable at the option of the Board”, the words “shall be voidable at the option of the Board or, as the case may be, of the shareholders” shall be substituted

(8) Related Party Transaction: Prior Approval

Rule 15(2) Where any director is interested in any contract or arrangement with a related party, such director shall not be present at the meeting during discussions on the subject matter of the resolution relating to such contract or arrangement.

A contract or arrangement entered into by a director or any other employee, without obtaining the consent of the Board or approval by a resolution in the general meeting under sub-section (1) may be ratified by the Board or, as the case may be, by the shareholders at a meeting within three months from the date on which such contract or arrangement was entered into.

Prior Approval by way of resolution is required.

*If consent is not obtained or such contract or arrangement is not ratified within 3 months, such contract or arrangement shall be voidable at the option of the Board and if the contract or arrangement is with a related party to any director, or is authorized by any other director, the directors concerned shall indemnify the company against any loss incurred by it.

*Without prejudice to anything contained in sub-section (3), it shall be open to the company to proceed against a director or any other employee who had entered into such contract or arrangement in contravention of the provisions of this section for recovery of any loss sustained by it as a result of such contract or arrangement. [Section 188(4)]

(9) Penalties

On a director or any other employee of a company, who had entered into or authorized the contract or arrangement in violation of section 188 —

1. in case of listed company – imprisonment upto one year or fine of 25,000/- to 5,00,000/- or with both; and
2. in case of any other company – fine of 25,000/- to 5,00,000/-
   A person convicted for offence under section 188 stands disqualified from holding office of Director for a period of 5 years [Section 164(1)(g)

It was rightly said by Ralph Waldo Emerson– “Every Wall is a Door”
Thus, take a step forward to open the door for the new FDI norms.

Shweta Gupta from MUDS is recognized amongst the most-respected, knowledgeable and yes, pocket-friendly as well.

Why not give them a call right now at +91 9599653306 and start a conversation immediately.

The post Related Party Transactions appeared first on MUDS.