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1- KESC PRIVATIZATION
2- KESC REDUCED SECURITY DEPOSIT RATE
3-
FAST GROWING MARKET OF TFCS
4- DEBT RESCHEDULING WITH JAPAN
5- PAKISTAN'S FOREX RESERVES
6- ESTABLISHMENT OF AN ECN?
7- NEW RULES FOR NBFC
8- SDK CHAINS — REAL TIME PILLERS

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NEW RULES FOR NBFC

The main objective of the new system is to consolidate the non banking sector

 

From SHAMIM AHMED RIZVI, Islamabad
Apr 07 - 13, 2003

 

 

Securities and Exchange Commission of Pakistan (SEC) has notified the Non-Banking Finance Companies (NBFC) (Establishment and Regulation) Rules 2003. These rules have been made by the Commission in exercise of powers conferred by Section 282 of the Companies Ordinance, 1984.

Under these rules, all non banking financial institutions except Modarabas have to register afresh with the SECP. The law covers Investment Finance Services, Asset Management Companies, Venture Capital Investment Firms, Leasing and Housing Finance Companies. The total number of such companies presently operating in the country is 69.

Announcing the notification of Rules, Chairman SEC, Mr. Abdul Rehman Qureshi, at a press conference held in Islamabad said that the main objective of the new system is to consolidate the non banking sector. As a regulatory authority of this sector, SEC is empowered to allow merger in this sector. Previously it could be done only by courts.

Explaining the background and salient features of the new law, SEC Chairman said, the NBFC Rules were necessitated as pursuant to the amendments in the Companies Ordinance, 1984, all the existing Non-bank Financial Institutions (NBFI) — with the exception of Modarabas and Development Financial Institutions (DFI) — have been re-classified as Non-Banking Finance Companies (NBFC) and brought under the regulatory ambit of the SEC. This essentially means that the SEC shall also regulate investment banks, discount houses, venture capital companies, housing finance companies, National Investment Trust (NIT) and Investment Corporation of Pakistan (ICP), in addition to modarabas, mutual funds and leasing companies that were already under its regulatory purview.

Over the past few decades, NBFIs have performed well and provided quality services to their customers. However, the traditional model of NBFIs, consisting of a variety of separate, compartmentalized, specialized institutions such as leasing companies, investment banks, DFIs, etc., had led to fragmentation of the financial sector and a proliferation of institutions with inadequate capital, weak human resource base, low access to technology and high cost of operations. To ameliorate this situation, the NBFC concept was introduced that envisages a single entity — the NBFC — being able to provide a wide range of financial services through a one-window operation. The main objective of implementation of the NBFC concept is to consolidate the activities relating to non-banking financial sector under one umbrella and promote these activities by strengthening the capital base and reducing operational costs. It is expected that the NBFC model would help to consolidate and strengthen these institutions so that they are in a position to face the challenges ahead.

 

 

Salient features of the NBFC rules are as under:

•The NBFC rules consist of a comprehensive set of rules pertaining to establishment and regulation of NBFCs and contain separate chapters relating to operational aspects of leasing, investment finance services, housing finance services, venture capital investment, asset management services and investment advisory services.

•All NBFIs to be established in future would be incorporated as Nonbanking Finance Companies (NBFC) and the existing NBFIs, with the exception of Modarabas and Development Finance Institutions (DFI) would be converted into NBFCs subsequent to promulgation of the NBFC rules.

•A comprehensive set of definitions has been introduced for NBFC, covering all their activities/functions. Certain new definitions such as definition of "Administrator", "Facility", "leasing" and "equity" etc. have been introduced with an objective to make these rules more comprehensive and practicable.

•Licensing criteria to undertake any/all activities have been prescribed. Every company in existence and engaged in any form of business as specified in the NBFC rules shall apply in writing to the Commission for grant of a license under these rules before 15th May 2003. However, till such time that a new license is issued, the existing licenses/registrations would be deemed to be valid for the purposes of these rules.

•The NBFC rules also specify the Minimum Paid-up Capital requirement to be maintained — as separated tiers — for each form of business to be undertaken by a NBFC, which is as follows:

Investment Finance Services

Rs. 300 million

Investment Advisory and/or Asset Management Services

Rs. 30 million

Discounting Services

Rs. 200 million

Venture Capital Investment

Rs. 5 million for a venture
capital company

Leasing

Rs.200 million

Housing Finance Services

Rs.100 million

 

 

•The NBFC rules also contain conditions for issuance of certificates of investment (COI)/certificates of deposit (COD) by NBFCs undertaking leasing/housing finance services/investment finance services.

•The accounts of every NBFC shall be audited by an auditor who is a Chartered Accountant within the meaning of the Chartered Accountants Ordinance, 1961 (X of 1961), appointed by the NBFC with the approval in writing of the Commission which shall be obtained prior to proposing the name of the auditor at the Annual General Meeting.

•The Leasing Companies (Establishment and Regulation) Rules, 2000, Investment Companies and Investment Advisors Rules, 1971, Asset Management Companies Rules, 1995, Venture Capital Companies and Venture Capital Rules, 2001, Housing Finance Companies (Establishment and Regulation) Rules, 1997, and Investment Finance Companies SRO 585(I)/87 have been repealed and replaced by the NBFC rules.