Calculation of Financial Assets By FCS Shweta Gupta | MUDS


A  Reserve Bank of India press release dated 08/04/1999 explains that a  company will be treated as an NBFC if its financial assets are more than 50 percent of its total assets,  and income from financial assets should be more than 50 percent of the gross income. Both these tests are required to be satisfied as the determinant factor for the principal business of a company.

The questions that arise are: What is the meaning of ‘financial assets’ with respect to an NBFC? What is included in financial assets?  And, how to calculate financial assets?

As per AS 26, A Financial Asset includes the following:

  • Cash

  • Contractual right to receive cash or other financial assets

  • Contractual right to exchange financial instrument with another enterprise under conditions that are potentially favorable; or

  • An ownership interest in another enterprise.

Going by the above, investments in shares of private or unlisted securities should be included in the meaning of financial assets.

The circular dated 15th March 2012 of the RBI has stated that bank deposits will not be treated as financial assets for NBFCs. Income from bank fixed deposits is also de-recognized as income from financial assets. The circular further states that if a newly registered NBFC does not commence the business of a financial institution – other than of course investing in bank fixed deposits – their certificate will be deemed to be automatically withdrawn.

It may be recollected that the RBI had, vide its circular dated October 19, 2006, created a deeming condition regarding when a Company becomes an NBFC.  According to the circular, a company which does not have financial assets which is more than 50% of its total assets and does not derive at least 50% of its gross income from such assets is not an NBFC.

Since bank FDs are no more treated as financial assets, they may escape one or both of the conditions and thus escape the deeming provision which otherwise may have resulted in their requiring to apply for NBFC registration. RBI says that bank fixed deposits constitute near money and investing in such assets does not amount to carrying on of the business of the financial institution.

Interestingly, only fixed deposits with banks have been excluded and no other liquid assets of a similar nature. This may sound anomalous since NBFCs actually prefer in investing in other similarly liquid assets which yield more tax-efficient returns. The six-month limit to commence the business of NBFC may be an unduly strict requirement considering that this would mean that at least 50% of its assets and 50% of its income will need to be from financial assets within six months of the grant of Certificate of Registration (CoR).

The law relating to NBFCs has thus become just a little more complex, harsh and arbitrary. This is also in contrast with the report of the Working Group that liberally recommended that NBFCs having assets upto Rs. 1000 crores (Rs. 50 crores if they access public funds) should not require registration at all as compared to the present requirement of registering all companies engaged in the business of finance.     
   
It may be necessary in this context to know how to calculate the ‘owned fund’ and ‘net owned fund’ in relation to NBFCs

  • ‘Owned Fund’ means aggregate of the paid-up equity capital, preference shares which are compulsorily convertible into equity, free reserves, balance in share premium account and capital reserves representing surplus arising out of sale proceeds of asset, excluding reserves created by revaluation of asset, after deducting therefrom accumulated balance of loss, deferred revenue expenditure and other intangible assets.

  • 'Net Owned Fund' is the amount as arrived at above, minus the amount of investments of such company in shares of its subsidiaries, companies in the same group and all other NBFCs and the book value of debentures, bonds, outstanding loans and advances including hire purchase and lease finance made to and deposits with subsidiaries and companies in the same group, to the extent it exceeds 10% of the owned fund. 

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