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NBFCs to market and distribute mutual fund products

RBI notification dated 4th December 2006

In order to strengthen the NBFC sector by allowing diversification in their area of business, Reserve Bank of India has decided to allow Non-Banking Financial Companies(NBFCs), selectively, to market and distribute mutual fund products as agents of mutual funds, with prior approval of Reserve Bank, for an initial period of two years and a review thereafter. NBFCs fulfilling the following minimum requirements are eligible to apply:

i) Minimum net owned fund of Rs.100 crore;

ii) The company should have made net profit as per last two years audited balance sheet;

iii) The percentage of net NPAs to net advances of the NBFC as per the last audited balance sheet should not be more than 3%;

iv) The non-deposit-taking NBFCs (NBFCs-ND) should have CRAR of 10% and deposit-taking NBFCs (NBFCs-D) should have CRAR of 12% or 15%, as applicable to the company.

3. In addition, the NBFCs would be required to adhere to the following stipulations:

i) Operational Aspects

a) The NBFC should comply with the SEBI guidelines/regulations, including their code of conduct, for distribution of mutual fund products.

b) The company should not adopt any restrictive practice of forcing its customers to go in for a particular mutual fund product sponsored by it. The customers should be allowed to exercise their own choice.

c) The participation by a companyís customer in mutual fund products is purely on a voluntary basis and this information should be stated in all publicity material distributed by the company in a prominent way. There should be no `linkage' either direct or indirect between the provisions of financial services offered by the company to its customers and distribution of the mutual fund products.

d) The company should only act as an agent of the customers, forwarding the investor's applications for purchase/sale of MF units together with the payment instruments, to the Mutual Fund/the Registrars/the transfer agents. The purchase of units should be at the customers' risk and without the company guaranteeing any assured return.

e) The company should neither acquire units of mutual funds from the secondary market for sale to customers, nor should it buy back units of mutual funds from their customers. f) In case the company is holding custody of MF units on behalf of customers, it should ensure that itsí own investments and the investments belonging to itsí customers are kept distinct from each other.

ii) Other Aspects

a) The risks, if any, involved in mutual fund agency business should not get transferred to the business of the NBFC.

b) The NBFC should have put in place guidelines on fair practices code;

c) The company should be adhering to Know Your Customer Guidelines and provisions of prevention of Money Laundering Act;

d) The company must be complying with Non-Banking Financial Companies Acceptance of Public Deposits ( Reserve Bank) Directions, 1998 and/or Non-Banking Financial Companies Prudential Norms (Reserve Bank) Directions, 1998 and any other instructions / provisions of RBI Act, 1934 to the extent applicable to the NBFC concerned;

e) The NBFC should comply with other terms and conditions as the Bank may specify in this behalf from time to time.


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