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  • SECURITIES & EXCHANGE COMMISSION OF PAKISTAN

    SPECIALIZED COMPANIES DIVISION NBFC DEPARTMENT

    NIC Building, Jinnah Avenue, Blue Area, Islamabad.

    PABX: 9207091-4 - Fax. No. 9218590, E-mail: secphq@isb.paknet.com.pk

    No. SC/NBFC-PR/ /2004 January 21, 2004.

    CIRCULAR NO. 2 OF 2004

    Subject: PRUDENTIAL REGULATIONS FOR NON-BANKING FINANCE

    COMPANIES (NBFCs)

    The Securities and Exchange Commission of Pakistan (SEC), in exercise of powers conferred by

    section 282D of the Companies Ordinance, 1984 (the “Ordinance”) hereby directs all Non-

    Banking Finance Companies (NBFCs) undertaking the business of Investment Finance Services,

    Leasing, Housing Finance Services, Venture Capital Investment, Discounting Services,

    Investment Advisory Services and Asset Management Services to conduct their businesses in

    conformity with the directions/regulations enclosed herewith as Prudential Regulations for

    NBFCs (the “Regulations”). These Regulations shall be effective from January 21, 2004.

    The Regulations were necessitated pursuant to the amendments in the Ordinance, whereby all the

    existing NBFIs with the exception of Modarabas and Development Financial Institutions (DFIs)

    have been re-classified as NBFCs and are being regulated by SEC w.e.f. November 15, 2002.

    The objective behind the issuance of these Regulations is to introduce a uniform set of

    Regulations for all NBFCs in order to improve their effective risk management capabilities and

    to promote corporate governance in the non-bank financial sector.

    These Regulations are being issued in supercession of SEC’s Circular No. 15 of 2002 dated 2-

    12-2002, Circular No. 18 of 2003 dated 31-7-2003 and Circular No. 21 of 2003 dated 25-8-2003,

    regarding Prudential Regulations. However, it is clarified that the NBFCs, House Building

    Finance Corporation (HBFC) and Investment Corporation of Pakistan (ICP) shall continue to

    submit all the information, returns and statements etc. to SEC and Credit Information Bureau

    (CIB) of State Bank of Pakistan in the same manner and format as previously prescribed.

  • SECURITIES & EXCHANGE COMMISSION OF PAKISTAN

    SPECIALIZED COMPANIES DIVISION NBFC DEPARTMENT

    NIC Building, Jinnah Avenue, Blue Area, Islamabad.

    PABX: 9207091-4 - Fax. No. 9218590, E-mail: secphq@isb.paknet.com.pk

    NBFCs are advised to ensure circulation of Regulations among all their officers / branches for

    meticulous compliance in letter and spirit. Any violations or circumvention of these Regulations

    shall be dealt with under the provisions of the Ordinance.

    The new set of Regulations has also been placed on SEC Website www.secp.gov.pk for

    information of the concerned quarters and general public.

    Please acknowledge receipt.

    (Asif Jalal Bhatti)

    Joint Director

    Distribution:

    1. Chief Executives of all NBFCs 2. Managing Directors of all Stock Exchanges 3. The Chairman, Investment Banks Association of Pakistan 4. The Chairman, Leasing Association of Pakistan 5. The Chairman, Mutual Funds Association of Pakistan 6. The Chairman, ICP 7. The Managing Director, HBFC 8. Director, Banking Supervision Department, State Bank of Pakistan 9. The President, Institute of Chartered Accountants of Pakistan 10. The President, Institute of Cost and Management Accountants of Pakistan 11. All Divisions of SEC 12. All CROs

  • Page 1 of 27

    PRUDENTIAL REGULATIONS FOR NON-BANKING FINANCE COMPANIES

    Part - I

    Definitions.__ (1) In these guidelines, unless there is anything repugnant in the subject or context:-

    (a ) Borrower includes a person on whom a NBFC has taken any exposure during the course of business.

    (b) Contingent liability means:

    (i) a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the enterprise; or

    (ii) a present obligation that arises from past events but is not recognized

    because: (a) it is not probable that an outflow of resources embodying

    economic benefits will be required to settle the obligation; or (b) the amount of the obligation cannot be measured with sufficient

    reliability; and includes letters of credit, letters of guarantee, bid bonds / performance bonds, advance payment guarantees and underwriting commitments.

    (c ) Documents include vouchers, cheques, bills, pay-orders, promissory notes, securities for leases / advances and claims by or against the NBFC or any other record / papers supporting entries in the books of a NBFC.

    (d) Equity of the Borrower includes paid-up capital, general reserves,

    balance in share premium account, reserve for issue of bonus shares and retained earnings / accumulated losses, revaluation reserves on account of fixed assets and subordinated loans.

    Explanation: Revaluation reserves will remain part of the equity for first

    three years only, from the date of asset revaluation, during which time the borrower will strengthen its equity base to enable it to avail facilities without the benefit of revaluation reserves.

    (e ) Exposu re includes facilities and subscription to or investment in shares.

    Explanation: Secure d exposure m e a n s exposure backed by tangible

    security and any other form of security with appropriate margins (in cases where

  • Page 2 of 27

    margin has been prescribed by SEC, appropriate margin shall at least be equal to the prescribed margin). Clean exposure m e a n s exposure without any security or collateral.

    (f) Financial Institutions includes, –

    (a) a company or an institution whether established under any special enactment and operating within or outside Pakistan which transacts the business of banking or any associated or ancillary business through its branches;

    (b) a modaraba, leasing company, investment bank, venture capital company, financing company, housing finance company, a non-banking finance company and a bank or any institution duly licensed by State Bank of Pakistan;

    (c) such other institution or companies authorised by law to undertake any similar business, as the Federal Government may, by notification in the official Gazette, specify for the purpose;”.

    (g) Forced Sale Value (FSV) means the value which fully reflects the

    possibility of price fluctuations and can currently be obtained by selling the mortgaged / pledged/ leased/collaterally held assets in a forced / distressed sale conditions.

    (h) Government Securities include monetary obligations of the Federal

    Government or a Provincial Government or of a Corporation wholly owned or controlled, directly or indirectly, by the Federal Government or a Provincial Government and guaranteed by the Federal Government and any other security as the Federal Government may, by notification in the Official Gazette, declare, to the extent determined from time to time, to be Government Securities.

    (i) Group means persons, whether natural or juridical, if one of them or his

    family members including spouse, lineal ascendants and descendants and brothers and sisters or its subsidiary, have control or hold substantial ownership interest or have power to exercise significant influence over the other. For the purpose of this:

    (i) Subsidiary will have the same meaning as defined in sub-section 3(2)

    of the Companies Ordinance, 1984 i.e. a company or a body corporate shall deemed to be a subsidiary of another company if that other company or body corporate directly or indirectly controls, beneficially owns or holds more than 50% of its voting securities or otherwise has power to elect and appoint more than 50% of its directors.

  • Page 3 of 27

    (ii) Control refers to an ownership directly or indirectly through

    subsidiaries, of more than one half of voting power of an enterprise. (iii)Substantial ownership / affiliation means beneficial share holding of

    10% by a person and/or by his family members including spouse, lineal ascendants and descendants and brothers and sisters.

    (iv) Significant influence refers to the management control of the

    company, to participate in financial and operating policies, either exercised by representation in the Board of Directors, partnership or by statute / agreement in the policy making process or affiliation or material inter- company transactions.

    (j) Liquid Assets are the assets which are readily convertible into cash

    without recourse to a court of law and mean encashment / realizable value of government securities, bank deposits, shares of listed companies which are actively traded on the stock exchange, NIT Units, certificates of mutual funds, Certificates of Investment (COIs)/Certificates of Deposits (CODs) issued by DFIs / NBFCs and Cert i f icates of Musharika (COMs) issued by Modarabas rated at least ‘A’ by a credit rating agency registered with the SEC, listed TFCs and Commercial Papers rated at least ‘A’ by a credit rating agency registered with the SEC, National Saving Scheme securities and units of open ended schemes for which a duly licensed asset management company quotes dai

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