ISLAMABAD, Nov 22: The Securities and Exchange Commission of Pakistan (SECP) has notified the Non-Banking Finance Companies and Notified Entities Regulations, 2007.

The regulations shall be applicable to NBFCs carrying out leasing, investment finance services, housing finance services, asset management services, discounting services, investment advisory services and venture capital investment, including their business activities and to the notified entities being managed by such companies.

The amended rules take into account SECP’s experience with the NBFCs sector since 2002. The commission is of the view that these regulations are based on international best practices and extensive stakeholder consultations with individual regulated entities as well as the relevant trade associations.

The new framework takes into account the enhanced powers of SECP awarded to it under the Finance Act 2007.

These powers are reflected in several changes and new additions to Section 282 of the Companies Ordinance.

The new regulatory framework is divided into two segments – NBFCs Rules 2003 (amended) and NBFC Regulations.

According to the amended regulations, aggregate liabilities, excluding contingent liabilities and security deposits of an NBFC shall not exceed seven times of its equity for the first two years of its operation and 10 times in the subsequent years.

Similarly, contingent liabilities of an NBFC shall not exceed seven times of its equity for the first two years of its operation and 10 times in the subsequent years.

An NBFC shall have an internal audit department whose head shall report to the board of directors of that NBFC directly and shall, inter alia, be responsible for compliance with these regulations and for establishing an effective means of testing, checking and compliance with the policy and procedures established by it.

An NBFC shall submit such periodical statements, information or reports by following various deadlines set by the commission. Such a company shall acquire and maintain membership of an association constituted in consultation with the commission and the NBFCs shall follow the code of conduct prescribed by the said association(s).

The NBFCs shall follow guidelines issued to safeguard itself against involvement in money laundering activities and other unlawful trades. Irrespective of the precautionary measures NBFCs may have taken in respect of prevention of money laundering and other illegal trades and in addition to the said guidelines that may be issued by the commission, an NBFC shall comply with some other rules.

An NBFC shall accept deposits from an investor only after ensuring that an account has been opened in the name of the investor using an account opening form, which shall be developed by the respective industry associations in consultation with the commission. It shall make efforts to determine the true identity of the customer before extending its services.

Particular care shall be taken to identify ownership of all accounts and those using safe custody facilities, effective procedures shall be instituted for obtaining identification from new customers and a policy shall be devised to ensure that business transactions are not conducted with customers who fail to provide evidence of their identity.

Under the amended rules, an NBFC shall not offer services or provide active assistance in transactions which in the opinion of the NBFC are associated with money derived from illegal activities. An NBFC shall establish procedures for ascertaining customer status and for monitoring of borrower accounts on a regular basis for checking identities and bona fide of remitters and beneficiaries of transactions and for retaining internal record of transactions for future reference.

The transactions, which are out of character with the normal operation of the account involving high deposits, withdrawals and transfers, shall be thoroughly scrutinised and properly investigated.

An NBFC shall not make any payment or receive any amount exceeding R50,000 in cash.

The regulations have also set procedure for appointment of directors and chief executives. The application for approval of the appointment or any change in the directors or chief executive of an NBFC shall be submitted by the NBFC to the Specialised Companies Division of the SECP not later than 14 days before the election/appointment or any change in the directors or its chief executive.

The rules have also specified terms of cancellation of registration of an NBFC by the commission.