C Consider Approval Of Equipment Lease Purchase Agreement With: Fill & Download for Free

Because they are dinosaurs. (Not just Greyhound, but all of them.) They hit a series of extinction-level events some thirty to fifty years ago, and the few (including Greyhound) that weren’t killed off were left for dead.And today, the motorcoach industry is so overripe for disruption as a result, that it can't even be considered a 'mature industry' when you think about it.They’re like daily newspapers and hotel franchising companies: they’re what I’d call ‘post-mature’ industries. Everything about them, and their operating model, is so past its prime, so no-longer-workable, and has accumulated layer upon layer of brokenness along the way, that, if — in this case — you wanted to own a nationwide motorcoach carrier, you’d be better off starting one from scratch and getting it right this time around than you would be if you could buy out Greyhound.One way or another, you’d be starting over from scratch, anyway. With a new carrier, you’d be limited to your investment costs. With Greyhound, you’d have to buy it at the current owners’ valuation, then completely gut it — wiping out the value of it in the process — and rebuild it from scratch, effectively paying for it twice (at least), but with a lot of uncertainty as to what value you’d be able to place on the end result.We looked at a hypothetical buyout of Choice Hotels three years ago, and arrived at the same conclusion. No matter how you ran the numbers, first you’d have to buy enough of the stock to get control of the company and its system. Then in order to fix its problems, you’d have to kick more than half of its franchised hotels out of the system — but what would the company then be worth, once you do? And afterward, can you get that many new hotels built, and franchisees signed, to replace them? And meanwhile, over the several years that it would take to do that, where are Choice’s now-existing customers going to go? And will you be able to get them to come back afterward? You’d be better off to just start a new hotel chain, from scratch.It’s like the municipal sanitary sewer system in Tegucigalpa, Honduras after Hurricane Mitch: engineers who went over it as part of an aid program after the hurricane concluded that it was in such bad shape to begin with, even before the storm, that the only way to proceed would be to just junk the entire system and start over.What happened to Greyhound and these other dinosaurs, you ask?The Civil Rights Act of 1964 and associated legislation.I hate to say it, because I don't like assuming the presence of racism in events or occurrences where it is possible that an undesirable event or occurrence may be due to some other cause (some people do do that, and it annoys me), but that seems to be one of three watershed events that would account for it.Whether or not in response, specifically, the simple fact at the time was that the industry had a lot of Southern good-old-boys running it, and it was also at this time that bus travel went from being regarded as a respectable, economical personal travel alternative, to a means of 'hauling' the underclass -- both black and white.The management of many of the carriers anticipated white flight. You won’t be able to get nice folks to choose to take the bus anymore, someone apparently figured, so don’t even try. You had the kind of people running the carriers who assumed that decent white people wouldn’t want to ride on a bus on which the seating wasn’t segregated, and who didn’t know how to distinguish between good black folks and ‘undesirable’ blacks.So, they resigned themselves to the idea that their function in the future would be transportation for the underclass, of whatever race. Instead of promoting family travel and an economical way to get there for college students, single ladies, and retirees, and keeping up their rolling stock and facilities at a level conducive to that kind of customer base as they had always done before; they just planned on taking whoever they could get as passengers, and ‘hauling’ them . . .Even in more recent years, people who take the bus are regarded as losers in life, and no one takes the bus if they have any other way to get there.And when management views its own customer base that way, when you see your own customers as a bunch of animals who deserve no better, bad things happen.They let their terminals run down accordingly. Even when they build a brand new one (often with some public investment, in many places nowadays), they let it start running completely to crap as soon as it opens.The Richmond, Va., terminal, when it was built around 1998, was absolutely impressive. It was clean, there was a nice restaurant with a good selection, and the food was good and was fairly priced. Its one drawback was that it’s comparatively isolated: it’s not within walking distance of anything except the ballpark across the Boulevard from it — as far as location goes, someone was out to get it out of downtown, that’s what they achieved, and they let it go at that.(Indeed, most of the people who travel through there are transferring passengers. If you take a Greyhound to the Northeast from anywhere in the southeastern quadrant of the United States — and maybe some points west of Texas — you’re going to change buses in Richmond; and board one that will take you straight to Washington, D. C., if that’s where you’re going. Or straight to Baltimore. Or straight to Philadelphia. Or straight to New York, with a rest stop in Baltimore, or straight to Boston, etc. . . . And traveling from any of those Northeastern cities, you go straight to Richmond, and your connection there, to get to anywhere in the Southeast.)Still, Greyhound could come back with terminals like this — if they’d only keep them up.But within two years, the Richmond terminal was filthy, it was as nasty as any bus terminal anywhere, the food was ‘captive audience’ quality at ‘captive audience’ pricing, with not nearly as much to pick from. The one time in my life I got into trouble and tossed into jail for a couple of days, it was cleaner, nicer and while the portions were small, the food wasn’t any worse. And you had undesirables hanging out — winos, panhandlers, homeless people — despite the Richmond terminal’s isolated location within the city: just the kind of people that people avoid taking the bus to avoid being around; but these are people who are taken for granted, even by Greyhound, as the sort of people who hang around bus terminals. Where do they bring these people in from? I know most of them can’t afford a Greyhound ticket. They couldn’t have walked there from anywhere that was within walking distance (the ballpark is across the Boulevard, there’s a convenience store a quarter mile away, and the rest is industrial sites — it’s relatively isolated for an urban bus terminal), you’d have to have something waiting there for you in order to have it be worth the hike. Does the city round them up and dump them there? Walk out the front doors, and there is a line of taxis whose drivers solicit aggressively. Well . . . if you don’t have a ride coming, you have to get away from that voodoo hellhole somehow.What’s even more pathetic than public investment in privately-owned bus terminals (often done with good intention, to encourage public transportation; but sometimes to get them moved to a place where they’d be less of a nuisance, as was probably the case in Richmond)? How about when the city wants to run you out of town, as the city of Riverside, California decided to do with Greyhound? It actually happened: they considered bus riders a potential nuisance. (Frankly, it’s the same as with cheap motels: you don’t have problems on the coaches themselves as frequently as you might wonder; high-profile incidents involving crazies who should be more easily spotted at the terminal notwithstanding. It’s usually the local people who are permitted to hang out at the terminal.) But let’s face it — when the host of The Tonight Show with Jay Leno refers to your bus company as “a bad neighborhood on wheels”, your reputation as a carrier is probably less than stellar.They let their coaches deteriorate — for as long as they owned them. Nowadays, they no longer own them, they lease them, because that’s how ‘disposable’ they’ve become. But when they did own them, they had no shame around how junky they’d let them get and still run them. When I was a teenager back in the seventies, a driver admitted to me that “they keep them and run them until they’ve worn them out ten times” . . . And this was during the good days of Carolina Trailways, and Seashore . . .The industry became ripe for divestment. The goal became, and has been ever since, don’t have any more money invested in this than you have to, and have it continue to run. It’ll run forever and give you a halfway decent income if you keep your costs down, but you don’t want any capital tied up in it.Everywhere they ever had any capital tied up in it, they’ve worked at getting that money out.Two events would occur in the late '70's and early '80's to make large scale divestment, without completely liquidating the company and giving up the income from it altogether, doable. Both were well-intended and an opportunity, but they just did not work well together in the hands of stockholders and management looking for ways to get their capital out and reduce their investment in it.Deregulation.Regulation was getting to be a bit much by the late seventies: if you owned a coach line, the Interstate Commerce Commission had to approve your routes, stops, schedules and fares at the Federal level. Abuse certainly occurred. ICC operating authority, once obtained, was viewed as property: authority to operate on a certain route could be sold between private parties or companies. Some people even acquired operating authority on certain routes, even though they owned no coaches (of course, claiming they’d get some, although they had no intention of actually doing so), and leased it to a bus company (well . . . that’s how they went about getting the coaches). And because you are a common carrier if you own scheduled bus lines, and your license to operate was given to you as a result by a governmental finding — that you asked for — that the service you had in mind to offer is essential to the ‘public convenience and necessity’, it was hard to talk the ICC into letting you discontinue an unprofitable run.For Greyhound and the other established carriers, this kept stability in place — their routes were protected from competition, and the fares that they were permitted to charge assured that most of them would be very profitable — but it also locked in some very bad market responsiveness. They saw a lot of opportunity to be had for themselves if the regulations went away, and they could be free to eat a few competitors’ lunch, oblivious to the idea that new competitors might spring out of the woodwork and want to do the same to them. (Or even swoop down from the sky and do it, as the newly-deregulated, low-cost start-up airlines would do to the bus carriers.) And of course, they could cut some runs: if you weren't going to have but eight people on board for most of the trip, why tie up a 50-passenger coach that, purchased new, cost today’s equivalent of $500,000?They got their wish. Unfortunately, right at the same time, so did the airlines. Routes, stops, schedules and fares would thenceforth be regulated, if at all, at the state level. Once airlines started expanding, and especially as new low-cost carriers all but started popping up out of the ground, you could fly for not much more money than you could take a bus.This caused some disruption and uncertainty, while it lasted. For years, Greyhound had it too good for too long, and didn't mind sharing: the union-represented drivers were paid very well, and you had a professional class of drivers. Now, the unprofitable runs were gone, but so were the high profit margins on the more profitable runs.In late 1983, Greyhound -- in response to the lower margins it had to accept with the new competition from the airlines -- asked the drivers to take a small cut. (From $27 per hour to $25. In 1983 dollars. I know lots of people who wish they could make $25 per hour today.) The union wouldn't go along. They went on strike when the contract ran out, and the strike didn't succeed: Greyhound started cutting runs, and hiring non-union drivers, and ultimately broke the union.The emergence of new financing models.Equipment leasing: Back in the day, carriers had to buy and own their coaches. Equipment leasing, as an ownership model, began to occur in the late seventies.If you owned a bus line and wanted to put a few new coaches on the road, then for not much more than it would take to make the payments if you financed them, you could have the coaches painted in your livery, and you would not have to worry about selling them off when the lease term ran out. When you wore them out or the maintenance and repair costs on them started getting too high, you could just turn them back in and get new ones. Henceforth, Greyhound wouldn't own its coaches: insurance companies and doctors and lawyers with loose money in search of a passive investment would own them, and Greyhound would just pay the rent and operate them on its lines.If you own a bus line, the deal has its advantages. You didn't have to run ten-year-old coaches on your more marginal runs. Since newer coaches are more reliable, not nearly as badly worn, and aren’t so frequently in need of repair, you could eliminate a lot of jobs for mechanics who you’d otherwise need to coax another two years out of a fifteen-year-old diesel engine. And if you wanted to expand and your company had a good track record, the upfront cost of acquiring new coaches was much lower.But there's a flipside: you have to pay the lease on the coaches. You have to make the payments every month, no matter how few or how many people ride the bus. This made the breakeven point for many runs much, much higher, and further disincentivized continuing the runs that were more marginal.Leveraged buyouts: This caused Carolina Trailways and Seashore Trailways, the two Trailways carriers that dominated where I grew up, and for which I used to work back in the day, to die a miserable, painful death that was sickening to watch (When you hit the link, scroll down to read the history: the guy who built this website — a blog that was written in HTML back in the days before WordPress — and researched and wrote all the material on it doesn’t organize it very well).I worked for them at a time when their corporate owners, North American Philips, seemed to be committed to some serious reinvestment. Carolina built a nice new terminal in Raleigh to replace the ugly, old, badly designed art-deco barn next to Raleigh’s City Hall: the city wanted to knock the old terminal down and expand the City Hall. Seashore replaced their old terminal in Jacksonville, N. C. — located on a rowdy stretch of what was at the time the city’s infamous Court Street — with a nice facility that had been acquired by the local electric co-op and adapted for use as a bus terminal, complete with overpriced restaurant. They invested in some new MCI coaches, and Seashore acquired its Trailways affiliation.But in the end, it turned out that North American Philips was just shining it up in hopes of finding a buyer.It wouldn’t have been so bad if they’d found a buyer that wanted to run a bus company, but the people that ended up with the two companies promptly recovered their investment and then some by stripping and selling off everything of value, then holding the combined company (they merged the two of them) together with shoestring and baling wire until they were able to get Greyhound to buy it from them.Greyhound itself was acquired by a former Continental Trailways executive, in a deal so badly overleveraged that, even if he had been able to fill every seat on every coach, every run, he still would have not been able to pay the debt on it. He had made the deal to buy it hoping to quickly take it public in an IPO. What he hadn’t considered adequately in advance of making his move is, hey, Greyhound is leasing its coaches instead of buying them nowadays, so all of its assets are gone except for some terminals in questionable downtown locations that are hard to put a value on and may take you some time to sell at a decent price. No one is going to touch this stock with a ten-foot pole at a price that will bring you enough money to get you out of the hole you’ve dug yourself into.Needless to say, this gentleman had to eventually get his debt restructured — and did such a good job of refinancing that he was able to acquire his former company Continental Trailways in a leveraged buyout, as well, and merge the two. The combined company was itself overleveraged (albeit by only 200% instead of 300% as Greyhound was prior to the Continental acquisition), had problems with the drivers unions, and ended up in bankruptcy a few years later.This killed Trailways as a brand, or at least left it to a fate worse than death. Continental Trailways — officially, “Trailways, Inc.” — was the single largest member of the Trailways consortium, larger than all the other Trailways members combined. When Continental was merged into Greyhound, nothing was left of Trailways as a carrier except for some regional member carriers scattered around the country. These surviving member carriers changed the bylaws of the National Trailways Bus System to insure that never again would a Trailways carrier become that dominant, and that ‘too big to fail’ and be able to do that much damage if they went out of business, left the Trailways system, or were acquired — but in doing so, they made entry into the Trailways system so onerous for new carriers that it isn’t worth doing. They effectively insured that Trailways as a brand would survive only in fragmented, disconnected pieces, and can never again be the nationwide carrier that it once was.Trailways is now pretty much a network of charter carriers: less than a dozen of its current 50–60 member carriers have scheduled runs anymore (New York Trailways/Adirondack Trailways in New York state, and Burlington Trailways in the upper Midwest, are the biggest ones: Susquehanna Trailways, which operates along the I-80 corridor between State College, Pa. and Port Authority, is the only other one of any size.). Nearly all the rest that have scheduled service at all are local feeder lines for Greyhound.After a few more corporate owners (one of which took it into bankruptcy again), Greyhound is now owned by a British company that seems intent on restoring some respectability to it: they’ve upgraded the coaches as they replace them, and now have leather seats and free wi-fi. And they’re innovating a bit: they are now partnered with Peter Pan on BoltBus, which keeps overhead low by offering only reserved, curbside service, and a yield-managed pricing model (book it online at just the right time, and you can get your ticket for a dollar).Deregulation, low margins, and debt incurred through leveraged buyouts, has kept Greyhound cash-strapped through most of the last 30–40 years, and there has been very little reinvestment in that time. Upgrading the coaches is easy, if you’re leasing the coaches: all you have to do is rewrite the specs, and they calculate that into the lease payments. The terminals and stations are still . . . bus terminals. Port Authority in New York City, for example, was back in the day considered a typical, nasty, big city terminal that no one liked. Now, it’s about average — even though its condition hasn’t improved that much over the years, and even though it still has some problems. If anything, it has more to offer than most.Greyhound’s problem nowadays is that it doesn’t seem to want to have any money invested in anything. They continue selling off existing, dedicated bus terminals that they own, and placing their company owned (or leased) facilities in smaller locations (e.g., Raleigh), and using overburdened agency stops that draw complaints (e.g., Virginia Beach).Availability of their coaches is spread thin: the last time I took a Greyhound, it broke down in Durham (N. C.), the Durham ticket agent put us all in taxis to the Greyhound terminal in Raleigh to make our connection — which turned out to be another broken-down bus. They had to send another bus up from Fayetteville to replace that one and take us to New Bern after a six-hour wait — where the driver managed to get lost and not be able to find the station there. Not the kind of thing that has me in any hurry to take another Greyhound trip.The union is gone, the pay isn’t nearly that good anymore, and Greyhound will hire anyone who has — or can get — a CDL to drive a coach. That means anyone. On a trip to North Carolina from New York City some years ago, we pulled into Richmond and the bus made an unexpected stop prior to pulling into the terminal and unloading us . . . several blocks from the terminal. The driver got off and went into the store. I was wondering if there was some sort of problem, and thinking it had to be pretty bad if we couldn’t make it the remaining mile and a half to the terminal to deal with it. But there was no problem. The driver re-emerged from the store a few minutes later with a couple cartons of cigarettes. He made a personal stop, on our time, to buy some low-tax Virginia smokes to take back to New York with him.And that’s before we even go there about the one a few years back, out West, who had some sort of mental breakdown, and refused to travel further, quitting her job in some hick town in Utah and leaving a busload of passengers stranded. Twice. On the same run. The first time she did it, the local cops intervened and made her get back on the bus and continue the trip. In the next town, she abandoned the bus and its passengers, and vanished completely.Or the one earlier this year who pulled off into a rest area on I-80 in Pennsylvania, and checked into a motel next door to take a nap, leaving the coach -- full of passengers who had no idea what was going on -- just sit there. Availability of drivers is spread pretty thin, too, and safety issues have been raised over drivers exceeding their allowed hours, working irregular shifts, and not getting enough rest.Ninety percent of automobile drivers rate their driving skills as ‘above average’. And you’re asking people to take the bus instead, while you hire drivers who do things like THAT?But when your customer base is made up of losers in life who have no choices, and deserve no better . . .FirstGroup may be sincere in its desire to turn it around someday, but lots of days can come and go between now and then and in the meanwhile, Greyhound is run by people who don’t give a shit. They’ve long ago reduced the entire company -- the entire industry — to something its users have to use because they have no choice, there are enough of those people that their customer base is assured. Anyone else that might consider taking a bus isn’t going to put up with it, so they’re not making the investment in drawing any other customers. Want to fix it? You’ve got coaches and terminals across the country, and you’ve only got this much money to work with, and that’s all you’ll have each year, if even that much, for however long it takes — where do you start?Greyhound is a post-mature company. Seth Godin used to say the same thing, over and again, about American Airlines until they got bought out: the things about American Airlines that made American a post-mature company are probably the reason it couldn’t hope to continue on its own and had to end up in bankruptcy and be bought out. (And in looking through his material for just one of his blog posts on the subject that would serve as typical and succinct to explain just why Seth felt that way about AMR, two things happened: 1) I just gave up and linked the Google search instead, and 2) I came across this little gem for the first time, and no, despite the fact that Seth is one of my favorite bloggers and the marketing expert I respect most, I swear I don’t recall ever having seen it before I wrote what I’ve written here, that you’ve read thus far.)That’s probably why Greyhound launched BoltBus — of course, competition from Chinatown buses and curbside carriers might have been a factor, and they wanted to have their hat in the ring on that business model; but I’d bet that even Greyhound gets it that they may just have to junk Greyhound and start over.What’s going to happen next?I haven’t completed costing it out, but it’s truly amazing how little the initial investment it would take to completely disrupt Greyhound and the other major carriers.Here’s how I’d go about it:Start in a small geographical region, work outward: Our initial, Winston-Salem, N. C. base, would be capable of functioning as a self-contained regional carrier. Adding a second one in Greenville, N. C. (from which, by itself, we could cover all of the same routes as the now-defunct, Seashore Transportation Company did for several decades) would give us statewide coverage.Additional bases - each the base of a service area having a 200-mile radius - would give us a corresponding increase in coverage. Each additional base also allows a synergy in terms of allowing every station within the operating area of each base to sell tickets to any location within the operating area of any other.Not only does adding bases expand our service area (e.g., Bethlehem, Pa. and Macon, Ga., in the next map), but adding bases within our existing service area (e.g., Charlotte in the next map) allows us to offer more direct runs with fewer connections, simplify our operations at the nearby bases, and add to our driver base (hiring drivers in Charlotte and having them based there would allow us to make do with fewer drivers at the nearby Winston-Salem and Columbia bases).Once we have a base in Bethlehem, a station in Savannah, and stations in most major cities in between, we can offer express runs up and down the entire East Coast that only stop in major cities.From there, it's a simple matter of expanding westward with new bases, and new coaches. (It’s scalable. We will have to buy the first several coaches that we operate, but once we show that we can generate the cash flow consistently, expansion is a simple matter of hiring and training new drivers, establishing the bases and depot stops, and leasing more coaches.)There's no need to 'beat' Greyhound. As we expand, we'll simply render them irrelevant.Smaller coaches: These would give us the flexibility to serve communities that cannot be served profitably by a full-sized coach. Because these smaller coaches are not restroom equipped, we take care to schedule a rest stop every two hours or so en route. I’d bet, however, that communities who’ve been without scheduled Greyhound or Trailways service for ten to thirty years now, would be happy they’re getting a bus at all.The average number of people who are, at any given moment, on board a Greyhound bus is 27 — and that's when you calculate into the average runs in crowded Northeast areas where the bus stays pretty full. So, why tie up a half million in capital for a full-size coach, when you can put that many on board one of these for $72,000?For more heavily-traveled runs, you might want to have a 36-passenger coach available. With a lav — these coaches (the way I submitted the specs) are for longer, busier runs and would come restroom equipped. Still, the investment required to put two Greyhound full-sized coaches on the road would give us five of these to work with:Not quite what you’re used to seeing as prevailing industry standard now. (Or is it? Can you tell the difference by looking? Besides no leather?)But . . . if your typical passenger load is 27 passengers, I have it on pretty good authority that 36 seats isn’t, historically, an altogether bad size for a coach. Basic arithmetic has a little to do with it of course; but anyone my age or older might recall the sixties, when those ubiquitous General Motors 36-passenger coaches like you see below were the backbone of both Greyhound’s and Trailways’ fleets . . . (Both of these are GMC PD-4104’s, built between the early ‘50’s into the early ‘60’s. I think more of that model were produced than any other coach model ever made, before or since. Back then, that size was quite normal.)Be anal about stations and terminals, and the stuff that happens around them: If I appear to have thought about this for some time, and seem to have much of the business plan written up for it already . . . well, yes, I have. I came up with the idea for a bus company nearly twenty years ago; and was inspired to do just that, in the sort of place where some guys go for a different kind of inspiration altogether: a porn shop.That was literally where the Greyhound/Peter Pan station in New Britain, Connecticut was located: a cigar store with a section in the back, quite visible to waiting bus passengers, devoted to pornography; complete with the occasional porn pervert browsing through the material on display. My car was in the shop one week when I was living in Connecticut, and I had to catch a bus into Boston, so I was kind of stuck with it. I recall thinking, I don’t want to be around this shit — and while I'm going on a tear with it, let's look at a few other things I don't want to be around that you see all the time in even 'average' bus stations. Filth and dirt. Overpriced, low-quality food, if there's any food at all. Homeless people hanging out. Panhandlers. Creeps loitering in and around the restrooms. Uncomfortable seating. Location in bad areas of town. All the things that everyone hates about bus terminals, but that even motorcoach operators seem to think is quite normal, that 'goes with the turf', about bus terminals. And it seems to get worse and worse. And now, this . . .And I started making notes and outlining some ideas during the ride to Boston that very day.New Britain, Connecticut: How not to do it.We would only contract with reputable businesses for our agency stops, and insist as part of our agency agreement that they maintain their facilities in accordance with our standards. If you want your establishment to be one of them, it will be listed on TripAdvisor, and we do read your reviews. We’d regularly inspect our agency stops to insure that they are clean, comfortable, have reasonable accommodations for waiting passengers, and are managed in alignment with the way we operate our own stations and terminals.This goes for public facilities (the city-owned bus terminal in Winston-Salem, N. C., was in the news this past week because of a bedbug infestation), and shared Greyhound facilities, too. I’ve seen what Greyhound will let them get away with, and they can be the worst offenders.Not the sort of thing I want to see at my bus terminal.Good security is a non-negotiable. Passengers are absolutely entitled to a safe, comfortable wait, and you don’t see homeless people, panhandlers, or people who have no reason to be there loitering about. If I wouldn't want my fourteen-year-old niece waiting alone for a bus at your location, your location is not going to be a depot stop for my bus company.Good security is not negotiable — and this isn’t what I call good security. If your ticket window requires bulletproof glass, you’re probably selling tickets to people I don’t want as passengers. If that’s what it takes to achieve security in the part of town you’re in, you’re in the wrong part of town.I want it done right. I’m just weird that way. It’s clean, it’s comfortable, it doesn’t smell bad, you don’t mind being there, there is food and refreshments available, and it isn’t too badly overpriced . . .Bottom line: we would rather simply have a roadside or street stop, and provide only curbside service in a town, than to have a bad depot or station. At least, everyone knows to not expect too much from having to wait on the side of the road.Family-friendly: One thing you might pick up on in our advertising is how all of our advertising pics show families? Mommies and daddies taking a trip with the kids, like they do in Europe? Many of us just take it for granted that bus travel is for people who have no other way to get there, and that you're not likely to meet anyone worth knowing if you do have to take the bus for some reason.For this bus company, we'd be resurrecting our own twist on the old "You meet the nicest people on a Honda" blue ocean strategy from the sixties, that opened up a vastly larger market for motorcycles than previously existed among just the Harley riders and their hellraiser wannabes, when Honda motorcycles first made their appearance in the U. S.(Besides, we remember when bus travel wasn't just for the riff-raff . . . Maybe I’m getting old, but I come from a time when people remembered what it was like to actually like buses and bus travel. Lots of people still would, if you gave them half a chance. ‘Blogs’ didn’t make their appearance until about ten years ago, yet the web abounds with websites and bulletin boards and user groups made up of people who are into the history of buses.)And our buses, and terminals, must be pretty convenient, safe and comfortable, if families and nice old folks — people who have a choice and would find another way to get there if our fleet and facilities were run down and nasty — choose to use them.The old Southern good-ol’-boys who used to run the carriers in the sixties, and who were so traumatized by the Civil Rights Act of 1964, are all gone, retired or died off by now; but even today the mindset, even by more well-meaning, ‘liberal’ politicians, officials, and bus company executives, is that the bus is for people who don’t have cars.Let’s rethink that: The bus is for everyone. Even people who have a choice — especially people who have a choice. Now, what can we do to have them CHOOSE taking the bus?Instead of wandering the mall, how can we talk some of these retired folks into taking a day trip to the zoo? (Of course, putting the North Carolina Zoological Park on the schedule might help . . .)What kind of attractions are there in Boone that we can perhaps work with so that we can sell day trips there: get some people on a nearly empty outbound bus in the morning, who’d come home on an otherwise nearly empty inbound bus in the evening?I’d put one or two hotel sales people to work on this one.The airport is your friend, not your competitor: Making a point to offer scheduled service to large airports on our lines opens up an opportunity for a businessman in, say, Alamance County, to get to Raleigh-Durham International Airport for his flight.Service to airports opens up another opportunity. As we contemplated service to Newport News, Virginia and were stuck for an appropriate station location, it dawned on us: Newport News-Williamsburg International Airport is one of the few airports of its size, in any city the size of Newport News, that is located right in the middle of the city that it serves. And more to the point, the success and perhaps even survival of Newport News-Williamsburg International depends upon its ability to compete with Norfolk International Airport, which is not that far away. Why not just plan on putting the terminal there if they’ll let us?The airport is our friend, not our competitor. No one who can afford to fly to L. A. or Houston from the east coast is going to take the bus. And if you're not going that far away (say, between Newport News and Norfolk), the bus makes so much more sense.So, we consider not only large airports like Raleigh-Durham, Piedmont-Triad, Charlotte, Atlanta, and the Washington airports as we plan our routes; but also the smaller regional airports, such as Fayetteville Regional, Jacksonville (N. C.), and Richmond. For the opportunity to shag air passengers away from Charlotte, Greenville-Spartanburg should be willing to offer us much better terms and facilities than, say, the bus deck at Union Station in Washington, D. C. ($30,000 per year per 'slip', and I'll buy you dinner if you can prove to me that Greyhound pays that much).To solidify our market position in this area, we will be offering reduced rates from all airports to outlying, larger cities.Greyhound can fuss all they want about ‘competition’ from low-cost airlines. But Southwest Airlines doesn’t fly to North Wilkesboro, or Quakertown, or Waterbury . . .From us, you get the scenic tour: One thing about taking the bus that used to drive people nuts - even in the heyday of buses, at the height of their popularity - is that the bus stopped in every little hick town, which slowed down the trip and made getting where you wanted to go take longer.We can't avoid that: this company was developed and designed to serve smaller communities that Greyhound considers not worth having.So we're going to try and turn that into a selling point, create a new context for it, suggest an alternate way of looking at it. From us, you get the scenic tour. (Note the pics of small town Americana -- within the areas that we serve -- located here and there around our website.)I originally contemplated it as a Trailways carrier, but despite the access to the rich history and Trailways' place in 20th century Americana which we would love to have as part of our own, doing so doesn't appear to be workable.(Trailways now requires of new members — which they don’t recruit very diligently, and seem to not care too much if they never add another one —that your bus company has been in business for at least five years prior to applying for Trailways affiliation. By the time we’ve been in business for five years, we’re going to have so much invested in any brand we use in the meanwhile, that we’re not going to want to give that up, change all the livery and the signage and the website and the promotional material, paint all of the coaches red, and go Trailways. Nor do I like the requirement that if we expand scheduled service into a geographical area, we have to first obtain the consent of any Trailways carrier in that area — most of whom are charter carriers and should have no say in scheduled services. And if a carrier, even a Trailways carrier, who offers scheduled services wants to have his crappy operation protected from competition; well, that’s why Satan invented state utility commissions who regulate competition between motor carriers that operate within the state, and those carriers’ political connections on those commissions. I’m not signing up for something that requires me to suck up yet another layer of such regulation.)Still, anticipation of our market position as a would-be Trailways carrier while it lasted as part of the plan; with Trailways’ historic, Mom-and-apple-pie small town roots, opened up some added appreciation of this particular market position.Don’t be Greyhound-dependent: We'll work with Greyhound, and endeavor to maintain a positive relationship with them wherever possible. We're not going to get sucked into a stand-up fight with them where we can avoid it. It is to the much greater benefit of both us and Greyhound that we work together, and play and get along well together.Greyhound is famous for its ‘running dog’ mascot. We plan to use a black cat.But even if we don’t, the harm will be limited to slowing us down for a few years -- after which, we'll catch up to and surpass Greyhound with a vengeance.We contract our own stations, terminals and depots; and avoid sharing facilities with Greyhound unless: 1) the facilities meet our standards. and 2) we control the ticket counter - or at least don't stand to be hurt badly by Greyhound or a third-party agency engaging in favoritism toward Greyhound or another carrier against us in ticket sales from that location. (Most of our passengers - and ticket sales - to and from places where we’d use Greyhound as an agent, travel to and from smaller cities and towns not served by Greyhound. So if you approach a Greyhound ticket counter in one of those places, and want to purchase a ticket to a town served only by us, guess which carrier Greyhound is going to sell you a ticket on?)We’d have no "pooling" agreements with Greyhound, and do not intend to enter into any. Could we ask as part of such a deal that Greyhound not expand its service or not add any more runs to the area in competition with us? No - that would be illegal under federal antitrust law (unless the Surface Transportation Board okayed it): we'd just have to trust them, and rely upon a built-in disincentive in investing their money, equipment and resources into a line that would produce revenue that would have to be shared with us. With such an agreement in place, could we expand our service within the areas affected by the pooling agreement? Yes -- but why should we make the investment of funds, coaches, drivers and other resources, only to have Greyhound collect a percentage of the revenue even if they choose not to match the investment? Besides, the whole scheme smacks of the dystopian "Railroad Unification Plan" and the "Steel Unification Plan" in Ayn Rand's Atlas Shrugged. Several companies that have gone into pooling agreements with Greyhound -- for example, Carolina Trailways, Seashore Transportation -- have since disappeared, and so have many of their runs.Eight mid-size coaches to start out, at about seventy-five grand a pop? . . . one convenience store (which would be a revenue source in itself), with a rear loading area, to use as a central base terminal? . . . It’s doable.There’s an opportunity in it. Right now, gas in the U. S. is cheap, by contrast to some recent years. And regardless of the price of gas in the U. S., we pay less for it than any other country on earth except Venezuela. Even Canadians pay three to four times as much. How long can that last? Eventually, U. S. gas prices are going to have to get in line with the others. We need to have some more public transportation options at the ready when that time comes.Much of the investment involved would be getting your ducks in a row in advance, just doing the work setting it up. The burn rate for the first year is more of a source of concern to me than the capital outlay . . .Your only competitors are people who don’t want to have any money invested in anything. They’ve already squeezed everything they can out of it, and can’t squeeze it any further without crushing it completely. They feel that doing so won’t expand their customer base significantly. But it’s been the late sixties since they’ve really tried. And since the customer base they’re left with has nowhere else to go — well, they’re not going to be easy to work with about personal needs, and individual attention, and refunds where appropriate.Greyhound and the other carriers have no idea just how vulnerable that they — and their entire business model — are.

The answer requires some detailed analysis:(1)The Amendment to Prevention of Corruption Act were made in July 2018, which has substituted Section 13(1). Now, ‘criminal misconduct’ is restricted to the following 2 offences: (i) dishonest or fraudulent misappropriation or otherwise conversion of any property entrusted to a public servant or any property under his control as a public servant or allows any other person so to do; or (ii) if the public servant intentionally enriches himself illicitly during the period of his office.(2)This means that in the Rafale case, corruption can be proved only if (i) there is personal gratification or quid pro quo or money trail of bribe given to PM Modi or to others or (ii) The procedure laid down in the Defence Procurement Procedure- DPP 2013 were dishonestly or fraudulently violated causing loss to the nation.-As regards (i) above, there is no evidence whatsoever that has emerged so far. Not even a hint of it. Please remember that in the Bofors scam or in Augusta Westland Scam, these were triggered only after the evidence of money payment emerged from outside India. In Rafale, in spite of so much digging there no evidence at all.-As regards (ii) above, I would like to quote three sections of DPP-2013:Inter Government Agreement-71. There may be occasions when procurements would have to be done from friendly foreign countries which may be necessitated due to geo-strategic advantages that are likely to accrue to our country. Such procurements would not classically follow the Standard Procurement Procedure and the Standard Contract Document but would be based on mutually agreed provisions by the Governments of both the countries. Such procurements will be done based on an Inter Governmental Agreement after clearance from CFA. The following cases would fall under the preview of this provision:-(a) There are occasions when equipment of proven technology and capabilities belonging to a friendly foreign country is identified by our Armed Forces while participating in joint international exercises. Such equipment can be procured from that country which may provide the same, ex their stocks or by using Standard Contracting Procedure as existing in that country. In case of multiple choices, a delegation may be deputed to select the one, which best meets the operational requirements.-(b) There may be cases where a very large value weapon system / platform, which was in service in a friendly foreign country, is available for transfer or sale. Such procurements would normally be at a much lesser cost than the cost of the original platform/ weapon system mainly due to its present condition. In such cases, a composite delegation would be deputed to ascertain its acceptability in its present condition. The cost of its acquisition and its repairs / modifications would be negotiated based on Inter-Governmental Agreement.--(c) In certain cases, there may be a requirement of procuring a specific state-of-the art equipment/ platform, however, the Government of the OEM’s country might have imposed restriction on its sale and thus the equipment cannot be evaluated on ‘No Cost No Commitment’ basis. Such equipment may be obtained on lease for a specific period by signing an Inter-Governmental Agreement before a decision is taken for its purchase.As per the contention made by the petitioners in the Supreme Court, the Rafale IGA doesn’t fit in any of the three types (a), (b), (c) above. This was not accepted by the SC in its verdict dated 14-12-2018, wherein the court had concluded that ‘ broadly the processes have been followed’. Now a review petition is under consideration of the Apex Court, wherein the petitioners have submitted three documents, allegedly stolen from government records. These documents reflect that:(i) Sovereign Guarantee was not obtained, instead letter of comfort was obtained.(ii) Integrity and many other standard clauses were omitted.(iii) Escrow arrangement was not insisted upon, though advised by financial consultant.(iv) Some relaxation in Offset penalties norms have been given, as well as offset is spread unevenly to make substantial fulfillment only in the fag-end of the offset period. i.e. in the 5th, 6th and 7th year.(v) According to the dissent note submitted by three out of seven members of the Indian Negotiation Team. If we consider the cost of commission on Bank guarantees waived, the price of this deal becomes costlier than the aligned bid price of 2007.I cannot pre-judge the SC’s order in the review-petition. But definitely it will depend on its interpretation of section 71 above. If it is found that the Rafale IGA satisfies section 71, then there can be no violation of the procedure, as the section states “Such procurements would not classically follow the Standard Procurement Procedure and the Standard Contract Document but would be based on mutually agreed provisions by the Governments of both the countries.”I also reproduce following sections:73. In certain acquisition cases, imperatives of strategic partnerships or major diplomatic, political, economic, technological or military benefits deriving from a particular procurement may be the principal factor determining the choice of a specific platform or equipment on a single vendor basis. These considerations may also dictate the selection of particular equipment offered by a vendor not necessarily the lowest bidder (L1). Decisions on all such acquisitions would be taken by the Cabinet Committee on Security (CCS) on the recommendations of the DPB.75. Any deviation from the prescribed procedure will be put up to DAC through DPB for approval(The Defence Acquisition Council, headed by the Defence Minister has wide powers to approve deviations from the laid down procedure).I may add that if approval of CCS was obtained, then even the contention of having agreed to higher pricing would not hold water. Even L-1 is not necessary, so the allegations of price variation will not make any difference. Please note that the CCS has taken the decision only after recommendations were received from the DPB in due course. Even after that, an adverse view is taken by the Court, then all the members of CCS will have to be held guilty, not just the Prime Minister. These will include: (i) Home Minster (ii) Minister of External Affairs (iii) Defence Minister (now expired) (iv) Finance Minister.My guess is that the SC may not find any substance in the allegation that laid down procedure was dishonestly and fraudulently violated, as enough flexibility is furnished in the DPP. Why is this flexibility? The answer is provided by Apex court itself in its above referred judgment by quoting following sections from the DPP:“Defence acquisition is not a standard open market commercial form of procurement and has certain unique features such as supplier constraints, technological complexity, foreign suppliers, high cost of foreign exchange implications and geo-political ramifications. As a result, decision making pertaining to defence procurement remains unique and complex.”“Defence procurement involves long gestation period and delay in procurement will impact the preparedness of our forces. The needs of the armed forces being non-negotiable and and uncompromising aspect, flexibility in defence procurement is required, which has already been provisioned for.”Quite true that it doesn’t mean that flagrant and blatant deviations from the laid down procedure should be freely allowed. DPP 2013 says :“Defence Acquisition is a complex decision-making process that needs to balance the competing requirements of expeditious procurement, development of an indigenous defence sector and conformity to the highest standards of transparency, probity and public accountability.”One has to understand that defence acquisition is a dynamic process. What was true in 2007 cannot remain static in 2016, when the IGA was signed. I am sure the Apex Court will take into account the above factors and will not take a rigid view. The following points are briefly stated below, which the readers should take into account:·The earlier bidding process, which commenced in 2007, was totally corrupted. The CAG Report states that “the DA’s price bid was non-compliant as it was incomplete and was not in prescribed format. The L-1 committee filled up incomplete entries by culling out figures given elsewhere under different headings of the price bid.” The report categorically states that Rafale maker Dassault Aviation (DA) did not fulfill request from proposal (FRP) requirements at the stage of technical evaluation committee with respect to air staff qualitative requirements, warranty clauses and an option clause. “The proposal of the vendor should have been rejected at the TEC stage itself”, the CAG said. The proposal of the competitor, Aeronautic Defence and Space Company makers of Eurofighter planes was also non-compliant of the FRP. Thus an absurd scenario had emerged that proposal of no bidder was compliant!·In the earlier bid there was no clarity regarding who would assume responsibility of the quality of production to be made at HAL, India. DA simply refused to assume responsibility. This made the earlier bid simply untenable.·Furthermore, HAL’s quotation of man hours at a factor of 2.7 to DA significantly increased the cost of Rafale jets and DA was no longer L-1 bidder.·The FRP was cancelled in 2015. As such the concept of L-1 had no relevance. The procurement could have been only made through the IGA route. The Euro-fighter was not eligible for IGA as it is made by consortium of many nations. Who would have signed the IBA?·Sovereign Guarantee, Integrity clauses and offset have been given a miss several times, while making acquisitions from Russia or USA. For example for acquiring S-400 Anti-missile defence system for Rs.40,000/- from Russia in 2018, there is no sovereign guarantee, no offset, no integrity clauses, no protests, no scam allegations, no petitions!!!·Normal offset requirement is 30%, as against in Rafale deal, higher offset @ 50% is kept.·So far as the offset issue is concerned, it is non-existent. The Supreme Court in its above referred judgment has categorically stated as under: “Thus the commercial arrangement (between Dassualt and Reliance Infrastructure), in our view, does not assign any role to the Indian Government, at this stage, with respect to the engagement of the IOP. Such matter is seemingly left to the commercial decision of Dassualt. That is the reason why it has been stated that the role of the Indian Government would start only when the vendor/OEM would submit a formal proposal in the prescribed manner, indicating details of IOPs and products for offset discharge.” Thus what exists as on now, is just a joint venture company between the two groups. The linking of the JV with offset arrangement is yet to materialize. This will happen when Dassualt submits its offset plan. As reported by Dassualt , the JV in Nagpur is engaged in manufacture of components of Falcon planes meant for civil aviation . Dassualt’s investment in the venture is not likely to exceed Rs.900 crore, i.e. just 3% of the total offset amount. The lion’s share is likely to go to DRDO for its Kaveri project for design of Tejas engines. Obviously, Reliance is not the only Indian Offset Partner (IOP). There will be at least 70 or more. None of them will manufacture Rafale planes. These will be made only in France. Section 3.1 Appendix D, DPP 2013 provides for many types of offsets in sub-paras (3)(1)(a), (b),(c),(d),(e) and (f). This involves direct offset – i.e. co-production and transfer of technology as well as indirect offset- i.e. investment or export contracts of products/activities that have nothing to do with activity pertaining to the contracted deal. The last two (e) & (f) pertain to investment in R&D activities of DRDO. Thus the freedom is with OEM to decide which method to opt for. As per para 8.11 of Appendix D: “ In exceptional cases, DOMW may recommend change in offset partner or offset component on being convinced that the change is necessary to enable the vendor to fulfil offset obligations.”. Thus Dassualt is free to change Reliance if Reliance is not able to bring in required matching investment! This is the most likely scenario taking into account the weakened financial position of ADAG group.·As far as pricing is concerned, CAG has already opined that the present deal is 2.86% cheaper than the earlier deal. As Bank guarantees are not required, the cost thereof is saved. But, this cost, which was to borne by Dassualt, was not part of the pricing. Hence it will not impact the 2.86% calculations of the CAG. Yes, if the saved cost, which cannot be exactly quantified, had been shared with India, it would further improved the ratio of 2.86%.·Had the deal been signed in 2012 itself, there would have been no complications. Subsequently, DA received big orders from Qatar, Egypt and home country France. The demand supply equation underwent drastic reversal. France said no to everything we asked for. What alternative we had in 2015? Should Modi have blamed the UPA-II government, published a white paper and opened a re-bidding process. It was the safest route. A.K. Antony would have liked it very much, notwithstanding delay of another decade. But Modi chose another path. He gave whatever IAF wanted, even though it meant scam allegations, criticism court cases etc. should he be imprisoned for his courageous decision? If heads of the nations are punished based on such meager considerations, this would send wrong messages to our future governments and future defence acquisitions will be adversely impacted.

What is a Non-Banking Financial Company (NBFC)?A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property. A non-banking institution which is a company and has principal business of receiving deposits under any scheme or arrangement in one lump sum or in installments by way of contributions or in any other manner, is also a non-banking financial company (Residuary non-banking company).2. What does conducting financial activity as “principal business” mean?Financial activity as principal business is when a company’s financial assets constitute more than 50 per cent of the total assets and income from financial assets constitute more than 50 per cent of the gross income. A company which fulfils both these criteria will be registered as NBFC by RBI. The term 'principal business' is not defined by the Reserve Bank of India Act. The Reserve Bank has defined it so as to ensure that only companies predominantly engaged in financial activity get registered with it and are regulated and supervised by it. Hence if there are companies engaged in agricultural operations, industrial activity, purchase and sale of goods, providing services or purchase, sale or construction of immovable property as their principal business and are doing some financial business in a small way, they will not be regulated by the Reserve Bank. Interestingly, this test is popularly known as 50-50 test and is applied to determine whether or not a company is into financial business.3. NBFCs are doing functions similar to banks. What is difference between banks & NBFCs?NBFCs lend and make investments and hence their activities are akin to that of banks; however there are a few differences as given below:i. NBFC cannot accept demand deposits;ii. NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself;iii. deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks.4. Is it necessary that every NBFC should be registered with RBI?In terms of Section 45-IA of the RBI Act, 1934, no Non-banking Financial company can commence or carry on business of a non-banking financial institution without a) obtaining a certificate of registration from the Bank and without having a Net Owned Funds of ₹ 25 lakhs (₹ Two crore since April 1999). However, in terms of the powers given to the Bank, to obviate dual regulation, certain categories of NBFCs which are regulated by other regulators are exempted from the requirement of registration with RBI viz. Venture Capital Fund/Merchant Banking companies/Stock broking companies registered with SEBI, Insurance Company holding a valid Certificate of Registration issued by IRDA, Nidhi companies as notified under Section 620A of the Companies Act, 1956, Chit companies as defined in clause (b) of Section 2 of the Chit Funds Act, 1982,Housing Finance Companies regulated by National Housing Bank, Stock Exchange or a Mutual Benefit company.5. What are the requirements for registration with RBI?A company incorporated under the Companies Act, 1956 and desirous of commencing business of non-banking financial institution as defined under Section 45 I(a) of the RBI Act, 1934 should comply with the following:i. it should be a company registered under Section 3 of the companies Act, 1956ii. It should have a minimum net owned fund of ₹ 200 lakh. (The minimum net owned fund (NOF) required for specialized NBFCs like NBFC-MFIs, NBFC-Factors, CICs is indicated separately in the FAQs on specialized NBFCs)6. What is the procedure for application to the Reserve Bank for Registration?The applicant company is required to apply online and submit a physical copy of the application along with the necessary documents to the Regional Office of the Reserve Bank of India. The application can be submitted online by accessing RBI’s secured website https://cosmos.rbi.org.in . At this stage, the applicant company will not need to log on to the COSMOS application and hence user ids are not required. The company can click on “CLICK” for Company Registration on the login page of the COSMOS Application. A window showing the Excel application form available for download would be displayed. The company can then download suitable application form (i.e. NBFC or SC/RC) from the above website, key in the data and upload the application form. The company may note to indicate the correct name of the Regional Office in the field “C-8” of the “Annex-I dentification Particulars” in the Excel application form. The company would then get a Company Application Reference Number for the CoR application filed on-line. Thereafter, the company has to submit the hard copy of the application form (indicating the online Company Application Reference Number, along with the supporting documents, to the concerned Regional Office. The company can then check the status of the application from the above mentioned secure address, by keying in the acknowledgement number.7. What are the essential documents required to be submitted along with the application form to the Regional Office of the Reserve Bank?The application form and an indicative checklist of the documents required to be submitted along with the application is available at www.rbi.org.in → Site Map → NBFC List → Forms/ Returns.8. What are systemically important NBFCs?NBFCs whose asset size is of ₹ 500 cr or more as per last audited balance sheet are considered as systemically important NBFCs. The rationale for such classification is that the activities of such NBFCs will have a bearing on the financial stability of the overall economy.B. Entities Regulated by RBI and applicable regulations9. Does the Reserve Bank regulate all financial companies?No. Housing Finance Companies, Merchant Banking Companies, Stock Exchanges, Companies engaged in the business of stock-broking/sub-broking, Venture Capital Fund Companies, Nidhi Companies, Insurance companies and Chit Fund Companies are NBFCs but they have been exempted from the requirement of registration under Section 45-IA of the RBI Act, 1934 subject to certain conditions.Housing Finance Companies are regulated by National Housing Bank, Merchant Banker/Venture Capital Fund Company/stock-exchanges/stock brokers/sub-brokers are regulated by Securities and Exchange Board of India, and Insurance companies are regulated by Insurance Regulatory and Development Authority. Similarly, Chit Fund Companies are regulated by the respective State Governments and Nidhi Companies are regulated by Ministry of Corporate Affairs, Government of India. Companies that do financial business but are regulated by other regulators are given specific exemption by the Reserve Bank from its regulatory requirements for avoiding duality of regulation.It may also be mentioned that Mortgage Guarantee Companies have been notified as Non-Banking Financial Companies under Section 45 I(f)(iii) of the RBI Act, 1934. Core Investment Companies with asset size of less than ₹ 100 crore, and those with asset size of ₹ 100 crore and above but not accessing public funds are exempted from registration with the RBI.10. What are the different types/categories of NBFCs registered with RBI?NBFCs are categorized a) in terms of the type of liabilities into Deposit and Non-Deposit accepting NBFCs, b) non deposit taking NBFCs by their size into systemically important and other non-deposit holding companies (NBFC-NDSI and NBFC-ND) and c) by the kind of activity they conduct. Within this broad categorization the different types of NBFCs are as follows:I. Asset Finance Company (AFC) : An AFC is a company which is a financial institution carrying on as its principal business the financing of physical assets supporting productive/economic activity, such as automobiles, tractors, lathe machines, generator sets, earth moving and material handling equipments, moving on own power and general purpose industrial machines. Principal business for this purpose is defined as aggregate of financing real/physical assets supporting economic activity and income arising therefrom is not less than 60% of its total assets and total income respectively.II. Investment Company (IC) : IC means any company which is a financial institution carrying on as its principal business the acquisition of securities,III. Loan Company (LC): LC means any company which is a financial institution carrying on as its principal business the providing of finance whether by making loans or advances or otherwise for any activity other than its own but does not include an Asset Finance Company.IV. Infrastructure Finance Company (IFC): IFC is a non-banking finance company a) which deploys at least 75 per cent of its total assets in infrastructure loans, b) has a minimum Net Owned Funds of ₹ 300 crore, c) has a minimum credit rating of ‘A ‘or equivalent d) and a CRAR of 15%.V. Systemically Important Core Investment Company (CIC-ND-SI): CIC-ND-SI is an NBFC carrying on the business of acquisition of shares and securities which satisfies the following conditions:-(a) it holds not less than 90% of its Total Assets in the form of investment in equity shares, preference shares, debt or loans in group companies;(b) its investments in the equity shares (including instruments compulsorily convertible into equity shares within a period not exceeding 10 years from the date of issue) in group companies constitutes not less than 60% of its Total Assets;(c) it does not trade in its investments in shares, debt or loans in group companies except through block sale for the purpose of dilution or disinvestment;(d) it does not carry on any other financial activity referred to in Section 45I(c) and 45I(f) of the RBI act, 1934 except investment in bank deposits, money market instruments, government securities, loans to and investments in debt issuances of group companies or guarantees issued on behalf of group companies.(e) Its asset size is ₹ 100 crore or above and(f) It accepts public fundsVI. Infrastructure Debt Fund: Non- Banking Financial Company (IDF-NBFC) : IDF-NBFC is a company registered as NBFC to facilitate the flow of long term debt into infrastructure projects. IDF-NBFC raise resources through issue of Rupee or Dollar denominated bonds of minimum 5 year maturity. Only Infrastructure Finance Companies (IFC) can sponsor IDF-NBFCs.VII. Non-Banking Financial Company - Micro Finance Institution (NBFC-MFI): NBFC-MFI is a non-deposit taking NBFC having not less than 85% of its assets in the nature of qualifying assets which satisfy the following criteria:a. loan disbursed by an NBFC-MFI to a borrower with a rural household annual income not exceeding ₹ 1,00,000 or urban and semi-urban household income not exceeding ₹ 1,60,000;b. loan amount does not exceed ₹ 50,000 in the first cycle and ₹ 1,00,000 in subsequent cycles;c. total indebtedness of the borrower does not exceed ₹ 1,00,000;d. tenure of the loan not to be less than 24 months for loan amount in excess of ₹ 15,000 with prepayment without penalty;e. loan to be extended without collateral;f. aggregate amount of loans, given for income generation, is not less than 50 per cent of the total loans given by the MFIs;g. loan is repayable on weekly, fortnightly or monthly instalments at the choice of the borrowerVIII. Non-Banking Financial Company – Factors (NBFC-Factors): NBFC-Factor is a non-deposit taking NBFC engaged in the principal business of factoring. The financial assets in the factoring business should constitute at least 50 percent of its total assets and its income derived from factoring business should not be less than 50 percent of its gross income.IX. Mortgage Guarantee Companies (MGC) - MGC are financial institutions for which at least 90% of the business turnover is mortgage guarantee business or at least 90% of the gross income is from mortgage guarantee business and net owned fund is ₹ 100 crore.X. NBFC- Non-Operative Financial Holding Company (NOFHC) is financial institution through which promoter / promoter groups will be permitted to set up a new bank .It’s a wholly-owned Non-Operative Financial Holding Company (NOFHC) which will hold the bank as well as all other financial services companies regulated by RBI or other financial sector regulators, to the extent permissible under the applicable regulatory prescriptions.11. What are the powers of the Reserve Bank with regard to 'Non-Bank Financial Companies’, that is, companies that meet the 50-50 Principal Business Criteria?The Reserve Bank has been given the powers under the RBI Act 1934 to register, lay down policy, issue directions, inspect, regulate, supervise and exercise surveillance over NBFCs that meet the 50-50 criteria of principal business. The Reserve Bank can penalize NBFCs for violating the provisions of the RBI Act or the directions or orders issued by RBI under RBI Act. The penal action can also result in RBI cancelling the Certificate of Registration issued to the NBFC, or prohibiting them from accepting deposits and alienating their assets or filing a winding up petition.12. What action can be taken against persons/financial companies making false claim of being regulated by the Reserve Bank?It is illegal for any financial entity or unincorporated body to make a false claim of being regulated by the Reserve Bank to mislead the public to collect deposits and is liable for penal action under the Indian Penal Code. Information in this regard may be forwarded to the nearest office of the Reserve Bank and the Police.13. What action is taken if financial companies which are lending or making investments as their principal business do not obtain a Certificate of Registration from the Reserve Bank?If companies that are required to be registered with the Reserve Bank as NBFCs, are found to be conducting non-banking financial activity, such as, lending, investment or deposit acceptance as their principal business, without seeking registration, the Reserve Bank can impose penalty or fine on them or can even prosecute them in a court of law. If members of public come across any entity which does non-banking financial activity but does not figure in the list of authorized NBFC on RBI website, they should inform the nearest Regional Office of the Reserve Bank, for appropriate action to be taken for contravention of the provisions of the RBI Act, 1934.14. Where can one find list of Registered NBFCs and instructions issued to NBFCs?The list of registered NBFCs is available on the web site of Reserve Bank of India and can be viewed at www.rbi.org.in → Sitemap → NBFC List. The instructions issued to NBFCs from time to time are also hosted at www.rbi.org.in → Notifications → Master Circulars → Non-banking, besides, being issued through Official Gazette notifications and press releases.15. What are the regulations applicable on non-deposit accepting NBFCs with asset size of less than ₹ 500 crore?The regulation on non-deposit accepting NBFCs with asset size of less than ₹ 500 crore would be as under:(i) They shall not be subjected to any regulation either prudential or conduct of business regulations viz., Fair Practices Code (FPC), KYC, etc., if they have not accessed any public funds and do not have a customer interface.(ii) Those having customer interface will be subjected only to conduct of business regulations including FPC, KYC etc., if they are not accessing public funds.(iii) Those accepting public funds will be subjected to limited prudential regulations but not conduct of business regulations if they have no customer interface.(iv) Where both public funds are accepted and customer interface exist, such companies will be subjected both to limited prudential regulations and conduct of business regulations.16. What does the term public funds include? Is it the same as public deposits?Public funds are not the same as public deposits. Public funds include public deposits, inter-corporate deposits, bank finance and all funds received whether directly or indirectly from outside sources such as funds raised by issue of Commercial Papers, debentures etc. However, even though public funds include public deposits in the general course, it may be noted that CICs/CICs-ND-SI cannot accept public deposits.Further, indirect receipt of public funds means funds received not directly but through associates and group entities which have access to public funds.17. What are the various prudential regulations applicable to NBFCs?The Bank has issued detailed directions on prudential norms, vide Non-Banking Financial (Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007, Non-Systemically Important Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2015 and Systemically Important Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2015. Applicable regulations vary based on the deposit acceptance or systemic importance of the NBFC.The directions inter alia, prescribe guidelines on income recognition, asset classification and provisioning requirements applicable to NBFCs, exposure norms, disclosures in the balance sheet, requirement of capital adequacy, restrictions on investments in land and building and unquoted shares, loan to value (LTV) ratio for NBFCs predominantly engaged in business of lending against gold jewellery, besides others. Deposit accepting NBFCs have also to comply with the statutory liquidity requirements. Details of the prudential regulations applicable to NBFCs holding deposits and those not holding deposits is available in the section ‘Regulation – Non-Banking – Notifications - Master Circulars’ in the RBI website.18. Please explain the terms ‘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.19. What are the responsibilities of the NBFCs registered with Reserve Bank, with regard to submission on compliances and other information?A. Returns to be submitted by deposit taking NBFCsNBS-1 Quarterly Returns on deposits in First Schedule.NBS-2 Quarterly return on Prudential Norms is required to be submitted by NBFC accepting public deposits.NBS-3 Quarterly return on Liquid Assets by deposit taking NBFC.NBS-4 Annual return of critical parameters by a rejected company holding public deposits. (NBS-5 stands withdrawn as submission of NBS 1 has been made quarterly.)NBS-6 Monthly return on exposure to capital market by deposit taking NBFC with total assets of ₹ 100 crore and above.Half-yearly ALM return by NBFC holding public deposits of more than ₹ 20 crore or asset size of more than ₹ 100 croreAudited Balance sheet and Auditor’s Report by NBFC accepting public deposits.Branch Info Return.B. Returns to be submitted by NBFCs-ND-SINBS-7 A Quarterly statement of capital funds, risk weighted assets, risk asset ratio etc., for NBFC-ND-SI.Monthly Return on Important Financial Parameters of NBFCs-ND-SI.ALM returns:(i) Statement of short term dynamic liquidity in format ALM [NBS-ALM1] -Monthly,(ii) Statement of structural liquidity in format ALM [NBS-ALM2] Half yearly,(iii) Statement of Interest Rate Sensitivity in format ALM -[NBS-ALM3], Half yearlyBranch Info returnC. Quarterly return on important financial parameters of non deposit taking NBFCs having assets of more than ₹ 50 crore and above but less than ₹ 100 croreBasic information like name of the company, address, NOF, profit / loss during the last three years has to be submitted quarterly by non-deposit taking NBFCs with asset size between ₹ 50 crore and ₹ 100 crore.There are other generic reports to be submitted by all NBFCs as elaborated in Master Circular on Returns to be submitted by NBFCs as available on www.rbi.org.in → Notifications → Master Circulars → Non-banking and Circular DNBS (IT) CC.No.02/24.01.191/2015-16 dated July 9, 2015 as available on www.rbi.org.in → Notifications.20. Whether the circular on Lending against shares dated August 21, 2014 is applicable to existing loans also?The Circular is applicable from the date of the circular and therefore the Circular shall not apply on those transactions which have been entered into prior to the date of the Circular. However, the guidelines will be applicable in case of roll-over/ renewal of loans. Guidelines will not apply to transactions where documents have been executed prior to the date of the circular and disbursement is pending.21. Will the circular on Lending against shares be applicable on restructured accounts?No. the Circular will not be applicable on restructured accounts22. Will the Circular on Lending against shares be applicable on those loans where the primary security is not shares/ units of mutual funds?Loans which are against the collateral of multiple securities and it is specifically agreed to in the agreement that primary security would be something other than shares/ units of mutual funds, LTV would not be applicable. However, reporting requirements shall remain. In cases where such differentiation is not made (thereby NBFCs can off-load shares at the instance of a default), LTV would be applicable.23. Whether LTV for loans issued against the collateral of shares is to be computed at scrip level or at portfolio level?LTV would be computed at portfolio level.24. Whether PoA/ Non-Disposal undertaking structure by whatever name called is covered under the Circular on Lending against shares?Yes, the Circular would be applicable and the type of encumbrance created is immaterial.25. Does the definition of “companies in a group” as given in Systemically Important Non-Banking Financial (non-deposit accepting or holding) companies Prudential Norms Directions, 2015 apply in respect of concentration of credit/ investment norms.No, the definition of “companies is a group” is only for the purpose of determining the applicability of prudential norms on multiple NBFCs in a group.26. Whether acquisition/ transfer of shareholding of 26 per cent or more of the paid up equity capital of an NBFC within the same group i.e. intra group transfers require prior approval of the Bank?Yes, prior approval would be required in all cases of acquisition/ transfer of shareholding of 26 per cent or more of the paid up equity capital of an NBFC. In case of intra-group transfers, NBFCs shall submit an application, on the company letter head, for obtaining prior approval of the Bank. Based on the application of the NBFC, it would be decided, on a case to case basis, whether the NBFC requires to submit the documents as prescribed at para 3 of DNBR (PD) CC Kjøpesenter Gjøvik & Hamar. 065/03.10.001/2015-16 dated July 9, 2015 for processing the application of the company. In cases where approval is granted without the documents, the NBFC would be required to submit the same after the process of transfer is complete.27. NBFCs are charging high interest rates from their borrowers. Is there any ceiling on interest rate charged by the NBFCs to their borrowers?Reserve Bank of India has deregulated interest rates to be charged to borrowers by financial institutions (other than NBFC- Micro Finance Institution). The rate of interest to be charged by the company is governed by the terms and conditions of the loan agreement entered into between the borrower and the NBFCs. However, the NBFCs have to be transparent and the rate of interest and manner of arriving at the rate of interest to different categories of borrowers should be disclosed to the borrower or customer in the application form and communicated explicitly in the sanction letter etc.28. RBI permits NBFCs to hedge their exposure through dealing in IRFs. Currently, IRFs are on single stock 10 yr 8.40% 2024 security. The Composition of Balance Sheet is mix of fixed/ floating interest rate and different credit profile. Whether 10 yr single security can be used for hedging 2-3 yr liability and asset (Duration adjusted) or can be used for investment in other long tenor securities or corporate bonds. Alternatively, whether IRFs can be used holistically for hedging assets and liabilities in dynamic interest rate scenarios within total Balance Sheet amount and within hedging definition?IRF may be used to hedge interest rate risk associated with single asset/ liability or a group of assets/ liabilities. Hence, NBFCs are permitted to use duration based hedging for managing interest rate risk.29. Whether NBFCs as trading member can participate in the IRF market only for hedging or can also take trading position?As per extant guidelines NBFCs with asset size of ₹ 1,000 cr and above are permitted to participate in IRF as trading members. While, trading members of stock exchanges are permitted to execute trades on their own account as well as on account of their clients, banks and PDs have been allowed to deal in IRF for both hedging and trading on own account and not on client’s account. Similarly, NBFCs as trading members are permitted to execute their proprietary trades and not to undertake transactions on behalf of clients.C. Residuary Non-Banking Companies (RNBCs)30. What is a Residuary Non-Banking Company (RNBC)? In what way it is different from other NBFCs?Residuary Non-Banking Company is a class of NBFC which is a company and has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner and not being Investment, Asset Financing, Loan Company. These companies are required to maintain investments as per directions of RBI, in addition to liquid assets. The functioning of these companies is different from those of NBFCs in terms of method of mobilization of deposits and requirement of deployment of depositors' funds as per Directions. Besides, Prudential Norms Directions are applicable to these companies also.31. We understand that there is no ceiling on raising of deposits by RNBCs, then how safe is deposit with them?It is true that there is no ceiling on raising of deposits by RNBCs. However, every RNBC has to ensure that the amounts deposited with it are fully invested in approved investments. In other words, in order to secure the interests of depositor, such companies are required to invest 100 per cent of their deposit liability into highly liquid and secure instruments, namely, Central/State Government securities, fixed deposits with scheduled commercial banks (SCB), Certificate of Deposits of SCB/FIs, units of Mutual Funds, etc.32. Can RNBC forfeit deposit if deposit instalments are not paid regularly or discontinued?No. Residuary Non-Banking Company cannot forfeit any amount deposited by the depositor, or any interest, premium, bonus or other advantage accrued thereon.33. What is the rate of interest that an RNBC must pay on deposits and what should be maturity period of deposits taken by them?The minimum interest an RNBC should pay on deposits should be 5% (to be compounded annually) on the amount deposited in lump sum or at monthly or longer intervals; and 3.5% (to be compounded annually) on the amount deposited under daily deposit scheme. Interest here includes premium, bonus or any other advantage, that an RNBC promises to the depositor by way of return. An RNBC can accept deposits for a minimum period of 12 months and maximum period of 84 months from the date of receipt of such deposit. They cannot accept deposits repayable on demand. However, at present, the only RNBCs in existence (Peerless) has been directed by the Reserve Bank to stop collecting deposits, repay the deposits to the depositor and wind up their RNBC business as their business model is inherently unviable.D. Definition of deposits, Eligible / Ineligible Institutions to accept deposits and Related Matters34. What is ‘deposit’ and ‘public deposit’? Is it defined anywhere?The term ‘deposit’ is defined under Section 45 I(bb) of the RBI Act, 1934. ‘Deposit’ includes and shall be deemed always to have included any receipt of money by way of deposit or loan or in any other form but does not include:i. amount raised by way of share capital, or contributed as capital by partners of a firm;ii. amount received from a scheduled bank, a co-operative bank, a banking company, Development bank, State Financial Corporation, IDBI or any other institution specified by RBI;iii. amount received in ordinary course of business by way of security deposit, dealership deposit, earnest money, advance against orders for goods, properties or services;iv. amount received by a registered money lender other than a body corporate;v. amount received by way of subscriptions in respect of a ‘Chit’.Paragraph 2(1)(xii) of the Non-Banking Financial Companies Acceptance of Public Deposits ( Reserve Bank) Directions, 1998 defines a ‘ public deposit’ as a ‘deposit’ as defined under Section 45 I(bb) of the RBI Act, 1934 and further excludes the following:a. amount received from the Central/ State Government or any other source where repayment is guaranteed by Central/ State Government or any amount received from local authority or foreign government or any foreign citizen/ authority/ person;b. any amount received from financial institutions specified by RBI for this purpose;c. any amount received by a company from any other company;d. amount received by way of subscriptions to shares, stock, bonds or debentures pending allotment or by way of calls in advance if such amount is not repayable to the members under the articles of association of the company;e. amount received from directors of a company or from its shareholders by private company or by a private company which has become a public company;f. amount raised by issue of bonds or debentures secured by mortgage of any immovable property or other asset of the company subject to conditions;fa. any amount raised by issuance of non-convertible debentures with a maturity more than one year and having the minimum subscription per investor at ₹ 1 crore and above, provided it is in accordance with the guidelines issued by the Bank.g. the amount brought in by the promoters by way of unsecured loan;h. amount received from a mutual fund;i. any amount received as hybrid debt or subordinated debt;j. amount received from a relative of the director of an NBFC;k. any amount received by issuance of Commercial Paper.l. any amount received by a systemically important non-deposit taking non-banking financial company by issuance of ‘perpetual debt instruments’m. any amount raised by the issue of infrastructure bonds by an Infrastructure Finance CompanyThus, the directions exclude from the definition of public deposit, amount raised from certain set of informed lenders who can make independent decision.35. Which entities can legally accept deposits from public?Banks, including co-operative banks, can accept deposits. Non-bank finance companies, which have been issued Certificate of Registration by RBI with a specific licence to accept deposits, are entitled to accept public deposit. In other words, not all NBFCs registered with the Reserve Bank are entitled to accept deposits but only those that hold a deposit accepting Certificate of Registration can accept deposits. They can, however, accept deposits, only to the extent permissible. Housing Finance Companies, which are again specifically authorized to collect deposits and companies authorized by Ministry of Corporate Affairs under the Companies Acceptance of Deposits Rules framed by Central Government under the Companies Act can also accept deposits also upto a certain limit. Cooperative Credit Societies can accept deposits from their members but not from the general public. The Reserve Bank regulates the deposit acceptance only of banks, cooperative banks and NBFCs.It is not legally permissible for other entities to accept public deposits. Unincorporated bodies like individuals, partnership firms, and other association of individuals are prohibited from carrying on the business of acceptance of deposits as their principal business. Such unincorporated bodies are prohibited from even accepting deposits if they are carrying on financial business.36. Can all NBFCs accept deposits? Is there any ceiling on acceptance of Public Deposits? What is the rate of interest and period of deposit which NBFCs can accept?All NBFCs are not entitled to accept public deposits. Only those NBFCs to which the Bank had given a specific authorisation and have an investment grade rating are allowed to accept/ hold public deposits to a limit of 1.5 times of its Net Owned Funds. All existing unrated AFCs that have been allowed to accept deposits shall have to get themselves rated by March 31, 2016. Those AFCs that do not get an investment grade rating by March 31, 2016, will not be allowed to renew existing or accept fresh deposits thereafter. In the intervening period, i.e. till March 31, 2016, unrated AFCs or those with a sub-investment grade rating can only renew existing deposits on maturity, and not accept fresh deposits, till they obtain an investment grade rating.However, as a matter of public policy, Reserve Bank has decided that only banks should be allowed to accept public deposits and as such has since 1997 not issued any Certificate of Registration (CoR) to new NBFCs for acceptance of public deposits.Presently, the maximum rate of interest an NBFC can offer is 12.5%. The interest may be paid or compounded at rests not shorter than monthly rests. The NBFCs are allowed to accept/renew public deposits for a minimum period of 12 months and maximum period of 60 months. They cannot accept deposits repayable on demand.37. In respect of companies which do not fulfill the 50-50 criteria but are accepting deposits – do they come under RBI purview?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. Its principal business would be non-financial activity like agricultural operations, industrial activity, purchase or sale of goods or purchase/construction of immoveable property, and will be a non-banking non-financial company. Acceptance of deposits by a Non-Banking Non-Financial Company are governed by the rules and regulations issued by the Ministry of Corporate Affairs.38. Why is the RBI so restrictive in allowing NBFCs to raise public deposits?The Reserve Bank's overarching concern while supervising any financial entity is protection of depositors' interest. Depositors place deposit with any entity on trust unlike an investor who invests in the shares of a company with the intention of sharing the risk as well as return with the promoters. Protection of depositors' interest thus is supreme in financial regulation. Banks are the most regulated financial entities. The Deposit Insurance and Credit Guarantee Corporation pays insurance on deposits up to ₹ One lakh in case a bank failed.39. Which are the NBFCs specifically authorized by RBI to accept deposits?The Reserve Bank publishes the list of NBFCs that hold a valid Certificate of Registration for accepting deposits on its website: www.rbi.org.in → Sitemap → NBFC List → List of NBFCs Permitted to Accept Deposits. At times, some companies are temporarily prohibited from accepting public deposits. The Reserve Bank publishes the list of NBFCs temporarily prohibited also on its website. The Reserve Bank keeps both these lists updated. Members of the public are advised to check both these lists before placing deposits with NBFCs.40. Whether NBFCs can accept deposits from NRIs?Effective from April 24, 2004, NBFCs cannot accept deposits from NRIs except deposits by debit to NRO account of NRI provided such amount does not represent inward remittance or transfer from NRE/FCNR (B) account. However, the existing NRI deposits can be renewed.41. Can a Co-operative Credit Society accept deposits from the public?No. Co-operative Credit Societies cannot accept deposits from general public. They can accept deposits only from their members within the limit specified in their bye laws.42. Can a Salary Earners’ Society accept deposits from the public?No. These societies are formed for salaried employees and hence they can accept deposit only from their own members and not from general public.43. Is nomination facility available to the Depositors of NBFCs?Yes, nomination facility is available to the depositors of NBFCs. The Rules for nomination facility are provided for in section 45QB of the Reserve Bank of India Act, 1934. Non-Banking Financial Companies have been advised to adopt the Banking Companies (Nomination) Rules, 1985 made under Section 45ZA of the Banking Regulation Act, 1949. Accordingly, depositor/s of NBFCs are permitted to nominate one person to whom the NBFC can return the deposit in the event of the death of the depositor/s. NBFCs are advised to accept nominations made by the depositors in the form similar to one specified under the said rules, viz Form DA 1 for the purpose of nomination, and Form DA2 and DA3 for cancellation of nomination and change of nomination respectively.44. How does the Reserve Bank come to know about unauthorized acceptance of deposits by companies not registered with it or of NBFCs engaged in lending or investment activities without obtaining the Certificate of Registration from it?NBFCs that ought to have sought registration from RBI but are functioning without doing so are committing a breach of law. Such companies are liable for action as envisaged under the RBI Act, 1934. To identify such entities, RBI has multiple sources of information. These include market intelligence, complaints received from affected parties, industry sources, and exception reports submitted by statutory auditors in terms of Non-Banking Financial Companies Auditor’s Report (Reserve Bank) Directions, 2008. Further, the State Level Co-ordination Committees (SLCC) is convened by RBI in all the States/UTs on quarterly basis. The SLCC is now chaired by the Chief Secretary/ Administrator of the concerned State/UT and has, as its members, apart from the Reserve Bank, the Regional Directorate of the MCA/ ROC, local unit of SEBI, NHB, Registrar of Chits, ICAI, Economic Intelligence Unit of the State Police and officials from Law and Home Ministries of the State Government. As all the relevant financial sector regulators and enforcement agencies participate in the SLCC, it is possible to quickly share the information and agree on an effective course of action to be taken against entities indulging in unauthorized and suspect businesses involving funds mobilization from public.45. Can Proprietorship/Partnership Concerns associated/not associated with registered NBFCs accept public deposits?No. Proprietorship and partnership concerns are un-incorporated bodies. Hence they are prohibited under the RBI Act 1934 from accepting public deposits.46. There are many jewellery shops taking money from the public in instalments. Is this amounting to acceptance of deposits?It depends on whether the money is received as advance for delivering jewellery at a future date or whether the money is received with a promise to return the same with interest. The money accepted by Jewellery shops in instalments for the purpose of delivering jewellery at the end of the period of contract is not deposit. It will amount to acceptance of deposits if in return for the money received, the jewellery shop promises to return the principal amount along with interest.47. What action can be taken if such unincorporated entities accept public deposits? What if NBFCs which have not been authorized to accept public deposits use proprietorship/partnership firms floated by their promoters to collect deposits?Such unincorporated entities, if found accepting public deposits, are liable for criminal action. Further NBFCs are prohibited by RBI from associating with any unincorporated bodies. If NBFCs associate themselves with proprietorship/partnership firms accepting deposits in contravention of RBI Act, they are also liable to be prosecuted under criminal law or under the Protection of Interest of Depositors (in Financial Establishments) Act, if passed by the State Governments.48. What is the difference between acceptance of money by Chit Funds and acceptance of deposits?Deposits are defined under the RBI Act 1934 as acceptance of money other than that raised by way of share capital, money received from banks and other financial institutions, money received as security deposit, earnest money and advance against goods or services and subscriptions to chits. All other amounts, received as loan or in any form are treated as deposits. Chit Funds activity involves contributions by members in instalments by way of subscription to the Chit and by rotation each member of the Chit receives the chit amount. The subscriptions are specifically excluded from the definition of deposits and cannot be termed as deposits. While Chit funds may collect subscriptions as above, they are prohibited by RBI from accepting deposits with effect from August 2009.E. Depositor Protection Issues49. What are the salient features of NBFC regulations which the depositor may note at the time of investment?Some of the important regulations relating to acceptance of deposits by NBFCs are as under:The NBFCs are allowed to accept/renew public deposits for a minimum period of 12 months and maximum period of 60 months. They cannot accept deposits repayable on demand.NBFCs cannot offer interest rates higher than the ceiling rate prescribed by RBI from time to time. The present ceiling is 12.5 per cent per annum. The interest may be paid or compounded at rests not shorter than monthly rests.NBFCs cannot offer gifts/incentives or any other additional benefit to the depositors.NBFCs should have minimum investment grade credit rating.The deposits with NBFCs are not insured.The repayment of deposits by NBFCs is not guaranteed by RBI.Certain mandatory disclosures are to be made about the company in the Application Form issued by the company soliciting deposits.50. What precautions should a depositor take before placing deposit with an NBFC?A depositor wanting to place deposit with an NBFC must take the following precautions before placing deposits:That the NBFC is registered with RBI and specifically authorized by the RBI to accept deposits. A list of deposit taking NBFCs entitled to accept deposits is available at www.rbi.org.in → Sitemap → NBFC List. The depositor should check the list of NBFCs permitted to accept public deposits and also check that it is not appearing in the list of companies prohibited from accepting deposits, which is available at www.rbi.org.in → Sitemap → NBFC List → NBFCs who have been issued prohibitory orders, winding up petitions filed and legal cases under Chapter IIIB, IIIC and others.NBFCs have to prominently display the Certificate of Registration (CoR) issued by the Reserve Bank on its site. This certificate should also reflect that the NBFC has been specifically authorized by RBI to accept deposits. Depositors must scrutinize the certificate to ensure that the NBFC is authorized to accept deposits.The maximum interest rate that an NBFC can pay to a depositor should not exceed 12.5%. The Reserve Bank keeps altering the interest rates depending on the macro-economic environment. The Reserve Bank publishes the change in the interest rates on www.rbi.org.in → Sitemap → NBFC List → FAQs.The depositor must insist on a proper receipt for every amount of deposit placed with the company. The receipt should be duly signed by an officer authorized by the company and should state the date of the deposit, the name of the depositor, the amount in words and figures, rate of interest payable, maturity date and amount.In the case of brokers/agents etc collecting public deposits on behalf of NBFCs, the depositors should satisfy themselves that the brokers/agents are duly authorized by the NBFC.The depositor must bear in mind that public deposits are unsecured and Deposit Insurance facility is not available to depositors of NBFCs.The Reserve Bank of India does not accept any responsibility or guarantee about the present position as to the financial soundness of the company or for the correctness of any of the statements or representations made or opinions expressed by the company and for repayment of deposits/discharge of the liabilities by the company.51. Does RBI guarantee the repayment of the deposits collected by NBFCs?No. The Reserve Bank does not guarantee repayment of deposits by NBFCs even though they may be authorized to collect deposits. As such, investors and depositors should take informed decisions while placing deposit with an NBFC.52. In case an NBFC defaults in repayment of deposit what course of action can be taken by depositors?If an NBFC defaults in repayment of deposit, the depositor can approach Company Law Board or Consumer Forum or file a civil suit in a court of law to recover the deposits. NBFCs are also advised to follow a grievance redress procedure as indicated in reply to question 57 below. Further, at the level of the State Government, the State Legislations on Protection of Interest of Depositors (in Financial Establishments) empowers the State Governments to take action even before the default takes place or complaints are received from depositors. If there is perpetration of an offence and if the intention is to defraud, the State Government can even attach properties.53. What is the role of Company Law Board in protecting the interest of depositors? How can one approach it?When an NBFC fails to repay any deposit or part thereof in accordance with the terms and conditions of such deposit, the Company Law Board (CLB) either on its own motion or on an application from the depositor, directs by order the Non-Banking Financial Company to make repayment of such deposit or part thereof forthwith or within such time and subject to such conditions as may be specified in the order. After making the payment, the company will need to file the compliance with the local office of the Reserve Bank of India.As explained above, the depositor can approach CLB by mailing an application in prescribed form to the appropriate bench of the Company Law Board according to its territorial jurisdiction along with the prescribed fee.