The sphere of activities of NBFCs is wide and includes investment finance services, leasing, asset management services, investment advisory services, housing finance services and venture capital investment.
An NBFC may be established in Pakistan, according to Rule 3 of NBFC (Est & Reg) Rules, 2003, if each of its promoters, proposed directors, chief executive and chairman of the Board fulfils the Fit and Proper Criteria (FPC) specified in Schedule VIII to the Non-Banking Finance Companies and Notified Entities Regulations, 2007, issued on November 21, 2007 for compliance.
SBP had earlier issued such criteria for the Directors and Key Executives of the banks as part of the Prudential Regulations while Prudential Regulations for NBFCs issued by SECP in early 2004 had a smaller version of the criteria.
The Fit and Proper Test (FPT) has been introduced to promote corporate governance in NBFCs and would definitely impact the investors and shareholders. Main points of FPC applicable to NBFCs are summarised here for information of our readers.
FPC IS APPLICABLE ON:
(i) Sponsors and Promoters who apply for an NBFC license;
(ii) Investors acquiring strategic control/major stake in an existing NBFC;
(iii) Proposed Directors of NBFC;
(iv) Proposed Chief Executive of NBFC; and;
(v) Key Executives of NBFC.
According to definition in Schedule VIII, Key Executive means key executives of the NBFC and includes, inter alia, following functional responsibilities: (a) Any executive, acting as second to Chief Executive Officer including Chief Operating Officer; (b) Chief Financial Officer; (c) Heads of Accounts, Finance, Internal Audit, etc; (d) Company Secretary; (e) Compliance Officer; (f) Investment Analyst; and (g) Fund Manager. The scope is rather wide.
The fitness and propriety of specified persons associated with NBFC will be assessed taking into account all the relevant factors, including but not limited to the following broad elements: (a) Honesty, Integrity, Diligence, Fairness, Reputation and Track Record; (b) Financial Soundness; (c) Competence and Capability; (d) Conflict of Interest; and (e) Others.
The last three broad elements mentioned above may not be considered while assessing the fitness and propriety of the Sponsors and Promoters who apply for an NBFC license and the Investors acquiring strategic control/major stake in an existing NBFC.
According to the Regulations, FPT is continuous in nature and NBFCs shall ensure compliance with the FPT in letter and in spirit. All persons subject to FPT should immediately submit any change in the information already submitted through the Company Secretary of the NBFC to SECP. NBFCs have been warned that any violations or circumvention of these FPT shall be dealt with under the provisions of the Companies Ordinance, 1984.
All the above named categories of the persons excluding the Key Executives of NBFC shall obtain prior approval of SECP and the Directors and the Chief Executive (CE) shall not assume the charge of their respective offices until their appointments have been approved by SECP. The CE shall be full time employee of NBFC. All the requests for seeking approval of SECP shall be submitted by the respective NBFC along with the requisite information as specified.
In case of the Sponsors/Promoters, Proposed Directors and Chief Executive of the NBFC details required to be submitted for consideration by SECP include (a) personal details, (ii) affidavit on details, and (c) answers to the specified Questionnaire.
Personal details include passport size photograph, academic/professional qualifications, training, relationship with other directors, directorship in other companies, etc.
The Affidavit duly attested is required to be submitted stating on solemn affirmation that the deponent fulfills the entire fit and proper test, confirms correctness of the statement made and information supplied, undertakes that SECP may seek additional information from third party, undertakes to bring to attention of SECP any matter which may potentially affect his status and that nothing has been concealed.
Matters included in the Questionnaire for answer cover very wide canvas and are referred here only briefly:
(1) involvement in any criminal offence;
(2) association with illegal deposit taking,
(3) subject to any adverse findings;
(4) contravening of any SECP requirement;
(5) involvement with a company refused registration;
(6) involvement with a company whose registration revoked;
(7) debarring from being Chief Executive of a financial institutions;
(8) demotion or dismissal;
(9) resignation to avoid legal action;
(10) disqualification by regulators;
(11) in default of payment of dues;
(12) as sponsor having requisite financial resources;
(13) major stake in existing NBFC;
(14) in default of taxes;
(15) association with companies with unsatisfactory tax record;
(16) agreement for influencing exercising voting rights;
(17) minimum experience for incumbent position;
(18) mentally ill;
(19) director of NBFC holding similar license;
(20) service in brokerage house;
(21) member of Stock Exchange;
(22) consultant of NBFC intending becoming a director;
(23) an employee of NBFC;
(24) employee of a company where sponsors have substantial interest;
(25) member of any political party; and;
(26) other information relevant for SECP purpose.
The NBFCs must ensure while appointing Key Executives that they qualify FPT in letter and in spirit. The Key Executives shall be full time employees of NBFC and their appointment shall not require approval of SECP.
However, while appointing a Key Executive information on prescribed format shall be submitted to SECP within seven days of assumption of the charge of the post by the incumbent. The accuracy of the submitted information may be checked on post facto basis by SECP during onsite inspection.
In case of Key Executives, the details sought by SECP are slightly different and not that exhaustive as in case of the Directors. Personal details also include passport size photograph, academic qualifications, professional qualifications, training, current employment, previous employment history (10 years), references of the direct supervisors during the past five years and three references, other than relatives, who have been closely acquainted with him during the last five years.
The key executive is required to answer questions regarding conviction under any offence, ever censured or penalised by any financial regulator or ever been dismissed from employment. In case the answer is yes, more details and reasons are to be provided.
Assessment of Fitness and Propriety is the key activity in the approval of the proposed sponsors, promoters, chief executive, and chairman of the Board of the NBFC or any of the key executives taking into account all the relevant factors, including the following broad elements:
Honesty, Integrity, Diligence, Fairness, Reputation and Track Record. These attributes are determined over time and demand a disciplined, on-going commitment to high standards of behaviour.
In determining a person's qualities, SECP or the hiring authority at an NBFC shall consider all factors listed in the Questionnaire and as a minimum the following additional factors:
(i) the person, or any business in which he has controlling interest or exercises significant influence, has not been investigated by a regulatory body; (ii) has been fair, truthful and forthcoming in his dealings with customers, superiors, auditors and regulatory authorities; (iii) has not shown strong opposition or lack of willingness to maintaining effective internal control systems; (iv) has not been involved in any plea bargain with any government agency; (v) has, in case of sponsors and promoters, an established and proven track record of successfully running a business enterprise for 3 to 5 years, preferably a public listed company;
FINANCIAL SOUNDNESS: In order to demonstrate his capacity to ensure safety and soundness of an NBFC, including the balancing of risks and rewards, a person must demonstrate that he has managed his own financial affairs properly.
In determining a person's financial soundness, SECP or NBFC shall consider all relevant factors, including: (i) whether all relevant financial statements are available; (ii) whether the person has made composition with his creditors; and (iii) whether the person has been declared a defaulter by any stock exchange.
COMPETENCE AND CAPABILITY:
(a) While assessing the competence and capability of the proposed Directors, SECP shall take into account all relevant considerations including management experience of at least five years at a senior level, professionally qualified in banking, accounting, law etc not to be minors or of unsound mind and be registered as national tax payers. (b) In determining competence, and capability of the CE, SECP shall take into account all relevant considerations including a minimum experience of seven to ten years in a senior management position, demonstrated the capacity to successfully undertake the cognate responsibilities of the position; and have a sound knowledge of business and job responsibilities. (c) The Key Executives must be qualified professionals possessing relevant experience and degrees relating to the job/assignment. The NBFC may also take into account whether the person has been subject of any adverse judgement or has been in default of payment of loan or tax dues or has made any arrangements with his creditors.
CONFLICT OF INTEREST:
(a) each of an NBFCs directors, chief executive and chairman of the Board shall not be a director in other NBFC engaged in a similar business not be serving in a stock brokerage house nor in any company owned by a member of stock exchange, not be a member of stock exchange and nor in control of more than 20% shareholding of a brokerage house; and (b) the NBFCs must ensure that no Key Executive shall head more than one functional area and shall not hold directorship in his personal capacity: (i) in a business concern which is also a client of the NBFC, and (ii) in any other financial institution.
OTHERS: for directors, chief executive or key executive of an NBFC: (i) not more than 25% directors of the same family; (ii) not a Senator, MNA or MPA or a member of a political party; and (iii) at least one-third of the directors shall be independent directors.
Compliance with the FPC is a must for all NBFCs but would also be beneficial to any other institution. It is believed that all departments and institutions have specific requirements as to fit and propriety tests of their respective potential employees, key executives or directors. However, for deriving benefits in the years to come, the continued applicability and monitoring of FPC may be assured by all the institutions as has been prescribed by SECP for NBFCs.