Vishleshan for Regulatory Exams, 27 June: India’s First Maritime NBFC

To ace your preparation for the RBI, SEBI, or NABARD exam, you have to stay updated about key economic and regulatory updates. In today’s edition of Vishleshan, we delve into a significant topic: India’s First Maritime NBFC. These issues are highly relevant for competitive exams and offer valuable insights into India’s evolving economic scenario. Keep reading to stay ahead with a clear understanding of these current updates.

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Context: Sagarmala Finance Corporation to offer tailored funding to ports, MSMEs, and startups; standardised port tariffs and Port Readiness Index also announced. The company was registered as an NBFC with the Reserve Bank of India (RBI) on 19 June.

Source: Business Standard

In a strategic move to invigorate India’s maritime sector, the Ministry of Ports, Shipping and Waterways has launched Sagarmala Finance Corporation Limited (SMFCL), the country’s first Non-Banking Financial Company (NBFC) dedicated to maritime financing. Formerly known as Sagarmala Development Company Limited, this newly registered NBFC is poised to bridge critical financing gaps and catalyze infrastructure development aligned with the ambitious Amrit Kaal Vision 2047, aiming to position India as a global maritime leader.

Non-Banking Financial Company (NBFC):

Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 (if incorporated before 2013) or the Companies Act, 2013, primarily engaged in financial activities like loans and advances, acquisition of securities, leasing, and hire-purchase. However, it does not include entities whose principal business is agriculture, industrial activity, trading goods (other than securities), providing services, or real estate (purchase, sale, or construction of immovable property). A non-banking institution that is a company and primarily receives deposits in lump sums or installments is also considered a Residuary Non-Banking Company.

• “Principal Business” (The 50-50 Test): A company’s financial activity is considered its “principal business” if its financial assets constitute more than 50% of its total assets (netted off by intangible assets) AND income from financial assets constitutes more than 50% of its gross income. Companies fulfilling both criteria must register as an NBFC with the Reserve Bank of India (RBI). This test, popularly known as the 50-50 test, helps ensure that only companies predominantly engaged in financial activity are regulated by the RBI.
• Key Differences between Banks and NBFCs: While NBFCs lend and invest akin to banks, major differences exist:
  • NBFCs cannot accept demand deposits.
  • NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on themselves.
  • Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation (DICGC) is not available to depositors of deposit-taking NBFCs.
• Registration with RBI: It is generally mandatory for NBFCs to register with the RBI under Section 45-IA of the RBI Act, 1934. This requires:
  • Being a company incorporated under the Companies Act, 1956 or 2013.
  • Having a minimum Net Owned Funds (NOF) of ₹10 crore (for new registrations, ab initio; existing NBFCs have until March 31, 2027, to meet this).
  • Exemptions: Certain NBFCs regulated by other bodies (e.g., SEBI for Merchant Banks/Stock Brokers/AIFs, IRDAI for Insurance Companies, State Governments for Chit Fund Companies, Ministry of Corporate Affairs for Nidhi Companies) are exempted to avoid dual regulation.
• Scale-Based Regulatory Framework (SBR Framework): Implemented by RBI from October 01, 2022, this framework categorizes NBFCs into four layers based on size, activity, complexity, and interconnectedness, with increasing regulatory intensity from lower to higher layers.
  • NBFC – Base Layer (NBFC-BL).
  • NBFC – Middle Layer (NBFC-ML) and NBFC – Upper Layer (NBFC-UL) are considered systemically significant.
  • NBFC – Top Layer (NBFC-TL) is ideally expected to be empty, populated only if RBI identifies substantial systemic risk from specific NBFCs in the Upper Layer.
• Different Types/Categories of NBFCs (by activity type):
  • Investment and Credit Company (ICC): Principal business is asset finance, providing loans/advances for activities other than its own, and acquisition of securities.
  • Housing Finance Company (HFC): NBFC where financial assets for housing finance constitute at least 60% of total assets, with not less than 50% for individuals. Minimum NOF: ₹20 crore.
  • Infrastructure Finance Company (IFC): Deploys at least 75% of its total assets towards infrastructure lending. Minimum NOF: ₹300 crore.
  • Infrastructure Debt Fund – NBFC (IDF-NBFC): Non-deposit taking NBFC permitted to refinance post-COD infrastructure projects (completed at least one year of satisfactory commercial operations) and finance toll-operate-transfer (TOT) projects. Minimum NOF: ₹300 crore.
  • Core Investment Company (CIC): NBFC acquiring shares and securities, holding at least 90% of net assets in group company investments, with specific equity holding requirements and restrictions on trading/other financial activities. Asset size ₹100 crore or above and accepts public funds.
  • Micro Finance Institution (NBFC-MFI): Non-deposit taking NBFC with at least 75% of total assets as “microfinance loans” (collateral-free loans up to ₹3,00,000 annual household income). Minimum NOF: ₹2 crore.
  • Non-Banking Financial Company – Factors (NBFC-Factors): Non-deposit taking NBFC primarily engaged in factoring, with financial assets and income from factoring constituting at least 50% of total assets and gross income respectively.
  • Mortgage Guarantee Companies (MGC): Primarily transacts business of providing mortgage guarantees for housing loans. At least 90% of business turnover or gross income from mortgage guarantee. Minimum NOF: ₹100 crore.
  • Standalone Primary Dealers (SPDs): NBFCs authorized to undertake Primary Dealer activities in Government Securities, supporting the G-Sec market. Minimum NOF: ₹150 crore for core activities, ₹250 crore for core and non-core.
  • Non-Operative Financial Holding Company (NOFHC): Non-deposit taking NBFC holding shares of a banking company and other financial services companies in its group.
  • NBFC–Account Aggregator (NBFC-AA): NBFC undertaking the business of retrieving, collecting, consolidating, organizing, and presenting financial information for a fee. Minimum NOF: ₹2 crore.
  • NBFC–Peer to Peer Lending Platform (NBFC-P2P): Non-banking institution carrying on business as an intermediary providing loan facilitation via an online medium. Minimum NOF: ₹2 crore.

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SMFCL as an NBFC-Infrastructure Finance Company

Sagarmala Finance Corporation Limited (SMFCL) is specifically established as an NBFC within the maritime sector, likely falling under the broader category of an Infrastructure Finance Company (IFC) due to its mandate for maritime infrastructure development.

• What is an NBFC-IFC: As defined, an IFC is a non-banking finance company that deploys at least 75% of its total assets towards infrastructure lending. They are crucial for channeling funds into long-term infrastructure projects. Minimum NOF for an NBFC-IFC is ₹300 crore.
• Need to Launch it:
  • Bridge Financing Gaps: SMFCL is launched to “bridge crucial financing gaps” in the maritime sector. The Indian maritime industry, encompassing ports, shipping, shipbuilding, and related services, often faces challenges in accessing adequate and tailored long-term finance due to the capital-intensive and long-gestation nature of projects.
  • Sector-Specific Solutions: It will offer “sector-specific financial solutions” to a diverse range of stakeholders including “port authorities, shipping companies, MSMEs, startups, and maritime educational institutions”.
  • Support Strategic Sectors: SMFCL will support critical strategic sectors such as “shipbuilding, renewable energy, cruise tourism, and maritime education,” reinforcing India’s vision to become a global maritime leader.
  • Mobilize Funds: The government aims to mobilize nearly ₹1.5 trillion for maritime financing between the Maritime Development Fund and SMFCL. This highlights the scale of investment required and SMFCL’s role in attracting and channeling it.

Port Readiness Index:

The Port Readiness Index is a newly released tool by the Ministry of Ports, Shipping and Waterways to evaluate the preparedness and strategic action areas for major ports across India.

• Purpose: It aims to identify specific areas for strategic action and improvement within port operations and infrastructure.
• Key Action Areas Identified: The index will help identify areas such as:
  • Land facilitation for green hydrogen production.
  • Demand stimulation.
  • Shared infrastructure investment.
  • International collaboration.
  • Proactive investment roles.
• Well-Positioned Ports: “Indian ports such as V O Chidambaranar Port, Paradip Port, Deendayal Port, Jawaharlal Nehru Port, Mumbai, and Cochin are particularly well-positioned to cater to the clean energy demands of East Asia and the European Union”.

Analysis of the Article: Decoding the Issue

The launch of SMFCL signifies a crucial strategic shift by the Indian government to inject dedicated and specialized financial support into its burgeoning maritime sector, aligning with its broader vision of becoming a global maritime power.

1. Strategic Transformation and Alignment with Vision 2047:

• Conversion of Existing PSU: SMFCL was formed by converting the existing Sagarmala Development Company Limited (a PSU) into an NBFC. This strategic re-positioning leverages an existing entity with domain knowledge.
• Alignment with Amrit Kaal Vision 2047: The move is designed to play a “transformative role in India’s maritime infrastructure development, aligned with the Amrit Kaal Vision 2047”. This indicates a long-term, ambitious strategic goal for the maritime sector.

2. Bridging Financial Gaps and Empowering Stakeholders:

• Fulfilling Industry Demand: The launch “has fulfilled a long-standing demand of the maritime industry in the country” for specialized financing.
• Tailored Financial Products: SMFCL will offer “tailored financial products—including short, medium, and long-term funding”. This flexibility is crucial for diverse projects within the sector.
• Support for Diverse Stakeholders: Its services are targeted at “port authorities, shipping companies, MSMEs, startups, and maritime educational institutions”. This broad coverage is essential for holistic sector development.

3. Enhancing Transparency and Ease of Doing Business:

• Standardized Scale of Rates (SOR) Template: In a move to address discrepancies in tariff regimes at major ports, the ministry released a “standardised Scale of Rates (SOR) template for all major ports to enhance transparency and ease of doing business”. This aims to bring uniformity and predictability for port users.

4. Strategic Focus Areas for Maritime Leadership:

• Green Energy Demands: The mention of key Indian ports being “well-positioned to cater to the clean energy demands of East Asia and the European Union” highlights a strategic focus on renewable energy and green hydrogen production within the maritime context. This aligns with global sustainability goals.
• Shipbuilding and Cruise Tourism: SMFCL’s expanded mandate includes supporting “shipbuilding, renewable energy, cruise tourism, and maritime education”. These are high-potential areas for economic growth and global positioning.

In conclusion, the establishment of SMFCL as a specialized NBFC reflects India’s proactive and targeted approach to accelerating maritime sector growth. By providing dedicated financial solutions, leveraging existing public sector entities, and implementing parallel reforms like the Port Readiness Index and standardized tariffs, India aims to unlock the sector’s full potential, bridge critical funding gaps, and solidify its position as a prominent global maritime player.

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