MUMBAI, July 6: The Reserve Bank of India's (RBI) decision to make registration mandatory for finance companies before July 8, 1997 has caused confusion in the corporate world about the number of investment companies floated by them for investment and cross-holding in various group companies.

Corporate houses in the country have floated a number of such companies with small equity bases for this purpose taking the total number of such letter box firms to several thousands.

Sources say that a leading industrial house has got around 200 finance companies which were engaged in price rigging and other market operations on behalf of the group companies. CRB group itself had floated about 50 companies, most of them being in the finance business. Same is the case with other groups.``All major industrial groups have got at least a dozen finance companies. Some of them are just holding companies which are neither accepting any public deposit nor doing lelasing or hire purchase business. Now they will have to get a registration with the RBI or wind up their operation,'' sources said.

After the CRB scam the RBI has advised all the non-banking finance companies (NBFCs) to apply for compulsory registration on or before July 8, 1997. Out of more than 40,000 finance companies, only around 800 are currently registered with RBI. Therefore NBFCs including residuary NBFCs are advised to submit their anual returns for scrutiny. If they fail to apply for a certificate of registration from the RBI, they will become ineligible to carry on business including acceptance of deposits. Those who do business in contravention are liable to five year imprisonment and Rs 5 lakh fine. ``The RBI has got less than 1,000 applications and others are waiting for the last day on the hope that there will be some concession to investment companies,'' sources said.

The RBI has stipulated that finance companies which want to continue in the business submit a three year business plan to the central bank. ``These companies don't have any other business except acting as holding companies or as means to divert funds from the group companies to the promoters. What business plan they can submit to the RBI,'' they said. The new bill introduced in the Parliament to regulate NBFCs also stipulated certin minimum net owned funds, requirements of creation of reserve fund and transfer of certain per centage of profit every year to the fund and prescription for liquidity requirement. When the Association of Leasing and Financial Services Companies (ALFS), the representative body of the finance companies, tried to compile an year book of the finance companies, many of these investment companies did not submit details about their operation or shareholding pattern to the ALFS. ``While about 78 listed finance companies out of more than 1,000 listed finance companies disclosed details about their operation only 76 unlisted companies came forward with these details,'' ALFS sources said. Many of the companies did not disclose their date of establishment, number of employees or customers or a brief history as per the ALFS request.It has been a practice among the corporate houses to float investment companies to do stock market operations without their direct involvement. The seriousness of the problem can be gauged from the fact that various industry associations like Assocham, the Indian Merchants Chamber and ALFS have already made representation to the RBI as part of their lobbying to keep away such companies from compulsory registration.

Now these companies are in a dilemma as to whether they should continue in business after getting registration with the RBI or to wind up their operations. The investment companies have been used to deal in the shares of the group companies as insider trading is banned in the stock exchanges.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.