How to Calculate Net Owned Fund (NOF) for an NBFC

Owned Funds Minus Group Investments Above the Ten Per Cent Line

Two steps produce the figure, and the second carries the arithmetic that decides the result. Step one builds owned fund from the balance sheet: paid-up equity capital and free reserves, less accumulated losses, deferred revenue expenditure and other intangible assets. Step two reduces that result by the part of the company's group exposure sitting above a line drawn at ten per cent of step one.

Group exposure is two baskets read as one total. The first holds what the company has put into shares of its subsidiaries, of companies in the same group and of every other non-banking financial company. The second holds the book value of debentures, bonds, outstanding loans and advances made to those entities, and deposits placed with them. Only the amount by which the combined total crosses the ten per cent line comes off.

One date governs both steps, and the arithmetic links them. Because the line is a percentage of step one, an error in the additive half moves the allowance as well, so two errors compound instead of cancelling. Section 45-IA of the Reserve Bank of India Act 1934 frames this as a condition of carrying on the business, not only of obtaining a certificate of registration.

Building the Owned Funds Base From the Balance Sheet

The statute states the additive half narrowly. Its first limb is the aggregate of paid-up equity capital and free reserves as disclosed in the latest balance sheet. The Reserve Bank of India (Non-Banking Financial Companies - Prudential Norms on Capital Adequacy) Directions, 2025 widen that list for regulatory purposes. Owned fund there also takes in preference shares that must convert into equity, and the balance in the share premium account. Capital reserves representing surplus arising out of sale proceeds of an asset come in too.

Free reserves is the term doing the heavy lifting. Section 2(43) of the Companies Act 2013 treats a reserve as free only where it is available for distribution as dividend. Unrealised gains, notional gains and changes in an asset's carrying amount recognised in equity are all shut out. Whether a reserve is distributable is therefore the question, and which reserves may be distributed decides how much of the balance sheet reaches the base. Securities premium is handled separately again. Section 52 sends the premium to its own account, and the Act then applies the reduction of capital provisions to it as though it were capital.

Three items come off inside the same limb. An accumulated balance of loss, deferred revenue expenditure and other intangible assets are deducted before anything else happens. That matters, because the ten per cent allowance is measured on the result. A company that capitalises a large software build shrinks its base and its allowance in one move. How much of a capital raise actually reaches this base is a separate question with its own answer.

Deductions RBI Requires for Group and Subsidiary Exposure

Limb two of the Explanation reaches two different things, and it does not reach them equally. The share basket covers holdings in subsidiaries, in companies in the same group and in all other non-banking financial companies. That third item is the one readers miss. A stake in an unrelated finance company counts, because the concern is capital circulating inside the sector and not only inside the group.

The lending basket is drawn more tightly. It covers the book value of debentures, bonds, outstanding loans and advances made to subsidiaries and to companies in the same group, plus deposits placed with them. Hire-purchase and lease finance are named inside that list. Unrelated finance companies do not appear here at all. Lend to one and nothing is deducted; buy its shares and the holding enters the first basket.

The two baskets are then added and tested once. Ten per cent of owned fund is the allowance, and only the excess over it is removed, so a company whose entire group exposure sits inside the allowance loses nothing. Explanation II sends the words subsidiaries and companies in the same group to the Companies Act 1956 for their meaning. The Reserve Bank's own directions carry a separate definition of companies in the group. It is built on the subsidiary, associate and joint venture relationships in accounting standards, and on the promoter relationship in takeover regulation. The perimeter is therefore worth settling before the schedule is drawn.

Intangibles and Deferred Revenue Expenditure Knocked Off

Both of these sit inside the first limb rather than the second, and the placement changes their effect. Removing an intangible asset lowers owned fund, and because the allowance is a percentage of owned fund, it lowers the allowance too. A rupee of goodwill therefore costs the computation more than its own book value. Nothing in the statute lists what an intangible asset is, so the classification used in the accounts governs.

Deferred revenue expenditure is the older of the two ideas. It covers spending already incurred that a company chose to carry forward and write off across later years, and the statute deducts whatever balance is still carried. The line survives mainly where costs were capitalised on an earlier basis of accounting and have not yet been fully written off. Preliminary expenses and unamortised issue costs are the usual survivors.

The notes to the accounts are where the working gets checked. Guarantees given for a group company, undrawn commitments and contingent liabilities enter neither limb, since both work from amounts carried on the balance sheet itself. What the notes do carry is the relationship disclosure, and that is what a reviewer reads to test whether an investment or a loan was tagged to the right counterparty. Intangible assets under development sit on their own line, which is why a computation built only from the intangible assets line can miss them.

A Worked NOF Computation for a Small NBFC

Take a lending company with a single subsidiary and one investment outside the group. Its balance sheet shows paid-up equity capital of 30 crore rupees and compulsorily convertible preference shares of 5 crore rupees. Below those sit a securities premium balance of 12 crore rupees and free reserves of 6 crore rupees. Against them it carries an accumulated loss of 3 crore rupees, intangible assets of 2 crore rupees and deferred revenue expenditure of 50 lakh rupees.

Owned fund is the first four lines added and the last three taken away. Additions of 53 crore rupees less deductions of 5.5 crore rupees give an owned fund of 47.5 crore rupees. Ten per cent of that is 4.75 crore rupees, and that number is the allowance for everything in limb two.

Group exposure comes next. Shares in the wholly owned subsidiary stand at 3 crore rupees and shares in an unrelated finance company at 1.5 crore rupees. An inter-corporate deposit with a same-group company adds 2.5 crore rupees, and lease finance to the subsidiary adds 75 lakh rupees. The four add to 7.75 crore rupees. Subtract the allowance and 3 crore rupees is the excess.

Net owned fund is 47.5 crore rupees less 3 crore rupees, or 44.5 crore rupees. Two features of that result are worth noting. The unrelated finance company holding was deducted even though it sits outside the group, and the lease finance was deducted even though it is not a loan. Both are named in limb two, and both were caught only because the investment and loan schedules had been tagged by counterparty first.

Where the Computed Figure Is Reported

The figure travels to the Reserve Bank in the supervisory returns. The direction that governs filing is dated 27 February 2024 and fixes both the return set and the timelines. The statutory auditor's certificate return, DNBS10, is filed yearly against a reference date of 31 March by every NBFC and asset reconstruction company. Financial parameters run quarterly, in DNBS01 for the upper and middle layers and in DNBS02 for the base layer. DNBS03 carries prudential parameters including capital adequacy, and the returns are due within 21 days of the reference date.

A working paper file sits behind the return. The useful ones are a reserve-wise split showing which balances are distributable, the securities premium movement, and the investment schedule tagged by counterparty relationship. The loans and deposits ledger, filtered to subsidiaries and same-group companies, is the fourth. The tagging is the paper that matters, because limb two turns on who the counterparty is rather than on what the instrument is. Owned fund is also where the capital a supervisor risk weights begins.

Consistency across years is the last thing to hold. Moving a counterparty in or out of the perimeter changes the deduction with no transaction taking place. The basis on which the perimeter was drawn therefore has to be recorded and repeated. Where the same accounts also have to answer the measure company law asks for, the two computations are kept as separate schedules.

Run Your Balance Sheet Through the NOF Calculator

The inputs are short. Owned fund goes in as one figure or as its component lines, and group exposure goes in as a single total covering both baskets. Anyone who already knows how to calculate net owned fund by hand can check the output in a minute, which is the point of learning the method first.

The output worth reading is the allowance. Entering the figures line by line shows the ten per cent line as a number rather than a rule, and shows how much of the group exposure fell inside it. A company sitting near that line can then see what a fresh intra-group advance would cost before it is made.

A computed figure is not yet a stated one. The return, the auditor and the acceptor all work from a statement naming a date and a basis. Where that figure is certified is a separate question from how it was arrived at.