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Guidelines for Extending Equity Support to Housing Finance Companies


The National Housing Bank (NHB) issues the following guidelines to Housing Finance Companies (HFCs) which are housing finance institutions within the meaning of clause (d) of Section 2 of the National Housing Bank Act, 1987 for their growth on sound lines and to be healthy, viable and cost effective.

These guidelines are applicable to such of those HFCs who desire to avail of equity participation from NHB.

These guidelines shall be deemed to have come into effect from October 14, 2004.


1. A HFC who desires to avail of equity participation from NHB under the scheme of NHB, shall among others:

  • be a public limited company.
  • Provide long term finance for construction or purchase of houses in India for residential purposes.
  • Invest 75% of “capital employed” by way of long term finance for housing.

2. Explanation for the purpose of these guidelines, “capital employed” means and includes:

  • paid up capital of the company and its free reserves less intangibles;
  • long term borrowings;
  • deposits with maturity period of five years and above collected from the public and others, excluding the amount required to be kept or maintained in specified assets as stipulated in Section 29B of the National Housing Act, 1987, as amended from time to time.

2.1 HFCs should have a minimum paid up capital of not less than Rupees ten crores inclusive of equity support of NHB or such other amount as may be stipulated from time to time by NHB and/or the Securities and Exchange Board of India (SEBI) for listing shares on recognized stock exchanges, whichever is higher. Minimum promoters’ contribution in the share capital will always be the same as applicable to a company making an issue to the public.

2.2 NHB’s participation in equity shall be at par and restricted to 25% of the paid up capital of the HFC. However, where the HFC is promoted with the main object of catering to the home loan requirements of EWS/LIG/Rural segments of the Society, NHB’s participation can be up to 50% of the paid up capital.

2.3 In the case of rights issues, NHB can consider subscription even at premium.

2.4 HFCs should conform and/or comply with all other rules, regulations, instructions, guidelines or orders issued by NHB or any other authority empowered in that behalf.

2.5 The promoters of the HFCs seeking equity support from NHB shall have to execute an undertaking in favour of NHB to buy-back the shares held by NHB in the HFC in case its shares are not listed on a recognized stock exchange in India. The shares to be bought back shall be valued in accordance with the Method of Valuation given in Para 8.2. of these Guidelines.

2.6 With a view to enlarge equity base as well as public participation in housing finance activity, it is desirable that HFCs get their shares listed on recognized stock exchanges (s) in India at an early date. Where NHB has participated in the equity share capital of a HFC, it may also advise the HFC to get its shares listed on a recognized stock exchange and such company shall comply with the said requirement. Where HFC did not get its share listed even after being so advised by NHB, NHB may invoke the buy-back undertaking given to it by its promoters.


3. HFCs desirous of financial support from NHB by way of equity participation shall submit their applications in such form and furnish such information/statements etc , as may be required by NHB for its consideration.


4. HFC’s investment in land and building shall not exceed the ceiling as prescribed in the Housing Finance Companies (NHB) Directions, 2001 as amended from time to time.


5. NHB shall have the right to appoint two Directors on the Board of Directors of all HFCs having equity participation from NHB. However, in case of a HFC having equity participation from a bank/financial institution/Government and having on its Board of Directors two persons as nominee directors of such bank/financial institution/Government, NHB shall appoint only one Director as its nominee on the Board of such HFC. Articles of Association of HFCs should contain necessary provision for appointment of nominee directors. Appointment of Chief Executives of HFCs should be made in consultation with the NHB.


6. NHB may stipulate minimum equity grading of a HFC where deemed appropriate.


7. HFCs shall enter into a shareholder’s agreement with the NHB containing covenants regarding substantive issues like undertaking of new business, amalgamation, mergers, takeovers, floatation of subsidiaries, investment in subsidiaries, appointment of nominee directors etc. The covenants will also provide that if at any time in future, the promoters want to buy the shareholding of NHB, they should offer a price which is not less than the value arrived at as mentioned in paragraph 8.2 of these Guidelines. NHB may also disinvest its shareholding in entirety or part thereof in terms of paragraph 8.1 at a price as determined in terms of paragraph 8.2 of these Guidelines.


8.1 NHB may disinvest its equity share holding in housing finance companies in entirety or part thereof after the expiry of a period of Five Years from the date of its subscription or such early time as NHB may deem fit.

8.2 The disinvestment of the equity share holding of NHB shall be at a price not less than the value to be determined as per the methodology indicated below:

Method of Valuation of shares:

The value of the share shall be determined by taking the average of the values of the share based on the following three methods:

  • Valuation of shares based on Profit Earning Capacity Value (PECV) method. Under PECV method, weighed average of profit after tax for the last three years is divided by the no. of equity shares and is capitalized at certain rate. Accordingly,

Value of an equity = Weighed PAT for the last 3 years/

(No. of Equity Shares x Capitalization Rate)

Weights to be used may be 3,2,1 (from current year to previous years, in that order). The capitalization rate will be decided from time to time depending upon the market conditions at the time of review of Equity Participation Policy every year. For the current year, the same shall be 10%.

  • Valuation of shares based on P/E multiple method: Under this method, value of a share is the product of weighted EPS for the last three years and P/E multiple. P/E multiple of the housing finance industry may be estimated on the basis of average market price and average EPS of listed HFCs as per the published information (Newspapers/Financial Magazines) as available at the time of disinvestment.

Weights to be used may be 3,2,1 (from current year to previous years, in that order.

  • Net asset value/intrinsic value of shares : Uunder this method, value of a share shall be determined based on the weighted average of the NAVs for the last three years. Weights to be used may be 3,2,1 (from current year to previous years, in that order).

Mean Value of the Share – (Value based on PECV+Value based on P/E Multiple+NAV)/3.


9. The participation in equity by NHB shall be at its sole discretion and shall not be claimed as a matter of right.

10. The above guidelines are in supercession of the Guidelines issued by NHB on March 01, 2003 any act or deed done, action taken, refinance or other facilities extended thereunder, shall continue to be governed by said guidelines as if these guidelines had not been superceded.