The Hindu Business Line : Due diligence on major shareholders of NBFCs likely

Fangs proposed
Obtain names and holdings of significant shareholders of NBFCs & those exerting controlling influence
Recommend, reject and rescind appointment of auditors

K.R. Srivats

New Delhi, Oct. 12 The Reserve Bank of India should explore the option of having a say on the suitability of “major shareholders” in a non-banking financial company (NBFC).

This is likely to be suggested by an advisory panel on financial regulation and supervision, which was set up by the RBI-Government-appointed committee on financial sector assessment.

Eyes on NBFCs

At present, the suitability of major shareholders and senior management in NBFCs is not subjected to detailed scrutiny.

Due diligence is done only in respect of the directors.

The advisory panel was assigned the task of summary assessment of adherence to Basel core principles by financial sector including commercial banks and NBFCs.

Study out soon

This advisory panel, whose assessment covered only deposit taking NBFCs and non-deposit taking systemically important NBFCs, will submit its report in the next fortnight, sources close to the developments said.

The panel has concluded that such NBFCs are compliant on capital adequacy and largely compliant on risk management process, credit risk and provisioning in case of problem assets.

However, they were non-compliant on market risk, operational risk and interest rate risk in banking book.

They were also non-compliant on consolidated supervision and home-host relationships (between domestic and foreign regulators).

Controlling interests

The panel is also set to recommend that RBI should explore the option of obtaining information on names and holdings of significant shareholders of NBFCs who exert controlling influence.

This could be done periodically through offsite returns, according to the panel.

Currently, the RBI does not obtain through periodic reporting or on-site examinations the names and holdings of all significant shareholders or those exerting a controlling influence, including the identities of beneficial owners of shares being held by nominees.

However, details of “substantial interest” of promoters, chairman, managing directors and CEO are part of the certificate of registration application form that is obtained by RBI.

Recommendation

The panel is also likely to make a case for empowering the RBI to recommend, reject and rescind the appointment of auditors.

For this purpose, the Institute of Chartered Accountants of India may also be consulted, the panel is likely to recommend.

Currently, RBI does not have the power to recommend, reject, rescind the appointment of auditors.