Opinion

NBFCs under scanner

Shruti Kinra | Updated on August 29, 2019

The new Finance Bill gives the RBI greater control

The Finance (No.2) Bill, 2019 has proposed various amendments to the Reserve Bank of India Act, 1934 with a view to enhance the regulatory powers of the Reserve Bank of India in relation to non-banking financial companies (NBFCs). Once the Finance Bill (No. 2), 2019 is approved, these amendments will come into force on such date as the Central government may appoint.

The amendments appear to pave way for a ‘RBI 2.0’, with added powers and functions for the RBI. NBFCs have now been brought within greater purview and scrutiny of the RBI. Some key takeaways from the amendments are:

Increase in net owned fund: The upper limit of the net owned fund required to be maintained by an NBFC has been increased from ₹2 crore to ₹100 crore. Further, the RBI has been empowered to notify different amounts of net owned fund for different categories of NBFCs.

Board of directors: Sections 45-ID and 45-IE inserted in the RBI Act empower the RBI to remove a director of an NBFC as well as supersede the board of directors of an NBFC, if it either is satisfied to be in the public interest, to prevent the affairs of an NBFC from being conducted in a manner detrimental to the depositors or creditors, for financial stability or to secure proper management of the NBFC. Government-owned NBFCs have been kept out of the purview of this power.

Taking action against auditors: Section 45MMA has provided the RBI with an explicit power to remove or debar an auditor when he fails to comply with any direction or order by the RBI under Section 45MA of the RBI Act. The auditor shall be refrained from exercising his duties for any RBI-regulated entity for a maximum period of three years at a time.

Resolution of NBFCs: The newly embedded Section 45MBA empowers the RBI to frame schemes to amalgamate, reconstruct, or split NBFCs into different units or institutions, and for this purpose, establish institutions called ‘bridge institutions’, to preserve the continuity of the activities of the NBFCs. Moreover, the RBI may reduce the pay and allowances of CEOs, MDs, chairmen or any senior management officers of the NBFC, cancel the shares held by them or their relatives in the NBFC, or sell the assets of the NBFC. The losses incurred by these persons shall not be entitled for any compensation.

Group companies: The RBI, under the newly added Section 45NAA, can now direct NBFCs to annex to their financial statements or furnish separately, any information or statements related to the business or affairs of any of their group companies. The term ‘group company’ for the purpose of this Section means an arrangement involving two or more entities related to each other through the arrangement of a subsidiary-parent, joint venture, associate, promoter-promotee, related party, common brand name or one entity holding twenty per cent equity investment in the other entity. The RBI may even cause an inspection or audit to be made of any group company of an NBFC and its books of account.

The vital role of NBFCs as the ‘shadow banking sector’ has compelled the government to strengthen and enhance the regulatory framework, which is the need of the hour.

It is expected that the above amendments will have a significant impact on NBFCs, who will need to revisit their overall regime vis-a-vis RBI. The extent of enforcement and scrutiny by RBI will become certain upon the amendments becoming effective, and its impact is something that time will tell.

The writer is Partner, Shardul Amarchand Mangaldas & Co.

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Published on August 29, 2019

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