RBI Act amendment for NBFCs
August 9, 2019
Chapter VI of the Finance (No.2) Act 2019 provides for amendments inter alia to the RBI Act 1934 with respect to Non-Banking Finance Companies (NBFCs). In addition to increasing the limit for their net owned funds, the amendments empower the RBI to remove directors, supersede the Board, take action against auditors and frame schemes of arrangement. These amendments have been introduced in view of the issues arising from the ILFS imbroglio. The amendments have taken effect from 9 August 2019.
The key amendments to the RBI Act 1934 are as follows:
- Limit of net owned funds enhanced to Rs. 100 crores from the existing limit of Rs. 2 crores. Different amounts of net owned funds may be notified for different categories of NBFCs [Amendment to section 45-IA];
- Power to remove Directors [new section 41-D] : The Bank may, if it is satisfied in the public interest or to prevent the affairs of an NBFC being conducted in a manner detrimental to the depositors or creditors, or for proper management of the company, remove from office a director of such company. Government- owned NBFCs have been kept out of the purview of this power. Such director will be given a reasonable opportunity of making a representation. Pending consideration of such representation, if the Bank is of the opinion that a delay will adversely impact the company, it may, by order, direct the director to cease to act as such and debar him from taking part in the management of any other NBFC, whether directly or indirectly, for such period not exceeding five years at a time. If a person is appointed in place of the removed director, he shall hold office for a period of up to three years or such further period not exceeding three years at a time. Such person will not incur any obligation or liability by reason of having acted in good faith in carrying out his duties as director. A director who has been removed from office, as above, shall, notwithstanding any other law or contract, memorandum or articles of association, not be entitled to claim any compensation for loss or termination from office.
- Power to order supersession of the Board of the NBFC (other than Government company) (new section 45 -1E) : The Bank may for the same reasons as for the removal of a director from office, supersede the Board of directors of a company for a period of up to five years, extendable for up to a period of five years. It may then appoint an Administrator for a certain period and issue directions to the Administrator which he is bound to follow. The chairman, managing director, other directors will vacate office from the date of supersession and the Administrator will discharge the duties of the Board, with the assistance of a committee of experts, until a new Board is reconstituted.
- Power to take action against auditors (new section 45MAA): Where an auditor fails to comply with any direction or order issued by the Bank under section 45MA, the Bank may remove or debar the auditor from exercising his duties as auditor from any Bank regulated entities, for a maximum period of three years at a time.
- Resolution of NBFC : After inspecting the books of accounts of the NBFC, the Bank may, in the public interest or in the interest of financial stability, frame schemes of amalgamation, reconstruction or splitting up of the viable and non-viable businesses of the NBFC to preserve the continuity of the NBFC. For the latter, it may establish “Bridge Institutions” or temporary institutional arrangements. The schemes referred to above may provide for reduction of pay and allowances of the CEO, MD, Chairman or any senior management officer of the NBFC and cancellation of shares held by them or their relatives or sale of assets of the NBFC. None of these persons will be entitled to any compensation for loss incurred.
- Power in respect of group companies (new section 45NAA): The Bank can direct the NBFC to annex to its financial statement any information or statements related to the business of any of its group companies. Group companies means two or more parties related to each other through a subsidiary, joint venture, associate, promoter-promotee, related party, common brand name and investment in equity shares of 20% or more in the entity.
- Enhancement of penalties and fines for defaults committed by NBFCs : Penalties and fines for various defaults committed by NBFCs and auditors under the Act have been significantly enhanced.
SAM & Co comment
The amendments appear to pave the 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. 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 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 and its impact is something that time will tell.