RBI reins in NBFC sector post Budget 2019, gets powers over boards

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RBI reins in NBFC sector post Budget 2019, gets powers over boards

The government's intention to have RBI emerge as the primary regulator in the affairs of the NBFC in crisis is clear. However, the powers proposed to be given are wide

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With the non-banking financial company (NBFC) sector having come under serious financial pressure over the past few quarters, the government has come up with a proposal for laws and regulations that give the regulator more control. Consequently, the Finance Bill, 2019 (Finance Bill) proposes to amend the Reserve Bank of India Act, 1934 (RBI Act), to give the RBI a bigger role in the management of NBFCs in adverse situations.

Control over Management: The RBI has been given two ways, under newly inserted sections 45-ID and 45-IE, to control the management of an NBFC. It can either replace directors of a non-government NBFC or supersede the board of the NBFC. In case of the removal of director, the RBI can go on to appoint a person as a director in place of the removed director who shall hold office for as long as the RBI requires, subject to 3 years at a time, which may be renewed. Such director shall also be saved from being held liable for anything done as a director in good faith in the execution of his/her duties.

With respect to superseding the board of the NBFC, the RBI can take charge for a total period of 5 years and may appoint an administrator for such period as it may deem fit. The chairman, managing and other directors are to vacate their office. The administrator appointed will be carrying out all powers, duties and functions of the board either exercisable by itself or through a resolution of the shareholders.

The administrator shall be assisted by a committee of 3 or more members, appointed by the RBI, knowledgeable in law, accountancy, finance, banking or administration.

Power to remove/debar auditors: Currently, under section 45MA the RBI has powers to issue directions to the auditors of an NBFC in relation to balance-sheet, profit and loss account, disclosure of liabilities in the books of accounts or any matter relating thereto.

The RBI can also order a special audit of the accounts of an NBFC in relation to any transaction or class of transactions for a given period, for which it can appoint an auditor(s). New section 45MAA inserted gives the RBI the power to remove or debar an auditor from exercising duties as an auditor for an RBI regulated entity for a period of 3 years if the RBI is satisfied that such auditor has failed to comply with its directions section 45MA.

Amalgamation, Reconstruction or Splitting of NBFC: The RBI has been empowered under newly inserted section 45MBA to frame schemes for amalgamation, reconstruction or splitting of the NBFC into viable and non-viable businesses to preserve the continuity of the activities of the NBFC that are critical to the functioning of the financial system.

The RBI can set up temporary institutions or bridge institutions for such transition and preservation. The scheme framed by the RBI may also include terms to reduce the pay and allowance of the senior managerial personnel; cancel shares of the NBFC held by the senior managerial personnel and sale of the assets of the NBFC.

Inspection and Furnishing of Information of Group Companies: The RBI will now have additional power, under new section 45NAA, to direct an NBFC to furnish statements and information relating to its group company(ies) and order inspection or audit for the same. The group company concept is wide as it could be a company related to the NBFC through any of these arrangements being: (i) subsidiary – parent; (ii) promoter- promote; (iii) joint venture; (iv) associate; (v) related party; (vi) common brand name; or (vii) investment in 20% or more equity. The government’s intention to have RBI emerge as the primary regulator in the affairs of the NBFC in crisis is clear. However, the powers proposed to be given are wide.

Guidelines may be required to be framed to ensure that the powers are not exercised unless necessary. For instance, provisions pertaining to removal and, consequently, the appointment of directors and administrator, in case of emergency situations, mirror the power given to the Insurance Regulatory and Developmental Authority of India (IRDAI).

Even the Securities and Exchange Board of India (SEBI) has powers to secure management of intermediaries, stock exchanges and depositories under the relevant statutes. However, the powers have been made accountable by making such decisions appealable to the Securities Appellate Tribunal. In this context, the amendments to the RBI Act may require further controls. Additionally, the power to debar auditors could also face practical challenges. The Companies Act, 2013 constitutes the National Financial Reporting Authority (NFRA) which was formed for regulating auditors.

The NFRA has been given the power to inter alia debar a member or a firm from engagement as a member of the Institute of Chartered Accountant of India for a minimum period of 6 months up to 10 years for professional or other misconduct. Thus, a clarification setting the boundaries clear in terms of this conflict may be necessary. Having a check over powers is important. Thus, over the course of time, we can hope for suitable clarifications and amendments to streamline the already proposed amendments, and subsequently for the NBFC sector to bounce back.

Source- Business Today.