RBI makes 1000s of companies anxious by “Are you an unregistered NBFC?” notices

Over last week, Reserve Bank of India has sent notices to thousands –
tens of thousands perhaps – of companies asking them whether they are NBFCs.
And, if yes, why they have not registered.
This is worrying because if a Company is an NBFC and has not registered,
it entails serious consequences for the Company and its concerned
directors/officers. For example, the law provides for minimum and mandatory
punishment of one year for non-registration as NBFC.
The other thing is that the definition of NBFC itself is confusing and
contradictory. On one hand there is a qualitative definition that treats the
principal business as the determining factor whether the Company is an NBFC. On
other hand, in certain circulars/press note, Reserve Bank of India has provided
for quantitative method/formula for determining what is an NBFC. The nature of
activities included as finance activities is also broad but subject to
different interpretation. Even relatively minor terms like “financial assets”
are subject to varying interpretations. For example, is fixed deposit in bank a
“financial asset”?
It does not help that Reserve Bank of India has expressly declared that
it is the sole and final judge (subject to “consultation with the Central
Government”) to decide whether a Company is an NBFC or not. It also does that
help that there is no appellate tribunal to appeal against decisions of Reserve
Bank of India.
Further, even the Reserve Bank of India and law makers are sending mixed
signals. In perhaps unduly haste, the law makers made a drastic and unduly
broad law in 1997. It required any and every company engaged in specified
finance activities to register as NBFC first even if it intended to use own
funds for its business and not accept any public deposits. There is no minimum
size of companies that are exempt from registration. In fact, there is a
minimum entry barrier of Rs. 2 crores net owned funds for registration. Hence,
even the smallest and largest of companies are subject to registration. The
registration process is not a simple process of filing some documents. It is a
prolonged affair involving detailed scrutiny of antecedents even for small
companies operating with own funds. Several times initiatives were taken to
make these absurdly broad provisions narrow. About two years back, a fairly
large category of companies – Core Investment Companies – were exempted from
registration but subject to certain restrictions and requirements. Further,
just last year, an expert Committee recommended that companies below certain
size (Rs. 1000 crores of assets in some cases) should not be required to be
registered. That would have excluded most medium sized and small companies.
Indeed a few months back, Reserve Bank of India even issued draft guidelines proposing
to give effect to this, though final guidelines have not been issued.
And now these notices. The process of responding and disposal will be
prolonged and time consuming for the companies, their auditors and of course
the Reserve Bank of India itself. As stated above, determining whether a
Company is an NBFC or not is subject to qualitative and/or quantitative
There are other concerns too. The consequences of non-registration are
not just the stringent punishment of imprisonment for non-registration and fine.
The question is what would happen of consequential non-compliances. A
registered NBFC is required to follow several directions, particularly relating
to Prudential Norms. It is possible that these would not have been followed.
The onus of reporting whether a Company is NBFC or not is on their
auditors too by specific Directions addressed to them. Non-compliance by them would
be subject to fine, in some cases prosecution and also reference to the
Institute of Chartered Accountants of India.
It is possible that one reason for this step is the recent uncovering of
numerous companies in West Bengal and elsewhere having raised thousands of
crores from the public, a large part of which may be lost.

The coming days would
thus be anxious days for these companies – and others who have not yet received
such notices.

About the author

CA Jayant Thakur

1 comment

  • WPRT to, besides others, the contents of the third and fourth paragraphs from the top>
    Begging pardon of a great thinker and humanist par excellence of our times, though taking not entirely out of context, to put own reaction in his illuminating words:
    <“… there are two defects in our national character- lack of a sense of fairness, and lack of a sense of moderation..”
    “…While it is true that no one is above the law, it is equally true that so long as our Constitution lasts, everyone is above state terrorism….”
    (- No need to highlight, that, in this context, reference to “the law” can only be to the well thought out legislation, after sufficiently adequate home work, – most certainly, not any rule of law framed and brought in on the drop of a hat.)
    It calls for a serious and insightful deliberation, “ …as to how far the senseless fiscal and economic policies “ thrust upon the nation by our men in power themselves have “been responsible for the degradation in national character….”
    “In our desire to bring about a total change in the mentality of the GOVERNED, we must guard against the dangers of introducing the valueless values of a police state. Let us never forget that descent into a police state is deceptively easy. Excesses by the state can easily be counterproductive. They can destroy the PEOPLE’s morale which is a valuable but delicate national asset and which is prerequisite for a LEGAL system based on voluntary compliance…”>
    Last not but not least, it calls for a special focus, a ridiculously dangerous trend, fundamentally harmful to the national economy, has crept in recent decades ; in that, every bureaucrat entrusted with an authority but limited to his own regime, especially a regulatory authority such as RBI and SEBI, has been acting in excess of the powers vested, by resorting to ‘legislating’, thereby far transgressing the limit, express or implied by the statute under which it has come to be constituted.
    (Recommended to read and share, before anymore decade passes by, the noble thoughts for useful guidance, in the published speeches and writings of late N A Palkhivala – SOURCE: WE, the Nation THE LOST DECADES )

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