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.
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.
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”?
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.
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.
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
criteria.
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
criteria.
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.
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.
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.
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.