What did the Finance Bill have to say about the NBFC crisis?

All Non-Banking Financial Companies (NBFC) are regulated and supervised by the Reserve Bank of India (RBI). The Reserve Bank of India Act, 1934 vests certain powers in it under the provisions contained in Chapter IIIB. In the fag end of June, the RBI proposed a few changes that allow it to exercise greater regulatory and supervisory powers over non-banks.

The demand for these regulatory control was prompted post-RBI’s own observations in the June 2019 edition of the Financial Stability Report (FSR). The report cautioned that insolvency of any large NBFC or housing finance company might lead to other problems. It further added the NBFC crisis might give rise to issues that may be as debilitating as those caused by the big banks.

While Nirmala Sitaraman did not talk about the amendments to the RBI act during the budget, the finance bill had some sections tucked away that grant higher regulatory control to RBI over the NBFCs.

Net owned funds:

Section 45-IA of the RBI Act, 1934 proposes to increase the requirements for registration and net owned fund for non-banking financial companies that intend to carry on business.

The government seeks to raise the maximum threshold for NBFCs from two hundred lakh rupees to a hundred crore rupees. The proposed increase to the threshold is to restrict the deposit-taking as well as the non-deposit taking NBFCs.

Also Read: Changes in Corporate Tax in India Bring in Disappointment

Addition of new sections 45-ID and 45-IE:

The Finance Bill also debuted section 45-ID and 45-IE, both of which help RBI reign in the NBFCs by granting the central bank sweeping regulatory powers.

Powers to remove directors from office:

The newly inserted section 45-ID now empowers the RBI to remove a director of an NBFC if his actions do not lie in the general good of the debtors or creditors. This section was introduced bearing public interest in mind and aims to prevent a non-banking financial company to function in a manner that may be detrimental to financial stability. The RBI may do so by means of an order and the reason for removal may be recorded.

Supersession of Board of Directors of NBFCs:

If the apex bank is satisfied that an NBFCs actions may be detrimental to the interest of the public, it may supersede or replace the Board of Directors of such a company for a maximum period of five years.

Board of Directors is to be replaced by an Administrator and if need be additional members appointed by the RBI.

Power to take actions against auditors:

Under the newly injected 45MA, if an auditor fails to comply with any direction given or order made by the Central Bank, it may remove or debar the auditor. The ban will be for a maximum period of three years.

Resolution of NBFCs:

Under newly inserted section 45MBA, RBI is empowered to frame schemes to amalgamate an NBFC with any other NBFC or reconstruct it, or split the NBFC into different units. To ensure efficient resolutions, RBI can now establish bridge institutions which are temporary institutional arrangements for the transition and preservation.

In such schemes, RBI can also reduce the pay and allowances of CEO, MD, Chairman or other officers of an NBFC and can even ‘cancel’ all or some shares held by them or their relatives. This provision leaves unanswered questions, which are likely to be raised in lawsuits, as and when these provisions are enforced.

Power with respect to group companies:

Section 45NAA is another proposed addition; this allows the RBI to scrutinise any NBFCs financial statements or any information or documentation about the business or affairs of any group company or non-banking financial company

The Central Bank may also, at any time, inspect or audit to be made of any group company of a non-banking financial company and its books of account.