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.
The proposed amendments would empower RBI which shall include:
- Remove its director(s),
- Amalgamate or reconstruct or split an NBFC in public interest or for financial stability,
- Remove and debar auditors,
- Direct the inspection and audit of any group company of an NBFC,
- Raise the Net Owned Fund requirement for NBFCs, and
- Impose higher penalties in case of legal contraventions
Overview of the brief scope of the powers of RBI.
Control over Management:
- Two new sections 45ID and 45IE has been inserted to control the management of an NBFC.
- RBI 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 appoint the director for a period of maximum 3 years at a time or lower a RBI requires. However, such time period may be renewed.
- RBI can take charge for a total period of 5 years and may appoint an administrator.
- The administrator appointed will be carrying out all powers, duties and functions of the board.
- However, such power can be exercisable by RBI itself or through a resolution of the shareholders.
Power to remove/debar auditors:
As per section 45MA, 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.
- A news section 45MMA has been inserted in which RBI has the power to remove or debar an auditor for a period of 3 years if RBI satisfies that such auditor has failed to comply with its directions section 45MA.
- 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).
Amalgamation, Reconstruction or Splitting of NBFC:
- A new section 45MBA has been inserted to schemes for amalgamation, reconstruction or splitting of the NBFC into viable and non-viable businesses.
- This section will help to preserve the continuity of the activities of the NBFC that are critical to the functioning of the financial system.
- RBI can set up temporary institutions or bridge institutions for such transition and preservation.
- The scheme may also include:
- Terms to reduce the pay and allowance of the senior managerial personnel; 2. 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:
- A new section 45NAA has been inserted which gives additional power to RBI as 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 shall includes
(i) subsidiary – parent;
(ii) promoter- promote;
(iii) joint venture;
(v) related party;
(vi) common brand name; or
(vii) investment in 20% or more equity.
The government’s intention to have RBI emerges as the primary regulator in the affairs of the NBFC in crisis is clear. However, the powers proposed to be given are wide.