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Amendment in RBI Act: What is there for NBFCs?

Tanya Verma

| Updated: Jul 26, 2019 | Category: NBFC

Amendment in RBI Act

Recently, amendments in the RBI Act were done in the Finance {No.2} Bill, 2019. It was passed by Lok Sabha on 18th July 2019. The Finance {No.2} Bill, 2019 also include amendments of numerous other acts. However, in this blog, we are going to cover the Amendment in RBI Act, 1934 in relation to a non-banking financial company.

Amendment in The RBI Act in relation to NBFCs: Detailed Overview

Here we present you Clause wise detailed overview of the amendments in the RBI Act in relation to the NBFC Sector.

Insertion of New Sections

New sections i.e. Section45-ID & Section 45-IE is added in this act also referred to as the Principal Act after Section 45-IC.

  • Section45-ID

The Section45-ID specifies the following;

Sub-Section 1: This subsection specifies that the RBI holds the power to remove directors from any Non-Banking Financial Company. If the Bank is satisfied that the company is not working in public interest or is performing activities detrimental to the interest of creditor or depositor, or for securing the proper management of the company. The bank has the power to remove the director from the office of such company by ordering and providing the reasons to do so in writing. However, this rule is not applicable to Government-owned NBFC. This will be effective after the rules of this amendment have come into force in the Official Gazette. 

Sub-Section 2: The concerned director cannot defy the order unless he is given a reasonable opportunity to do so. And the director which is removed from office by the order of the Bank will not be allowed to;

  • Act as the director of such a company
  • Involve in the management of the company directly or indirectly

Sub-Section 3: The director against which any such order is passed will not be allowed to Act as the director and/ or Involve in the management of the company in any way. The order will be effective for the director of such a company for a period, not more than five years.

Sub-Section 4: The bank will appoint a director in such a company after the removal of the previous director by order in writing.

Sub-Section 5: The appointed director will:-

  1. hold the office for a period not exceeding three years
  2. not cause any liability/obligation neglecting the good reason he was appointed in the company

Sub-Section6: The director that is removed for the office by virtue of such order of the Bank will not receive any compensation in any kind.

Also, Read: Complete Story Behind Non Banking Financial Institutions Registration across India.

  • Section45-IE

The Section45-IE specifies the following;

Sub-Section 1: This Sub-Section specifies that the RBI holds the power to remove directors from any Non-Banking Financial Company. If the Bank is satisfied that the company is not working in public interest or is performing activities detrimental to the interest of creditor or depositor, or for securing the proper management of the company. The bank has the power to supersede the Board of Directors of such company for a period, not more than five years.

Sub-Section 2: The bank will appoint a suitable person as the Administrator for the specified period in such company.

Sub-Section 3: The appointed Administrator is bound to obey any directions issued by the Bank.

Sub-Section 4: After making the order for Suppression of the Board of Directors the following has to be done in the NBFC:-

  1. The chairman, managing director, and other directors must vacate the office
  2. All the official power, functions, duties, etc exercised by the company officials will be carried out by the Administrator. This will be effective until the board of Directors of that NBFC is reconstituted.

Sub-Section 5:

  1. The Bank may appoint a committee of three or more member having the relevant knowledge to assist the Administrator.
  2. The committee should conduct a meeting to observe the rules prescribed by the bank in the company.

Sub-Section 6: The salaries of the Administrator and the committee members will be paid by the concerned NBFC.

Sub-Section 7: The Administrator will facilitate reconstitution of the Board of Directors on or before the suppression under Sub-Section1.

Sub-Section 8: The concerned NBFC will not be able to demand any compensation for loss or termination of office under any law.

Sub-Section 9: The Administrator has to immediately vacate the office after the reconstitution of the Board of Directors of such company.

Insertion of New Section – 45 MAA

This section gives the Bank the power to take action against the auditor. This section specifies that the Bank can remove or debar the auditor from performing his duties if he fails to comply with any rule as specified by the Bank. Furthermore, he will be liable for this punishment for a period of up to three years.

Note- The term ‘Bank’ used in this article means the Reserve Bank of India.

Insertion of New Section – 45 MBA

A new section i.e. Section 45 MBA is added after Section 45 MB in the Principal Act and it will specify the following;

Sub-Section 1:  The Bank inspects the Book of Accounts of the company. If the Bank considers it necessary in the interest of the public or for improving financial stability the Bank may perform one or more of the following actions;

  1. Amalgamate the NBFC with any other non-banking institution
  2. Reconstruct the NBFC, or,
  3. Split the NBFC into different units or institute

Sub-Section 2: Without harming the foregoing provisions the Sub-Section1 may provide these;

  1. Reduction of the allowances and pay/salary of the chief executive officer, chairman, director or any other officer of the senior level
  2. Cancellation of the shares held by any officer of the senior level of the NBFC
  3. Sale of the assets of the NBFC

Sub-Section 3: The officers of the senior level such as the chief executive officer, chairman, director, etc. whose pays are reduced cannot demand any kind of compensation.

Note- All the provisions of these amendments will come in force in the Notification in the Official Gazette by the Central Government

Insertion of New Section – 45 NAA

A new section i.e. Section 45 MBA is added after Section 45 MB in the Principal Act and it will specify the following;

Sub-Section 1:  The bank may direct an NBFC (if it considers necessary for the provision of the act) to add to its financial statements or provide separately the statements relating to the business or affairs of any group company of the NBFC within the specified time.

Sub-Section 2:  The Bank may conduct an inspection or audit of the NBFC and its Book of Accounts if it feels anything in a contradiction with the Companies Act, 2013.

Also, Read: Minimum Capital Requirement of NBFCs.

Salient Features of these Amendments

  • Now the Reserve Bank of India has more power in regulating the NBFCs
  • The RBI now have the power to remove the director of the company in case of any non-compliance
  • Also, RBI can overpower the Board of Directors and appoint an Administrator from its end
  • The salaries of the members of the committee and the Administrator goes from the funds of the NBFC
  • It can debar NBFC auditor for a period up to 3 years in case of any default
  • It can force an NBFC to merge, split or reconstruct to work in public interest or to stabilize the financial status of the country
  • The pays of the senior officials of the company are reduced and it also provided that they cannot demand any compensation for that

Conclusion

Altogether we can say that the amendments in the Reserve Bank of India Act, 1934, even more, tighten the guidelines to run a Non-Banking Financial Company in India. Furthermore, various laws like the reduction in salary of the senior officials of the company are also a major cause of hassle for these officials.  Moreover, the new regulations give more power to the Reserve Bank of India as a regulatory body of NBFCs.

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Tanya Verma

Tanya is working as writer & editor from past 2 years with experience in covering startup and technology related topics.

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