Fit and Proper Criteria for NBFCs

Swetha Dhinesh

06 Jun, 2024

A nation is being built by the non-banking finance company through the development of wealth, the creation of jobs, the arrangement of working capital, and other factors. NBFC supports financial management for the general public at a reasonable credit rate. With the exception of institutions whose primary business is agriculture, industry, the purchase or sale of any goods (other than securities), the provision of any services, or the sale or purchase of any securities, NBFC is primarily engaged in the business of advances and loan, acquisition of stocks, bonds, shares, debentures, securities issued by the government or local authority, or other marketable securities of a like leasing, nature, hire-purchase, insurance business, and chit business. The directors and shareholders who are in charge of directing the activities of the companies must be fit and proper in addition to possessing the necessary qualifications due to the rising integration of Non-Banking Financial Companies in the financial sector and their growing systemic significance. Due to this, the following additional regulations are being implemented, and they came into effect on March 31, 2015, for all NBFCs-ND-SI and NBFCs-D.

Fit and Proper Criteria

No financial institution needs to emphasise the significance of directors exercising due diligence to determine their eligibility for the position in terms of qualifications, technical experience, track record, honesty, etc. It is suggested that the same rules apply to NBFCs as well. Although the Reserve Bank conducts due diligence on directors prior to issuing a Certificate of Registration to an NBFC, NBFCs must continuously implement an internal supervision procedure. 

Additionally, NBFCs are recommended to make sure that the procedures listed below are followed and the individuals meet minimal criteria before they are appointed to the Boards in order to expedite and bring uniformity to the process of due diligence when appointing directors: 

• ​​NBFCs should carry out a process of due diligence to assess a candidate’s appropriateness for appointment to the Board of Directors or for continuing to occupy that position based on qualifications, knowledge, track record, integrity, and other “fit and proper” criteria. NBFCs shall ask prospective and current directors for the necessary information and undertaking in the format outlined in Annexure II by the RBI.
• The NBFCs should carry out the process of due diligence at the time of appointment or renewal of appointment. 
• The boards of the NBFCs shall establish Nomination Committees to examine the declarations.
• When deemed essential, the Nomination Committees should decide whether or not to accept the directors based on the information presented in the signed declaration. 
• NBFCs should yearly, as of March 31, receive a simple declaration from the directors stating that the information already provided has not changed and that they promptly provide the necessary details in the event of a change. 
• The Board of the NBFC must make sure that the nominated or elected directors execute the deeds of covenants in the manner specified in Annex-3 by the RBI in order to protect the public interest.

Director’s Declaration and Undertaking (with any necessary enclosures) 

1. Director’s personal information
   1. Full name 
   2. Date of Birth
   3. Education and Training  
   4. Relevant Background and Experience  
   5. Permanent Address 
   6. Present Address 
   7. Email Address / Telephone Number. 
   8. Permanent Account Number (PAN) under the Income Tax Act and the name and address of the Income Tax Circle. 
   9. Relevant skills and experience.
   10. Additional details pertaining to the directorship of the NBFC. 
2. Relevant Relationships of Director
   1. Refer to Section 6 and Schedule 1A of the Companies Act of 1956 and the relevant sections of the New Companies Act of 2013 for a list of relatives, if any, who are associated with the NBFC. 
   2. A list of any entities in which they are deemed to have an interest (Refer to Sections 299(3)(a) and 300 of the Companies Act of 1956 and the New Companies Act of 2013 for further information). 
   3. A list of the entities that, in accordance with the 2007 NBFC Prudential Norms Directions, he or she is deemed to hold a major stake. 
   4. The name of the NBFC in which he or she currently serves or formerly served as a board member (together with information about the tenure of such position). 
   5. Any current fund and non-fund facilities that they availed by him or her.
   6. Any instances in which the director or the organisations named in (b) and (c) above are currently in default or have previously been in default with regard to loan facilities obtained from the NBFC or any other NBFC/bank. 
3. A list of professional accomplishments
   • Achievements in the field that are pertinent 
4. Proceedings, if any, against the director. 
5. Any additional justification or information with reference to items mentioned above and other information deemed necessary for evaluating fit and proper. IV. Proceedings, if any, against the director. 

Scope and Application 

• The policy shall apply to the appointment of new directors to the Company’s Board of Directors as well as to the renewal of existing director appointments. 
• The Declaration and Undertaking must be submitted, and all the board members must sign the covenant deed. 

Purpose 

This policy’s objectives are to: 

• To define the “fit and proper” standards by which new directors who are being considered for appointment and current directors whose appointments are being considered for renewal might be assessed. 
• It is believed that this policy will support the Company’s ongoing efforts to ensure that only people of the highest calibre are selected for the Board and that they have the ideal combination of qualifications, knowledge, track record, and integrity.

Fit and Proper Criteria Evaluation

• The Nomination and Remuneration Committee (NRC) would conduct adequate due diligence on such individuals to determine suitability based on the qualification, expertise, track record, integrity of such individual and also such other factors in respect of which information obtained by the Company in the aforesaid Declaration and Undertaking.
• Prior to the appointment of any individual as a director on the Board, the Company shall obtain the necessary information and declaration from the proposed or existing directors for the purpose in the format set forth in Annexure 2 of the RBI master circular or where applicable, in any other format that the RBI may occasionally prescribe for the purpose (“Declaration and Undertaking”). 
• The NRC would examine each Declaration and Undertaking. The NRC would decide and recommend to the Board whether or not to accept potential new directors or current directors whose appointments are to be continued or renewed, as applicable, after taking into account the findings of its due diligence and the information contained in the signed Declaration and Undertaking. 
• If a person is ineligible to serve as a director under the Companies Act of 2013 or any other applicable law, they will not be considered for appointment or reappointment. 
• The Board would form the opinion that it would be prudent to conclude on the basis of recommendations from the NRC.
• The Company would mandate that each director on the Board submit an annual declaration that either confirms that the information previously provided to the Board in the Declaration and Undertaking has not changed or, in the event that a change has occurred, specifies the necessary details of the change. The NRC would assess any declarations that suggested a modification to the details included in the initial Declaration and Undertaking and would advise the Board of any such modifications. 
• The Board would make sure that anyone appointed as a director on the Board would execute a deed of covenant in the format provided in Annexure -3 of the RBI Master Circular or in such other format (where applicable) as may be prescribed for the purpose from time to time by the RBI (“Director Covenant”), on or before the date on which such person’s appointment becomes effective. The Company and such directors would execute the Director Covenant with regard to the directors serving on the Board as of the Effective Date.

Quarterly Reporting

The Company will submit a statement to the RBI on a quarterly basis outlining any changes to the Company’s Board of Directors. The statement of change for the year’s final quarter, ending March 31, will be certified by the Company’s auditors and will also be accompanied by a certificate from the Managing Director of the Company attesting to the application of fit and proper criteria in the selection of such new directors.

Within 15 days of the end of the quarter, the statement must reach the Reserve Bank’s concerned Regional Office.

Conclusion

Overall, NBFCs must meet criteria in order to protect investors’ interests, provide financial stability, promote compliance with legislation, improve governance and risk management procedures, and uphold the industry’s reputation. Regulatory authorities want to build a more stable and reliable financial system. Thus, they have high standards for anybody working for an NBFC.

Read our Article: Returns by NBFC Having Overseas Investment