Returns to be filed BY NBFC’s and Requirement for obtaining prior approval of RBI in cases of acquisition/ transfer of control of NBFC’s

On 9th July 2015 RBI has issued two circular firstly DNBS (IT).CC.No.01/24.01.191/2015-16, Dated 9-7-2015 for returns to be submitted by NBFC’s (Assets size below Rs 500 Crore) and secondly DNBR (PD) CC.No. 065/03.10.001/2015-16, Requirement for obtaining prior approval of RBI in cases of acquisition/ transfer of control of Non-Banking Financial Companies (NBFCs).

I have tried to simplify the contents of the aforesaid circulars, its impact on NBFC’s for better understanding purpose.

The Reserve Bank of India (the “RBI”) has vide circular no DNBS (IT).CC.No.01/24.01.191/2015-16, dated9-7-2015, has directed NBFC’s with an assets size between 50 crore to 100 crore and NBFC with an assets size from 100 crore to 500 crore to file annual return in NBS 8 and in NBS 9 respectively, which is as under:

These Return Formats are available on the website https://cosmos.rbi.org.in under the menu ‘Download Blank Form. The Annual Return should be submitted within 30 days of closing of the financial year, i.e. by 30th April of every year.

The Annual Return for the year ending March 31, 2015 may be filed by 30th September 2015. Further, Non-deposit taking NBFCs with assets of Rs. 50- 500 crore that have already submitted the prescribed returns for the quarter ending March 31, 2015 are not required to submit the annual return for the year ending March 2015 (to avoid duplication)

There is no change in the returns prescribed for deposit taking NBFCs and NDSI (with assets of Rs 500 crore and above).

Now, question arises here is that whether NBFC with assets size below 500 crore also need to file Quarterly Return along with Branch Info return. Since, the aforesaid circular is silent on the this issue. While going through the circular on Revised Regulatory Framework for NBFC DNBR (PD) CC.No. 002/03.10.001/2014-15 dated November 10, 2014 Para 10. Off-Site Reporting, NBFCs-ND, with assets less than Rs. 500 crore, including investment companies, shall henceforth be required to submit only a simplified Annual Return, the details of which shall be separately communicated.

Conclusion, in view of aforesaid circular issued on 9-7-2015, which specified two New NBFC’s returns which is to be filed by NBFC’s with an assets size of lessthen 500 Crore. Hence, in my opinion only Annual return (in NBS 8 or NBS 9 as the case may be) is to be filed depending upon size of the NBFC’s. This is a good move by RBI as it reduces monthly and quarterly compliance requirements and it will also encourage NBFC’s to concentrate on its business and increase its assets size in such a dynamic business condition.

The RBI vide circular no. DNBR (PD) CC.No. 065/03.10.001/2015-16, has directed that all NBFC with the Requirement for obtaining prior approval of RBI in cases of acquisition/ transfer of control of Non-Banking Financial Companies (NBFCs). Highlight /Summary of the said circular are as under:

1. Prior written permission of the Reserve Bank shall be required for

a) Any takeover or acquisition of control of an NBFC, which may or may not result in change of management;

b) Any change in the shareholding of an NBFC, including progressive increases over time, which would result in acquisition/ transfer of shareholding of 26 per cent or more of the paid up equity capital of the NBFC except shareholding going beyond 26% due to buyback of shares/ reduction in capital where it has approval of a competent Court.

c) Any change in the management of the NBFC which would result in change in more than 30 per cent of the directors, excluding independent directors. Prior approval would not be required for those directors who get re-elected on retirement by rotation.

NBFCs shall continue to inform the Reserve Bank regarding any change in their directors/ management as required in Non-Banking Financial Companies.

2. Application for prior approval

NBFCs shall submit an application, in the company letter head, for obtaining prior approval of the Bank under paragraph 2, along with the following documents:

a) Information about the proposed directors/ shareholders as per the Annex;

b) Sources of funds of the proposed shareholders acquiring the shares in the NBFC;

c) Declaration by the proposed directors/ shareholders that they are not associated with any unincorporated body that is accepting deposits;

d) Declaration by the proposed directors/ shareholders that they are not associated with any company, the application for Certificate of Registration (CoR) of which has been rejected by the Reserve Bank;

e) Declaration by the proposed directors/ shareholders that there is no criminal case, including for offence under section 138 of the Negotiable Instruments Act, against them; and

f) Bankers’ Report on the proposed directors/ shareholders.

3. Requirement of Prior Public Notice about change in control/ management

A public notice of at least 30 days shall be given before effecting the sale of, or transfer of the ownership by sale of shares, or transfer of control, whether with or without sale of shares. Such public notice shall be given by the NBFCs and also by the other party or jointly by the parties concerned, after obtaining the prior permission of the Reserve Bank.

Before the aforesaid circular there was some gray area/confusion with regards to progressive change in the shareholding of the NBFC’s i:e whether progressive change in the shareholding required prior approval, whether 26% change in the shareholding is to be considered as change in control which require prior approval, whether change in director is to be treated as change in control. But after the aforesaid circular come in to effect confusion/controversy is been put on the rest and now circular specifically mentioned the circumstance which will be considered/treated as change in the control and required prior approval before acquisition/ transfer of control of (NBFCs).

Article is written by CA. Rahul Sureka, ACA, CS and can be reached at rahulsureka28@gmail.com or Mobile no 9773450180.

Disclaimer: This article is for general guidance on matters of interest only and does not constitute any professional advice. One should not act upon the information contained in this article without obtaining specific professional advice. Further, no representation or warranty (expressed or implied) is given as to the accuracy or completeness of the information contained in this article.