Just when companies have started to settle down with the revised framework, the master circular issued by RBI on 1 July 2015 has confused them again
For several years now, RBI has been issuing master circulars covering non-banking finance companies (NBFCs) on 1st July every year, consolidating all the regulatory amendments for ease of reference. The master circular comes with a sunset clause and is being issued every year. Usually, the process of issuing the master circulars is that they are a mere consolidation of all RBI notifications and circulars issued since the last master circular. Users do not have to hence go searching for various circulars that may have come during the year.
However, this year, the master circulars for NBFCs bring about some key changes. Either it is due to the major overhaul in the regulatory framework that happened via the regulatory pronouncements on 27 March 2015
or something else, master circulars have come out twice or thrice, affecting NBFCs badly.
First of all, breaking from its tradition, the RBI issued master circulars for NBFCs on 11 June 2015 or before 1st July. Then the master circulars were issued as usual on 1 July 2015. However, on 6 July 2015, some “corrected” versions of master circulars were released.
The most significant change introduced by way of master circular is with regard to aggregation of assets of all NBFCs in the group to determine whether they are systematically important or not. The provisions with regard to multiple NBFCs and aggregation of assets were introduced in the circular introducing revised regulatory framework
issued on 10 November 2014 (November Framework). This was, however given a miss in the final framework introduced on 27 March 2015
The general understanding of the NBFCs was since the provisions on multiple NBFCs did not feature in the March Framework, it has been dropped by RBI. However, this now features in the master circular on Miscellaneous Instructions to all NBFCs
issued on 1 July 2015.
Before we get into decoding the implication of the changes that have been coyly or inadvertently introduced in the master circulars, it is pertinent to set the context on how the regulations have unfolded over the period.
Transition to Revised Regulatory Framework
The revised regulatory framework was a by-product of the recommendations of Usha Thorat Committee Report and the Nachiket More Committee Report. The revised framework was first circulated by way of the November Framework, which mentioned that the notifications detailing the November Framework will follow.
The industry waited for good four months for the final notifications to be issued by RBI, to get clarity on what was to come by. The non-issuance of the final notification kept industry and practitioners guessing whether the November Framework was the regulation to be complied with. Or, was RBI to issue some notifications which will then have to be followed?
On 27 March 2015, RBI issued prudential norms for systematically important NBFCs and non-systematically important NBFCs apart from others. The notifications mentioned that they were applicable to the NBFCs with immediate effect, that is, from the date of issuance. This obviously meant that the companies had four days in hand to comply with the regulations.
The initial view that came from the regulators and the market was that the circular (November Framework) was the notification itself. In fact, seemingly, the view was that there was no need for a notification to be issued at all, as the circular itself was the law!
Section 45L of the Reserve Bank of India Act, 1934 empowers the central bank to issue directions. Pursuant to this power, two set of directions were issued – one on 27 March 2015 and another on 10 April 2015. If such is the case, then in what way can we say that the circular dated 10th November was a direction? In any case, the last para of the November Framework stated –“The Notifications in this regard shall follow”.
Even if we were to disregard the dichotomy on the understanding of sanctity of the circular and the notification, the notification of March 2015 itself raised more questions. The first reaction on March 2015 notifications was also split. Whether the March Framework was to be read in line with the November Framework or was it to be read, as sacrosanct, ignoring the items that did not feature in the March 2015 notification or are the two to be read together.
There is one more noteworthy thing that we found in the notification - the last line of the notification read as “It may be emphasised that the changes made vide above notifications/ amending notifications are only that corresponding to the circular”.
To be on the safer side of the law, NBFCs decided to take heed of the November Framework notification as well, which most importantly meant compliance with corporate governance norms on adoption of fit and proper policy, signing of deed of covenants between the Directors and the company, obtaining disclosures from the Directors in the manner provided in the circular and the making quarterly disclosures with respect to the change in the composition of the Board of Directors of the Company.
Just around time, when companies had started to settle with the revised framework, the master circular issued by RBI on 1 July 2015 is quite unsettling.
Change is the only thing that should be permanent rest everything else is ephemeral. However, this philosophy does not go down well, especially when we talk about the regulatory regime governing the financial markets in the country.
Multiple NBFCs issue
Para 29 of the master circular on miscellaneous instructions states that all NBFCs that are a part of corporate group and floated by a common set of promoters will not be viewed on standalone basis. The total assets of all the NBFCs in the group including deposit taking NBFCs will be aggregated to determine whether the NBFCs are systematically important or otherwise. The aggregate asset size will determine the regulations applicable on all NBFCs in the group.
For aggregation purposes, all NBFCs in the group are to be considered. The term ‘group’ is the same as provided for the in accounting standards. Para 5.4 of the Accounting Standard 21 on Consolidation provides for the definition of group as –
5.4 A group is a parent and all its subsidiaries
(i) Determination of NBFC – ND – SI
All NBFCs – ND with an asset size of Rs500 crore and more as per the last audited balance sheet will be considered as a systemically important NBFC – ND (NBFC-ND-SI).
There is no reference being made to multiple NBFCs in the master circular here.
‘Systemically important non-deposit taking non-banking financial company', means a non-banking financial company not accepting / holding public deposits and having total assets of Rs500 crore and above as shown in the last audited balance sheet’
Here again the definition of NBFC-ND-SI does not include multiple NBFCs or aggregation of assets for determining whether it is systematically important or not.
It is difficult to decipher whether the provisions with regard to multiple NBFCs got erroneously consolidated in the miscellaneous instructions or the intent was to actually include the provisions.
a. Source and application of funds;
b. Profit and loss account;
c. Sectoral deployment of funds.
The same is to be filed within 15 days of the month preceding the relevant quarter. However, it is to be noted in this regard that the NBFC-ND having asset size of Rs100 crore or more are already required to file the above mentioned details on a monthly basis.
Thus, NBFC-ND, having asset size of Rs100 crores or more are required to file the above mentioned details both quarterly and monthly. As evident there seems no logic for reporting details on a quarterly basis when the same is already subjected to monthly reporting, the same may be an error, which should be rectified/ clarified in near future. However, this will create enough confusion amongst the companies.
(Nidhi Bothra is executive vice president at Vinod Kothari Consultants Pvt Ltd).