Money & Banking
RBI goes fishing for NBFCs

With attention of the RBI offices diluted into thousands of non-descript companies, the big fish continue to have a field day right under the nose of the RBI

Unable to save lakhs of investors from losing thousands of crores, the Reserve Bank of India (RBI) has started fishing for non-banking finance companies (NBFCs). It has recently shot thousands of notices to companies asking to send their annual reports, for the RBI to examine whether the company is an NBFC or not. The same RBI slept over the years as Sahara collected in excess of Rs20,000 crore.

 

All this, surprisingly, comes just in the backdrop of the Usha Thorat Panel Report, which sought a major recast of NBFC regulation. RBI itself has published an advanced notice of rule-making, seeking to exempt companies, except those very large, from registration requirements. As of March 2012, RBI was monitoring some 12,385 companies registered as NBFCs. As if this was not enough, RBI has sent roving mailers to all those companies bearing registration with the Registrars of Companies (ROC) under a “financial code” asking them to send their annual reports and details of other companies in same group, so that the banking regulator could ensure that the company is not an NBFC.
 

In other words, by default, every company is an NBFC, unless the RBI concludes otherwise, or at least, every company with a financial code registration. A ‘financial code’ is a vast code and includes all financial intermediation, except insurance and pension funding (division 65 as per National Industrial Classification -NIC code 2004) and all activities auxiliary to financial intermediation (division within its ambit).
Financial intermediation activities include loan, hire purchase, investment, mutual fund, housing finance, chit funds, leasing and other related financial activities. However, it is pertinent to note that division 67 ‘Activities auxiliary to financial intermediation’ includes financial and mortgage advisory, brokers and security-dealing activities on behalf of others. Thus, the companies proposing to render financial advisory have no other option but to select the financial code at the time of incorporation.

 

As per the annual report of Ministry of Corporate Affairs (MCA), 31.57% of total companies which got registered during the year 2012-13 (till December 31, 2012) were registered under ‘Finance, Insurance, Real estate and Renting, Business Services’ head forming the largest chunk among all other categories. Last year also maximum companies were registered under the said head aggregating to 41.83% of the total. It is quite apparent that there will be some lakhs of companies registered under ‘financial code’. Is RBI intending to send notices to all such companies?

 

The efficiency of any regulation lies in relevance of the regulation and not its expansiveness. The more expansive, the shallower. Hence, Usha Thorat Panel recommended the RBI to focus on the big fish.
 

Apparently, the move of the RBI to send fishing letters is deplorable. If all that the RBI needs to know, by looking at the balance sheets of the companies, is to find out whether the company is a financial company or not, the balance sheets of the companies are on the website of the ROC, and they are available for download.
 

In addition, the RBI instituted a system of auditor’s report in terms of Non Banking Financial Companies Auditors’ Report (Reserve Bank) Directions, 2008. In this system, every auditor of a company is also supposed to report, both to the Board of Directors and the RBI, as to whether the company is carrying a financial activity and the company has registration with the regulator to do so. The auditor is required to make an exception report to the RBI if the company is carrying on a financial business, and is not registered with the central bank.
 

As if throwing the obligation of registration with the respective companies coupled with a secondary check by the auditing professionals was not sufficient, the RBI now wants to get into action directly by instructing all companies to communicate to the RBI their financials. It is almost like the local police office calling all citizens to be examined by the police to ensure that they have not done any crime.
 

It is this expansive regulatory attitude that is largely responsible for the present plight of millions of depositors in the country. With attention of the RBI offices diluted into thousands of non-descript, companies, the big fish continue to have a field day right under the nose of the RBI.
 

(Vinod Kothari is a chartered accountant, trainer and author. He is an expert in such specialised areas of finance as securitisation, asset-based finance, credit derivatives, accounting for derivatives and financial instruments and microfinance. The writers can be contacted at [email protected] and [email protected])

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COMMENTS

M G WARRIER

3 years ago

Very true. I liked the analogy of local police station calling every citizen and asking to prove innocence. But, right from GOI down to Gram Panchayat, there is a tendency to keep regulatory controls centralised. In the Indian context, there is need to ensure compliance at field level by exemplary punishment to the guilty fast. In the financial sector, the multitude of institutional arrangements and shifting of responsibility from one institution to another or between central and state governments give scope for miscreants to escape. The situation is made more complex by political support to violations in various ways.

nagesh kini

3 years ago

As a former RBI appointed auditor of a major NBFC I fully agree with Vinod.
RBI is barking up the wrong tree in making roving enquiries, sending mailers to all sundry with a remote 'finance' added on to their names.
The RBI, as very rightly suggested by the Thorat Committee, should necessarily go after the Auditors' Report or absence thereof, only of the bigger NBFCs and not go after small fry. Missing the forest for the woods!

nagesh kini

3 years ago

As a former RBI appointed auditor of a major NBFC I fully agree with Vinod.
RBI is barking up the wrong tree in making roving enquiries, sending mailers to all sundry with a remote 'finance' added on to their names.
The RBI, as very rightly suggested by the Thorat Committee, should necessarily go after the Auditors' Report or absence thereof, only of the bigger NBFCs and not go after small fry. Missing the forest for the woods!

Ramesh Poapt

3 years ago

Even RBI has not free hand in performing surgery on criticaly sick PSU banks!

HDFC net profit up 17% to Rs1,173 crore on strong demand for home loan

HDFC reported 17% growth in its first quarter net profit on healthy loan book growth and stability witnessed on the spreads

Housing Development Finance Corp (HDFC), the country's largest home loan provider reported a a 17% higher net profit for the first quarter due to strong demand for loan in tier-II and tier-III cities.

 

For the quarter to end-June, the lender said its net profit rose 17% to Rs1173.1 crore from Rs1001.9 crore while total revenues increased to Rs5,564.9 crore from Rs4,942.3 crore same period last year.

 

HDFC said its income from operations stood at Rs5,556.94 crore in the first quarter compared with Rs4,914.72 crore a year ago period.

 

Total income of HDFC was the same as income from operations as there was no profit from sale of investments compared with Rs20.24 crore during the first quarter last year. As the company reported nil profit on sale on investments during the quarter, non-interest income came in at mere Rs8 crore as compared with Rs117 crore in previous (March 2013) quarter and Rs28 crore in the quarter ended June 2012.

 

As on June 2013, HDFC said its loan book (net of loans sold) stood at Rs1.77 lakh crore compared with Rs1.48 lakh crore in the same quarter last year.

 

HDFC shares closed Friday 2.4% down at Rs803.5 on the BSE while the benchmark Sensex ended marginally up at 20,149.

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COMMENTS

LAMBODAR BORAH

3 years ago

Please provide some information from your side whether this type of profit making company can be included in one's portfolio or not and at what price.
Thanks.
LAMBODAR BORAH

2G scam: Anil Ambani, wife Tina among 13 summoned as witnesses

CBI, earlier in its chargesheet had alleged that Reliance Telecom structured Swan Telecom as its front company to circumvent the then existing telecom policy. This time, however, Anil Ambani, his wife and 11 others are summoned as witness by the CBI

Anil Ambani, chairman of Reliance Anil Dhirubhai Ambani (R-ADA) group, his wife Tina and 11 others were summoned as prosecution witnesses in the 2G spectrum allocation case by a special court in Delhi.

 

In its plea, the Central Bureau of Investigation (CBI) sought summoning of Ambani as witness in the case to ascertain Reliance ADA Group companies' alleged investment of over Rs990 crore in Swan Telecom Pvt Ltd.

 

CBI contended that Ambani will be able to “throw light” on issues of alleged investment by his group companies.

 

Special CBI Judge OP Saini said, “I find that examination of these witnesses is necessary for a just decision of the case and the application is allowed in total and all 13 are summoned.”

 

CBI had said Ambani and his wife had 'unrestricted powers' so far as cheque issuing authority is concerned and Tina Ambani had presided over the relevant meetings.

 

The CBI, in its first charge-sheet had alleged that top Reliance ADAG officials-Gautam Doshi, Hari Nair and Surendra Pipara-had conspired with former telecom minister A Raja and others.

 

Reliance Telecom (RTL) and its officials are accused of creating shell firms like Swan Telecom, Zebra Consultancy Services, Giraffe Consultancy Private Ltd and Parrot Consultants to create a web in which no company is a holding firm and the officials are the real masters, the CBI had alleged.

 

Ambani is required to be examined regarding the decisions on incorporation of the alleged shell companies, special public prosecutor UU Lalit had said, adding that although he may not have been a part of the decisions taken on these issues, he would have been aware about these matters.

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