Money & Banking
Stringent norms for change in control for the NBFCs
The revised directions are much more stringent, putting additional burden on the smaller companies, as they will have to rush to the RBI every time there is a change in their board
 
The Reserve Bank of India, on 9th July, 2015, came out with the fine print of the revised directions on change in control over/ acquisition of NBFCs (revised directions). These can be viewed here.  
 
Earlier, change in control over/ acquisition of NBFCs was governed by the notification of May 2014 (please see), whereby they were only required to obtain a prior written consent from the RBI. But under the revised directions, the RBI insists the promoters to make a full-fledged application to the RBI for the change in hands. In this write-up, we intend to draw up the impact of the revised directions and its comparison with the earlier norms.
 

What amounts to change in control/ acquisition of an NBFC?

As per the revised directions, the following circumstances amount to change in control/ acquisition of an NBFC and the same shall be subject to prior approval of the RBI –
(a) Any takeover or acquisition of control of an NBFC, even if the same does not tantamount to change in management of the company;
(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. However, exemption has been granted to a situation where the increase in the shareholding results due to a buyback of shares/ reduction in capital where it has been done with the approval of a competent court;
(c) Any change in management of the NBFC that would result in change in more than 30 per cent of the directors. However, change in the number of independent directors shall not constitute change in control for obvious reasons. However, prior approval would not be required for those directors who get re-elected on retirement by rotation.
 
Though the intent of the RBI is noble, it may at times pose a good amount of trouble to the NBFCs. There may be instances where the above events may occur due to reasons beyond the control of the promoters. Even then, a full-fledged application shall have to be made by the NBFC. Some of such instances have been discussed below.
 
Say, there are only three directors in an NBFC; one of them expires, which means more than 30% in the composition of the board. If we go by the directions, any change in more than 30% of the directors should be done only after prior permission of the RBI. Not sure how can an NBFC obtain a prior approval in such a case.
 
Let us again take an example of an NBFC with only 3 directors, and the shareholders wish to not reappoint one of the retiring director in the annual general meeting, this leads to a situation where more than 30% of the directors are changed. In this case, if the Directions were to be followed, the shareholders would require getting the consent of RBI before enforcing their proprietary rights.
 
Again, what happens if the 51% shares of an NBFC are being acquired by a bank/ banks under a strategic debt restructuring scheme, will it still require the prior consent of the RBI? This is a bit contradictory in nature, as one will have to obtain prior approval of RBI to act in accordance with a decision granted after exercising power granted by RBI itself.
 
These are only some of the instances. There can be several other instances as well, which might happen for reasons beyond the control of the promoters; but in all cases prior approval of the RBI has to be obtained.
 

Process of making an application to the RBI

The application for change in control/ acquisition of NBFCs has to be done by the company in its letter head along with complete details of proposed directors/ shareholders of the company (which is a list of 29 items!), sources of funds for the proposed acquisition of the shares of the company. 
 
The revised directions also require the company to enclose various disclosures from the proposed directors/ shareholders; one of such is a disclosure that the proposed directors/ shareholders are not associated with an entity which has been denied the certificate of registration by the RBI. Therefore, if you have ever failed to register your company as an NBFC, you will never be able to become a promoter/director of an NBFC again.
 
The revised directions also talk about a Banker’s Report on the proposed directors/ shareholders of the company; however, nothing else has been clarified in this regard.
The application has to be submitted to the Regional Office of the Department of Non-Banking Supervision in whose jurisdiction the registered office of the NBFC is located. 
 

Prior public notice for change in control/ management

The NBFC and proposed acquirer, either singly or jointly, shall have to issue a public notice at least 30 days before the change in control of the company/ acquisition of the shares of the company after the permission is granted by the RBI. The public notice, which is to be published in at least one leading national and in one leading local (covering the place of registered office) vernacular newspaper, shall indicate the intention to change the control, the particulars of acquirer and furthermore, the reasons for such change of ownership/ control.
 
The revised directions are much more stringent than what existed and this is one more sign which indicates that the RBI is intending to implement the check at the management level of the NBFCs. While the motive is noble, but at some places the core intent has got distorted. One of the major recommendation of the Usha Thorat Committee was deregulation of smaller companies, but these Directions seems to unknowingly put additional burden on the smaller companies, as they will have to rush to the RBI every time there is a change in their board. 
 
By the way, the consequences of violation of these directions also deserve a mention; in case of any violation of the revised directions; the CoR of the company will be cancelled!
 
(Abhirup Ghosh works as researcher at Vinod Kothari & Company)

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SC rejects Mallya's plea against ED, slaps Rs.10 lakh costs

In a setback to liquor baron Vijay Mallya, the Supreme Court on Monday rejected his plea challenging criminal proceedings for wilfully disobeying an Enforcement Directorate summons seeking his presence relating to a $200,000 payment to a British company for displaying the Kingfisher logo during 1996-98 Formula 1 events.
 
Dismissing the appeal, a bench of Justice J. Chelameswar and Justice Adarsh Kumar Goel also fined Mallya an "exemplary" cost of Rs.10 lakh that will go to the Supreme Court Legal Service Authority.
 
Rejecting his plea, the bench in its judgment said: "We do not see any merit in the appeal. We are also of the opinion that the entire approach adopted by the appellant (Mallya) is a sheer abuse of the process of law."
 
"Any other view of the matter would only go to once again establishing the notorious truth stated by Anatole France that 'the law in its majestic equality, forbids the rich as well as the poor to sleep under bridges, to beg in the streets and to steal bread'," said Justice Goel pronouncing the judgment.
 
Mallya had challenged a Delhi High Court verdict of May 21, 2007, turning down his plea against the ED summons for violating the now defunct Foreign Exchange Regulation Act (FERA) for not responding to the summon issued to him four times.
 
He was summoned on four occasions - September 27, 1999, November 8, 1999, November 26, 1999 and December 21, 1999. 
 
In the first instance, Mallya got summons after the date of appearance but for the subsequent two, he had sought the date and in the case of fourth, he had contended that the summons were not by registered post as required under the procedure.
 
Taking a dig at Mallya over the tenor of his letter explaining his inability to appear on November 8, the court said: "From the tenor of the letter, it appears that it was not a case of mere seeking accommodation by the appellant (Mallya) but requiring date to be fixed by his convenience."
 
"Such stand by a person facing a allegation of serious nature could hardly be appreciated. Obviously, the enormous money power makes him believe that the state should adjust its affairs to suit his commercial convenience," it observed.
 
Holding that Mallya's plea required to be dismissed for more than one reason, the court said that the mere fact that the adjudicating officer chose to drop the proceedings against him "does not absolve" him of the "criminal liability incurred" by him by not responding to the summons to appear before the official in question.
 
Mallya had allegedly paid $200,000 to Benetton Formula Ltd for displaying his Kingfisher logo in the Formula One World Championships that was to be held in London and other European countries in 1996, 1997 and 1998, allegedly without the Reserve Bank of India's prior approval in violation of the FERA. 
 
His subsequent application to the finance ministry on June 19, 1996 seeking approval for the payment made to British company was rejected on February 4, 1999.

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Higher food prices stoke June retail inflation
Rise in food and fuel prices propelled India's retail inflation to 5.40 percent in June from 5.01 percent in May, official data showed on Monday.
 
The data furnished by the Central Statistics Office (CSO) showed that the retail, or the consumer price indexed (CPI) inflation, in the corresponding month of 2014 stood at 6.77 percent.
 
According to the CSO data, the CPI-urban for June inched higher to 4.55 percent from 4.41 percent in May. The June CPI-rural, meanwhile, jumped to 6.07 percent from 5.52 percent in May. 
 
The main cause for the rise in June inflation was attributed to costlier food items. 
 
The "Food and beverages" sub-indice in the CPI has the highest weightage in the CPI of about 45.86 percent. 
 
The "Food and beverages" sub-indice in the CPI rose to 5.48 percent from 4.80 percent in May. 
 
However, June 2015's food inflation was lower in comparison to the corresponding month of 2014, when it stood at 7.21 percent.
 
The food inflation in the urban areas touched 5.24 percent from 4.48 percent in May. The food inflation burden for the rural households in June rose to 5.61 percent from 4.74 percent in May.
 
The food inflation in rural and urban areas during the corresponding month of 2014 stood at 8.05 percent and 5.62 percent, respectively.

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