In succession to the ongoing Government drive to strike off defunct companies, it’s the central bank of the nation which has come to the crease — resulting in cancellation of approximately 1330 NBFC registrations so far in 2018. The innings of Reserve Bank of India (‘RBI’) are on rally with 751 cancellations within last one and half month.

The move comes as a punitive measure against all the NBFCs (running in thousands) which have lagged behind/failed to meet the revised net owned fund threshold of Indian Rupees Two Hundred Lacs prescribed by the RBI vide Notification No. DNBR.007/CGM(CDS)-2015 dated 27.03.2015 (‘the Notification’) before 01.04.2017.

The genesis of the RBI’s ongoing drive, finds root in the Notification allowing existing NBFCs to carry on the business of non-banking financial institution, if such company achieves 50% of the above-said net owned fund before 01.04.2016 and remaining 50% before 01.04.2017.

Though the Notification provided for a timeline to comply with the revised net owned fund requirement, it certainly lacks a provision calling for automatic cancellation of NBFC registrations, in case of delays/ lags. However, in the extant RBI drive, instances have been noticed wherein licenses are cancelled even though the NBFCs had complied (though with a delay) with the revised net owned fund requirements even before the issuance of show cause notices and had supplied corroborative evidences to that effect, to the RBI.

Reminiscing the values of our constitution which does not only concern itself with the ‘Results’ but also with the ‘Means’, the crucial question which arises here is whether in a resolve to clean up the NBFC sector, can RBI take such severe measures, posing civil consequences on those at the receiving end, without even conforming to provisions of RBI Act and principles of natural justice.

To better appraise the issue, it is imperative to understand the powers conferred by Section 45-IA(6) of the RBI Act (enumerated here-in-below) on RBI to cancel the certificate of registration of NBFC —

(i) NBFC ceases to carry on the business of a non-banking financial institution in India, or

(ii) NBFC has failed to comply with any condition subject to which the certificate of registration had been issued to the NBFC, or

(iii) NBFC has at any time failed to fulfill the following conditions:

(a) The NBFC shall be in a position to pay its present or future depositors in full as and when their claims accrue, or

(b) The affairs of NBFC shall not be conducted in a manner detrimental to the interest of its present or future depositors, or

(c) General character of the management or the proposed management of NBFC shall not be prejudicial to the public interest or the interest of its depositors, or

(d) The NBFC has adequate capital structure and earning prospects, or

(e) The public interest shall be served by the grant of certificate of registration to the NBFC to commence or to carry on the business in India, or

(f) The grant of certificate of registration shall not be prejudicial to the operation and consolidation of the financial sector consistent with monetary stability, economic growth and considering such other relevant factors which the RBI may, by notification in the Official Gazette, specify, or

(g) any other condition, fulfilment of which in the opinion of the RBI, shall be necessary to ensure that the commencement of or carrying on of the business in India by a non-banking financial company shall not be prejudicial to the public interest or in the interest of the depositors.

(iv) NBFC fails:

(a) to comply with any direction issued by the RBI, or

(b) to maintain accounts in accordance with the requirements of any law or any direction or order issued by the RBI

(c) to submit or offer for inspection its books of account and other relevant documents when so demanded by an inspecting authority of the RBI.

(v) NBFC has been prohibited from accepting deposit by an order made by the RBI and such order has been in force for a period of not less than three months.

Notwithstanding the grounds for cancellation of registration being explicated under Section 45-IA (6) of the RBI Act, a complete reading of the Section 45-IA with Section 58(6) of the RBI Act, clearly manifest that the a registration cannot be cancelled mechanically and ought to be done only in ‘fit and proper’ cases because—

• First proviso to 45-IA(6) of the RBI Act, mandatorily requires RBI to grant an opportunity to NBFCs, if cancellation of registration is on the ground mentioned in above-said clause (ii) or (iii), to comply with the regulatory norms, unless RBI opines otherwise for the sake of prejudice to the interest of public or depositors or such NBFC.

  [Requirement of Net Owned Funds being a condition subject to which registration certificates are issued to NBFCs, thus squarely covered by clause (ii) of Section 45-IA(6) of the RBI Act, hence, for canceling any registration on ground of non-compliance with net owned fund requirements, an opportunity under first proviso to 45-IA(6) of the RBI Act ought to be granted to the NBFC concerned.]

• Second proviso of 45-IA(6) of the RBI Act, makes it incumbent upon the RBI to give opportunity of being heard in each and every case before cancelling a NBFC registration.
• Provisions of Section 58B (6) of the RBI Act provides for monetary penalty in cases of failure or default in compliance with the provisions of RBI Act, rules, regulations or directions issued thereunder. Therefore, cancellations cannot be ordered by RBI as a matter of first resort, especially when law provides for other deterrent or preventive measures.
• In addition to the above-said explicit provisions given under Section 45-IA (6) of the RBI Act, the principles of administrative laws would also govern the discipline of discretion to be exercised by the RBI in cancelling registration of a NBFC. In sum and substance, discretion exercised by the RBI in cancelling registration of a NBFC should manifest— fair-play, reasonableness, judiciousness and ought to be exercised within the four corners of the RBI Law.

The severity of the cancellation of registration is well understood by the legislature, hence, provision for appealing against the order of RBI cancelling the NBFC registration are expounded in Section 45-IA (7) of the RBI Act, providing a period of 30 days (from the date of communication of RBI order cancelling the registration) to file appeal before the Appellate Authority. Though the provisions for condonation of delay have not been expressly provided for, however, in light of the catena of judgments of High Courts and even Supreme Court of the Nation, the Appellate Authority in its discretion, may allow appeal even beyond the period of 30 days.

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