Reserve Bank of India (RBI) recently came out with a
notification (New Notification) that will increase its
regulatory oversight on the non-banking financial company (NBFC)
sector. The RBI through the New Notification mandated the
requirement of its prior written approval in cases of acquisition
or transfer of control of NBFCs. This is not the first time the RBI
has issued directions for its prior written permission on such
takeovers of NBFCs. Back in September 2009, it had issued similar
notification, albeit restricted to NBFCs accepting deposits.
However, the New Notification proves to be a significant expansion
in its regulatory regime.
According to the New Notification, the prior written permission
of the RBI shall be required for:
Any takeover or acquisition of control of an NBFC, by
acquisition of shares or otherwise;
Any merger/amalgamation of NBFC with another entity or vice
versa that would give the acquirer/other entity control of the
Any merger/amalgamation resulting in acquisition or transfer of
shareholding in excess of 10% paid up capital of NBFC;
Approaching the court or tribunal seeking for orders for
mergers or amalgamations with other companies or NBFCs.
These requirements are not applicable to Primary Dealers.
At the outset, it may be observed that permission of the RBI
must now be sought by any NBFC, whether they accept deposits or
not. The definition of the term "Control" has been
borrowed from SEBI (Substantial Acquisition of Shares and
Takeovers) Regulations, 2011. Therefore, there is a possibility
that it may suffer a similar fate to SEBI jurisprudence and fall on
a slippery slope of definitional inexactitude.
The basis for these directions, Section 45IA(4)(c) of the RBI
Act, which states that the RBI may require for the grant of
application for registration that "the general character of
the management or the proposed management of the non-banking
financial company" is not "prejudicial to the public
interest or the interests of its depositors." A supplementary
reason, as mentioned in the introductory letter to the New
Notification, for this regulatory expansion is to enable the RBI to
ensure that the `fit and proper` character of the management of
NBFCs is maintained. This suggests a relative discomfort of the RBI
in alteration of management of NBFCs being hitherto outside its
It may be recollected here that the RBI had earlier issued a
notification on 1 April 2014 that brought temporary suspension
to the issuance of new NBFC certificates. This was done to prevent
more institutions entering the NBFC sector, citing an imminent
shift in the regulatory paradigm. It is submitted that this latest
development is an attempt to further regulate the sector and
preserve general public interest till such time as a more
streamlined policy is put in place.
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