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 NBFC;
  • 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 purview.

MHCO Comment

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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