Wednesday, September 24, 2008

Recent Comprehensive Directions by RBI to Auditors of Non-banking Financial Companies

The Reserve Bank of India has issued, vide its circular dated 23rd September 2008, comprehensive and updated directions to auditors of non-banking financial companies (NBFCs) (posted here on the Reserve Bank of India website) requiring them to specifically answer many questions relating to NBFCs. These 2008 Directions replace the decade old 1998 Directions to auditors.

The Directions are in a way unique since they require that any negative or qualified answer should be specifically and directly be reported to the Reserve Bank of India. Normally, the Auditors report to the NBFC.

While there are many specific questions relating to many aspects of NBFCs and compliance of various provisions under the Reserve Bank of India Act and Directions issued thereunder by the Reserve Bank of India, for most practical purposes, the Auditors have to report even if there is a single violation of any of these legal provisions.

While I will write here a more detailed analysis of specific requirement of these Directions in a day or two, it can easily be seen that the Reserve Bank of India has placed much of the burden of interpreting many controversial and ambiguous requirements. This was true under the 1998 Directions too but the 2008 Directions are even more comprehensive. The Auditors will be damned if they interpret in one way and damned too if they interpret the other. For example, the law as to whether a company is an NBFC or not itself is ambiguous with Reserve Bank of India having not issued any clear cut official guidelines. However, the Auditor will have to interpret whether a company is an NBFC or not.

The violations of provisions relating to NBFCs can attract very serious consequences including minimum imprisonment of one year for some violations.

Note though that these directions will NOT apply to the audit for the year ended on 31st March 2008. They apply only to audit in respect of years ending on or after 18th September 2008. However, to view the matter in another sense, they would have immediate and even retrospective effect since they would apply to the current financial year also and though there do not appear to be any fresh requirement on the company itself, the company may need to prepare appropriate records for the auditors for the period from 1st April 2008 to satisfy the auditor that there is due compliance.

A review of these more comprehensive Directions should be made by the NBFCs and their Auditors.

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