Friday, October 23, 2009

RBI extends time limit for Auditors' Certificate for NBFCs - leaves fundamental issues unaddressed

Auditors of non-banking financial companies (NBFCs) have to submit a certificate every year to the Reserve Bank of India on whether the NBFC is engaged in the business of a non-banking financial institution (NBFI). The certificate also gives the income/asset pattern for making it eligible for classification under various categories. The last date for submission of this certificate for the immediately previous financial year ended on 31st March was 30th June (e.g., the last date for FY ended 31st March 2009 was 30th June 2009). This requirement was under the respective Prudential Norms Directions for deposit accepting and non-deposit-accepting NBFCs.

RBI has now changed this deadline of 30th June. Now, Auditors will need to submit such certificate within one month of the finalization of the balance sheet but in any case not later than 30th December (note that its 30th December and not 31st December). You can find the circular here (the circular contains the amending notifications too).

This extension was obviously needed since otherwise an NBFC would have been, for all practical purposes, required to finalize its accounts by 30th June (actually even earlier).

However, certain fundamental issues remain unresolved. How does an auditor certify whether the NBFC is engaged in the business of an NBFI? For most practical purposes, the legal requirement is that if an NBFC's "principal" business is of certain financial and similar activities, then it is deemed to be engaged in the business of an NBFI. How does one determine what is "principal" business? RBI has issued certain clarifications that one could look at the mathematical majority of assets and income as of the yearend. This has the advantage of mathematical certainty but creates numerous practical problems. Recent upturns and downturns in financial markets have ravaged the income and asset patterns of several NBFCs and yearend positions are often misleading.

RBI's view can be held to be contradictory and beyond the express provisions of the Act particularly if because of a temporary and a mere yearend change, it would mean that the NBFC is no more eligible to retain its certificate of registration. Also, whether a company is an NBFC and whether an NBFC continues to remain an NBFC is an issue that has implications even beyond the RBI Act since there are numerous cross references in other laws.

Of course, the reality also is that RBI does not appear to take a hyper-technical and strict stand and instead of going literally by its own clarification, it does look at the facts. But the NBFC would surely feel insecure when its own auditors may have to certify that it is no more an NBFC merely because of a yearend mathematical position and that too of just one year.

- Jayant Thakur

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