2020 (8) TMI 639 - HC - Indian Laws

Cancellation of Certificate of Registration of Non-Banking Financial Institution - HELD THAT - The petitioner has not made any effort to justify its calculation of NOF given in its Balance Sheet for the year 2016-17. This contention raised during hearing of the writ petition does not find mention in the body of the writ petition, therefore, has not been responded by RBI in its reply filed to the writ petition. However, in its letter dated 04.12.2018 submitted in response to Bank s letter dated 30.11.2018 and in its reply dated 15.01.2019 to the show cause notice dated 03.01.2019, the petitioner had specifically relied upon the above extracted circular to justify its calculations of NOF made in the Balance Sheet for the year ending on 31.03.2017. In its appeal preferred under Section 45-IA(7) of the RBI Act, the petitioner again defended its calculations in arriving at NOF on the strength of Master Circular of RBI. A bare perusal of the circular relied upon by the petitioner makes it evident that NOF described therein only pertains to Exposure norms to be followed by All India Financial Institutions namely Exim Bank, NABARD, NHB and SIDBI. NOF described therein cannot be read for calculating NOF of petitioner NBFC. The NOF of petitioner has to be calculated only in terms of Section 45-IA of RBI Act. Petitioner has not disputed investment of ₹ 17 Lakhs and loans of ₹ 54.41 Lakhs advanced by it to its Group Companies. Therefore, these amounts in excess of 10% of Owned Fund have been justifiably deducted by RBI while determining ₹ 150.33 Lakhs as NOF of the petitioner. In its notification dated 27.03.2015, the RBI had specified ₹ 200 Lakhs as minimum NOF required by an NBFC to commence or carry on business of NBFI. The then existing NBFCs holding CoR for carrying on business of NBFI were given timeline upto 01.04.2016 for achieving NOF of ₹ 100 Lakhs and upto 01.04.2017 for attaining NOF of ₹ 200 Lakhs. Petitioner NBFC did not achieve the minimum prescribed limit of NOF within the stipulated period. It failed to comply with the directions issued by the Bank under the provisions of Chapter III B of RBI Act. Therefore, no opportunity for complying with the directions could be granted to it as the CoR was cancelled by taking recourse to Section 45-IA(6)(iv). Thus, Master Circular relied upon by the petitioner for calculating its NOF is not applicable to it. NOF of the petitioner for the year ending on 31.03.2017 (2016-17) is required to be and justifiably determined by RBI in accordance with Explanation I of Section 45-IA of the RBI Act - Since NOF of the petitioner-NBFC determined under the applicable provisions of RBI Act fell short of minimum limit of ₹ 200 Lakhs prescribed by RBI for carrying on the business of NBFI, therefore, its CoR was cancelled by RBI taking recourse to Section 45-IA(6)(iv) of the Act - The CoR of the petitioner was cancelled by RBI under the provisions of Section 45-IA(6)(iv) of the RBI Act, which does not entail providing any opportunity for complying with the provisions/ conditions violated by the petitioner. Otherwise also, sufficient opportunity had already been granted by the RBI in the notification dated 27.03.2015 to achieve prescribed NOF, i.e. to comply with its directions. In any case, shortfall in NOF in the Balance Sheet of the petitioner for the year 2016-17 cannot be rectified three years later in 2020. Petition dismissed.

Summary

Issues Involved:
1. Calculation of Net Owned Fund (NOF)
2. Opportunity to rectify non-compliance before cancellation of Certificate of Registration (CoR)

Detailed Analysis:

1. Calculation of Net Owned Fund (NOF)
The primary issue revolves around the calculation of the petitioner's Net Owned Fund (NOF). The petitioner, a Private Limited Company registered under the Companies Act, 1956, had its Certificate of Registration (CoR) for carrying on the business of Non-Banking Financial Institution (NBFI) canceled by the Reserve Bank of India (RBI). The cancellation was based on the petitioner's failure to meet the NOF requirement of ?200 Lakhs as specified by the RBI.

The petitioner argued that the RBI had incorrectly calculated its NOF by deducting loans and advances made to its group companies from its owned funds. According to the petitioner, these deductions were not warranted under the RBI's Master Circular dated 01.07.2015, which did not explicitly mention the deduction of loans and advances while calculating NOF.

However, the court noted that the Master Circular relied upon by the petitioner was not applicable to NBFCs but to All India Financial Institutions like Exim Bank, NABARD, NHB, and SIDBI. The NOF for NBFCs must be calculated as per Section 45-IA of the RBI Act, which mandates the deduction of investments and loans to group companies exceeding 10% of the owned funds. Consequently, the RBI's calculation of the petitioner's NOF at ?150.33 Lakhs was upheld, as it correctly deducted the investments and loans exceeding the specified limit.

2. Opportunity to Rectify Non-Compliance Before Cancellation of CoR
The petitioner contended that even if its NOF was below the required ?200 Lakhs, the RBI should have provided an opportunity to rectify the deficiency before canceling the CoR, as per the proviso to Section 45-IA(6)(ii) of the RBI Act. This section stipulates that before canceling a CoR for failure to comply with conditions, the RBI should give the company an opportunity to take necessary steps to comply with the provisions.

The court, however, clarified that the cancellation of the petitioner's CoR was under Section 45-IA(6)(iv) of the RBI Act, which pertains to failure to comply with any direction issued by the RBI. This section does not mandate providing an opportunity to rectify non-compliance. The RBI had already specified the NOF requirement in its notification dated 27.03.2015, giving existing NBFCs until 01.04.2017 to meet the ?200 Lakhs NOF requirement. The petitioner failed to meet this requirement within the stipulated timeframe, justifying the cancellation of its CoR without further opportunity to comply.

Conclusion:
The court dismissed the writ petition, affirming the RBI's calculation of the petitioner's NOF and its subsequent cancellation of the CoR under Section 45-IA(6)(iv) of the RBI Act. The petitioner's reliance on the Master Circular was found to be misplaced, and the court emphasized that the NOF must be calculated as per the statutory provisions of the RBI Act. Additionally, the court ruled that no further opportunity to rectify the NOF deficiency was warranted, as adequate time had already been provided by the RBI.