‘Minimum Government and Maximum Governance’’ and ABC analysis must be adopted by RBI spare all private companies from requirements of registration and filing etc.

[CA DEV KUMAR KOTHARI]

‘Minimum Government and Maximum Governance’ (MGMG):

Minimum government and maximum governance (in short MGMG) is the policy of government. All governments claim to have such policies. Narendra Modi government seems to have more commitment in this regard.

However, unfortunately it appears that many of important government agencies are not adopting this policy and are trying to impose unreasonable government or regulations where it is not at all required.

Always Better Control or ABC control:

The concept of Always Better Control or ABC control for short, is based on theory of analysis of items to be controlled based on importance. Putting them in A, B, C  (may be some more classes if so required) categories and designing appropriate degrees for control.

Unless policy of selective control by way of ABC analysis for “Always Better Control” is adopted, we are afraid that the controls will not be manageable, many small private  companies,  will be penalized and big one will be proved ‘flight by night operators” after cheating innocent and gullible people.

Reserve Bank of India (RBI)

RBI being the Central Bank of India is established to monitor monetary, banking and related policies and control banking and some part of financial sectors in India.

On http://www.rbi.org.in/Scripts/AboutusDisplay.aspx#EP1 we find as follows:

The Preamble of the Reserve Bank of India describes the basic functions of the Reserve Bank as:

"...to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage."

Main Functions

Monetary Authority:

• Formulates, implements and monitors the monetary policy.
• Objective: maintaining price stability and ensuring adequate flow of credit to productive sectors.

Regulator and supervisor of the financial system:

• Prescribes broad parameters of banking operations within which the country's banking and financial system functions.
• Objective: maintain public confidence in the system, protect depositors' interest and provide cost-effective banking services to the public.

Manager of Foreign Exchange

• Manages the Foreign Exchange Management Act, 1999.
• Objective: to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India.

Issuer of currency:

• Issues and exchanges or destroys currency and coins not fit for circulation.
• Objective: to give the public adequate quantity of supplies of currency notes and coins and in good quality.

Developmental role:

• Performs a wide range of promotional functions to support national objectives.

Related Functions:

• Banker to the Government: performs merchant banking function for the central and the state governments; also acts as their banker.

Banker to banks: maintains banking accounts of all scheduled banks.

 On perusal of the above preamble and major functions of RBI, it is clear that the RBI must have approach with a broader outlook and broader result orientations.

RBI must devise control systems based on ABC analysis and MGMG. It is futile to control petty activities, which have insignificant role.

Control over small private limited companies:

It appears that the RBI is trying to force even very small private limited companies merely because they have some activities like investment in shares and securities, granting of loans and advances etc.

Private companies   must be spared from ambit of NBFC

Private companies   must be spared from ambit of NBFC and related regulations. Private companies are not entitled to invite or accept deposits from public.

As per Companies Act, 1956 the meaning of private company as per section 3 is as follows (with highlights added for relevance and analysis) :

3. Definitions of "company", "existing company", "private company" and "public company".

(1) In this Act, unless the context otherwise requires, the expressions "company", "existing company", "private company" and "public company", shall, subject to the provisions of sub-section (2), have the meanings specified below:

xxx

(iii) "private company" means a company which has a minimum paid-up capital of one lakh rupees or such higher paid-up capital as may be prescribed, and by its articles,

           (a) restricts the right to transfer its shares, if any;

(b) limits the number of its members to fifty not including

                  (i) persons who are in the employment of the company; and

(ii) persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased; and

(c) prohibits any invitation to the public to subscribe for any shares in, or debentures of, the company;

(d) prohibits any invitation or acceptance of deposits from persons other than its members, directors or their relatives:]

Provided that where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this definition, be treated as a single member;

Thus, in the Companies Act, 1956 the enactment itself contained restriction on private companies, on inviting or accepting deposit from public.

As per Companies Act, 2013 the meaning of private company as per section 2 (68) is as follows (with highlights added for relevance and analysis):

Definitions

     2. In this Act, unless the context otherwise requires,—

(68) "private company" means a company having a minimum paid-up share capital of one lakh rupees or such higher paid-up share capital as may be prescribed, and which by its articles,—

                (i)  restricts the right to transfer its shares;

               (ii)  except in case of One Person Company, limits the number of its members to two hundred:

Provided that where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this clause, be treated as a single member:

          Provided further that—

           (A) persons who are in the employment of the company; and

(B) persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased,

shall not be included in the number of members; and

               (iii) prohibits any invitation to the public to subscribe for any securities of the company;

Although in the Companies Act, 2013 in the meaning of ‘private company’ there is no specific restriction on acceptance of deposit from public,  as was found in the Act of 1956. However, the new Rules dealing with restrictions on deposit provide more stringent  restrictions . Now a private company cannot accept deposit even  from its director  except out of his own resources. Therefore, there is clear bar on acceptance of deposit from public.

Many of old private limited companies still contain restriction on accepting deposit from public or inviting public for making deposits, as was required under the Companies Act, 1956 and have not diluted this restriction.  Therefore, most of private companies are not entitled to invite public for any securities or accept deposit from public.

In Companies Act 1956, restrictions on number of shareholders was 50 this has been raised to 200 under the CA 2013. Therefore, a set of people consisting of say maximum of 200 cannot be called ‘public’, in the context of banking business of non banking finance companies.

Primary and common sense of banking:

In primary and common sense Banking business means taking money from public as deposits or otherwise at lower rate of interest and then lending money to public at higher rate of interest.  Thus earning difference in cost of finance and revenue from deployment of funds on interest can be called primary indication of a banking activity.

Miscellaneous finance companies:

However, at present many of such private companies who are making investments in securities, lending money, making deposits, engaged in hire purchase or instalment payment facilities etc. are called miscellaneous finance companies.

Private NBFC’s cannot avail public money by way of deposit.

The role of such private companies is very limited and can be called miniscule in overall context of our monetary and banking system.

Even limited companies which are not listed have limited number of shareholders and work with own resources or limited participation of associated persons.

On reading of some information available on the website of RBI, the following categories of NBFCs are not desired to be regulated by way of registration with the Reserve Bank of India. :-

i)          NBFCs with asset size below ₹ 25 Crore whether accepting public Funds or not.

ii)         NBFCs with asset size below ₹ 500 Crore and not accepting public funds, directly or indirectly.

Penny wise pound foolish policies and actions of  RBI

We find that RBI is un-necessarily writing , following and harassing small companies who have not availed and cannot avail public money like Private Companies who are not allowed to take deposits from public. Asking such companies to apply for registration, file documents , and investigate them can only  be called penny wise and pound foolish for an institution like RBI.

 Recent initiative of RBI by issue of letters to small companies:

Recently RBI has sent letters to many private companies on the following lines: 

Dear Sir/Madam,

Information called in terms of Section 45-M of RBI Act, 1934

…. Private limited:

Your attention is drawn to Section 45IA of the RBI Act, 1934, in terms of which no company can commence or carry on the business of Non- Banking Financial Company without obtaining a Certificate of Registration (CoR) from RBI. As per the records of Ministry of Corporate Affairs, your Company has been registered at Office of Registrar of Companies under the ‘financial code’.

2. You are therefore, advised, to submit the latest audited annual reports comprising Balance Sheet and Profit and Loss Account, along with the names and contact details (E-mail IDs, Phone numbers, Fax number and Addresses) of Directors of the company (including all companies in your group registered with RoC) within seven days to this office, in order to enable us to confirm that your company is not carrying on any business which falls under the ambit of non-banking financial activity.

3. You may submit the information at [email protected] , [email protected], [email protected], [email protected], [email protected] or send it to the undersigned by seed post/ courier/hand delivery addressed to General Manger, Reserve Bank of India, Department of Non-Banking Supervision, 5^th floor, 15 N S Road, Kolkata 700001. Please note that the information must reach this office within seven days of the date of this notice, failing which you may attract the penal provisions of Section 58-and contact details (E-mail IDs, Phone numbers, Fax number and Addresses) of Directors of the company (including all companies in your group registered with RoC) within seven days to this office, in order to enable us to confirm that your company is not carrying on any business which falls under the ambit of non-banking financial activity.

3. You may submit the information at [email protected] , [email protected], [email protected], [email protected], [email protected] or send it to the undersigned by seed post/ courier/hand delivery addressed to General Manger, Reserve Bank of India, Department of Non-Banking Supervision, 5^th floor, 15 N S Road, Kolkata 700001. Please note that the information must reach this office within seven days of the date of this notice, failing which you may attract the penal provisions of Section 58-B (4-A) of the RBI Act, 1934.

4. You may mark the subject line as “Company name- information called for in terms of Section 45-M of the RBI Act, 1934.” and mention the same on the face of the envelope.

                                                                                                               Yours Sincerely,

Manager.   

In case of some companies, it has been recently informed that application made by them long ago sometime around 20002004-  ( 10-15 years) was rejected  and it is found that the company is in finance company code . Therefore, information is required by companies and companies are asked / may be asked why penal action/ stern action etc.  should not be taken.

Such letters are issued as a routine knowing fully that company is a private limited company or a closely held company which has not received any public money.

Course of action by companies and subsequent action at RBI:

In view of threat of stern action, companies will have to furnish required documents, and may also make an application for registration. Once these documents are filed RBI officers will examine them and then take a view (most probably that registration as NBFC is desired. And then lot of documentation will take place.

All private limited companies must be exempted:

In view of discussion above all private limited companies must be spared by RBI from requirement of Registration and filing of documents etc.

Limited companies may be exempted if they do not accept public money by issue of securities and accepting deposits.

Suggested answer to such letters:

In case of companies who have been informed about rejection of an old application for registration and asked to furnish documents and  are threatened of stern action in case they fail to furnish documents or get registered, reply on following lines can be prepared with suitable modification.

Date :    January, 2015

To :

Mr. / Mrs. 

Asstt. General Manager

Reserve Bank of India

 Mumbai/ Kolkata/  Delhi ..

Dear Sir,

Reg : Exemption from registration as NBFC in view of small private company with prohibitions on invitation of public to contribute capital in any manner.

At the outsets we may mention that we are a very small closely held private limited company carrying business with own funds in nature of share capital and reserves.  We had never invited or otherwise accepted capital from public in any manner like equity, debenture, bonds or deposit of money in any manner from public.

In fact, as per our understanding of laws as a private limited company vide the Companies Act, 1956 as well as the Companies Act, 2013, we are prevented from making invitation to public or accepting from public capital in any form or manner like shares, debentures or deposits.

Our articles of Association also contains the following restrictions:

   “set out as per articles of Association”

As per Companies Act, 1956** the meaning of private company as per section 3 is as follows:

3. Definitions of "company", "existing company", "private company" and "public company".

(1) In this Act, unless the context otherwise requires, the expressions "company", "existing company", "private company" and "public company", shall, subject to the provisions of sub-section (2), have the meanings specified below:

xxx

(iii) "private company" means a company which has a minimum paid-up capital of one lakh rupees or such higher paid-up capital as may be prescribed, and by its articles,

               (a) restricts the right to transfer its shares, if any;

               (b) limits the number of its members to fifty not including

                    (i) persons who are in the employment of the company; and

                    (ii) persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased; and

               (c) prohibits any invitation to the public to subscribe for any shares in, or debentures of, the company;

^{          }        (d) prohibits any invitation or acceptance of deposits from persons other than its members, directors or their relatives:]

                    Provided that where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this definition, be treated as a single member;

Thus, in the Companies Act, 1956 the enactment itself contained restriction on private companies, on inviting or accepting deposit from public.

** 1956 Act is also relevant because in some cases RBI is now informing about rejection which took place long ago (and was most probably not communicated to company at that time)

As per Companies Act, 2013 the meaning of private company as per section 2 (68) is as follows:

Definitions

     2. In this Act, unless the context otherwise requires,—

(68) "private company" means a company having a minimum paid-up share capital of one lakh rupees or such higher paid-up share capital as may be prescribed, and which by its articles,—

                (i)  restricts the right to transfer its shares;

               (ii)  except in case of One Person Company, limits the number of its members to two hundred:

Provided that where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this clause, be treated as a single member:

          Provided further that—

           (A) persons who are in the employment of the company; and

(B) persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased,

shall not be included in the number of members; and

           (iii) prohibits any invitation to the public to subscribe for any securities of the company;

Although in the companies Act, 2013 in the meaning of ‘private company’ there is no specific restriction on acceptance of deposit from public,  as was found in the Act of 1956. However, the Rules dealing with restrictions on deposit provide similar restrictions. A private company cannot accept deposit from its director or shareholder except out of his own resources. Therefore, there is clear bar on acceptance of deposit from public.

Our articles still contain restriction on accepting deposit from public or inviting public for making deposits, as was required under the Companies Act, 1956 and we have not diluted this restriction.  Therefore, we are not entitled to invite public or accept deposit from public.

As stated earlier, we have not accepted any deposit form public or invited public to make any deposit or subscribe to any security. Therefore, there is no involvement of public money.

Therefore, we are not at all permitted to raise public money in any manner and we had never invited or accepted any money in any form from public.

We had never carried any business of the nature of banking or NBFC in true sense because there is no participation of public in any manner.

In primary and common sense Banking business means taking money from public as deposits or otherwise at lower rate of interest and then lending money to public at higher rate of interest.  Thus earning difference in cost of finance and revenue from deployment of funds on interest can be called primary indication of a banking activity. This has never been our business.

We sincerely believe and understand that we are not a company of size and nature which is required to be registered as NBFC or which need regulations and monitoring by RBI.

Further, as per our understanding, on reading of some information available on the website of RBI, the following categories of NBFCs are exempted from Registration with the Reserve Bank of India. :-

i)          NBFCs with  asset size below ₹ 25 Crore whether accepting public Funds or not.

ii)         NBFCs with asset size below ₹ 500 Crore and not accepting public funds, directly or indirectly.

With reference to your Letter No.  dated  we would like to state that, as explained above we are not required to get registered.

We are sorry to inform you that on checking of our old records we could not find your letter No. DNBS.RO.CAL.NO.     REJT.INOF.(     )/2002-2003 dated …...2002 in our  records  regarding rejection of  Certificate of Registration under Section 451A of the RBI Act. On recall of our memory, (of concerned persons)  also we could not recall any such rejection of application having been received by us. Therefore, it may be that the said letter was not received by us at all. In case any such letter was received, hopefully some reply must have been given from our end.

Submission of documents:

Without prejudice to our contention that we are not required to get registered, as desired by you, we are enclosing herewith a copy each of the last two audited Balance Sheet of the Company i.e. for Financial Year 2012-13 & 2013-14 for your kind perusal.

 From these you will find that there is no involvement of any public money in our operations.

Request:

In view of very small company, not entitled to invite public to contribute capital in any manner, not having invited or accepted any public money, not engaged in any banking activity etc. we request you to kindly exempt us from formalities of registration and other compliances.

A suggestion:

We suggest that RBI and other regulatory authorities must devote their valuable time in regulating companies where such regulation is really required. There seems no purpose of asking small private companies to get registered and comply with formalities and regulate them. It will be sheer wastage of public money if regulatory authorities like RBI are devoting time on regulating companies where any such regulation is not at all required. Therefore, there must be clear exemption of private companies from registration and compliances as NBFC.

Unless policy of selective control by way of ABC analysis for “Always Better Control” is adopted, we are afraid that the controls will not be manageable, small companies, like us will be penalized and big one will be proved ‘flight by night operators” after cheating people.

We hope our suggestion shall be taken and considered in right earnest and spirit by RBI ,as a meaningful regulator and in accordance with the basic policy  of the Narendra Modi Government  that is ‘Minimum Government and Maximum governance’’.

We therefore, request that we may be exempted from getting registration and any coercive proceeding may not be initiated,  for any technical or procedural lapses, if at all.

Thanking you,

Yours faithfully,

For ……… Finance/ investment/ leasing  Pvt. Ltd.

DIRECTOR

Encl:

Annual report for FY 2013-14  and 2012-13