Extension of Ombudsman Scheme to remaining class of notified NBFCs

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By Dibisha Mishra (dibisha@vinodkothari.com)

Updated as on April 26, 2019

Introduction

Reserve Bank of India (RBI), in its Statement on Development and Regulatory Policies[1] dated April 04, 2019, stated its intention to extend the same to the remaining notified classes of NBFCs as well, by the end of April, 2019.

Ombudsman Scheme for Non-Banking Financial Companies, 2018 (Scheme) on 23rd February, 2018[2] was introduced with the intent of curbing down the time, costs and complexities involved in complaint redressal mechanism for certain services rendered by non-banking financial companies (NBFC). The salient features of the Scheme worth taking note of has been explained in our previous article.[3] The Scheme covered within its ambit, all NBFCs registered with RBI, who are:

  • authorized to accept deposits; or
  • having customer interface, with assets size of Rs. 100 Crores or above, as on the date of the audited balance sheet of the previous financial year,

(hereinafter referred to as “notified classes of NBFCs”)

However, to start with, the Scheme was made applicable to deposit taking NBFCs only and the idea was to make it applicable on the other notified classes of NBFCs, once the same could gather some traction.

Subsequently, as per RBI’s recent statement in regard to increased applicability, a formal notification in this regard was expected to follow. The aforesaid has finally been notified vide. RBI’s notification dated April 26, 2019[4].

Considering the importance of the matter, in this article we will discuss all that the remaining notified classes of NBFCs must prepare for.

Applicability

As already stated the Scheme is applicable to all notified classes of NBFCs, however, the following classes of companies are excluded from its purview:

  • Non-banking Financial Company – Infrastructure Finance Company (NBFC-IFC);
  • Core Investment Company (CIC);
  • Infrastructure Debt Fund – Non-banking Financial Company (IDF-NBFC); and
  • A company under liquidation.

To do list for newly included entities

Upon notification of Scheme, the newly notified NBFCs will have to immediately take care of the following:

  1. Make the copy of the Scheme available on the website and also with the designated officer of the company for perusal in the office premises.
  2. Display prominently in all its offices and branches:
  • the purpose of the Scheme;
  • the contact details of the Ombudsman to whom the complaint is to be made by the aggrieved customer;
  • notice about the availability of the copy of Scheme with such designated officer.
  1.  Appoint Nodal Officers at Head/ Registered/ Regional/ Zonal Offices and inform all the Offices of the Ombudsman about the same.
  2. Nodal Officers so appointed must be responsible for representing the company and furnishing information to the Ombudsman in respect of complaints filed against the NBFC.
  3. Wherever more than one zone/ region of a NBFC is falling within the jurisdiction of an Ombudsman, designate one of the Nodal Officers as the ‘Principal Nodal Officer’ for such zones or regions

Pre-Conditions for availing the Scheme by an aggrieved customer

A customer aggrieved by the acts of the company or its representatives can make an application under the Scheme, however, the following pre-conditions must be satisfied before making an application:

  1. Complaint must refer to any of the grounds mentioned under Clause 8 of the Scheme.
  2. Customer must have filed a written representation to the respective NBFC regarding the grievance
  3. Concerned NBFC must have rejected the complaint or the complainant must not have received any reply within one month of NBFC receiving the representation or the complainant must not have been satisfied with the reply given to him by the NBFC.
  4. Not more than one year must have elapsed after the complainant received the unsatisfactory reply or where no reply was received, not later than one year and one month have elapsed after the date of representation to NBFC.
  5. The complaint must not be in respect of the same cause of action which was settled or dealt with on merits by the Ombudsman in any previous proceedings whether or not received from the same complainant or along with one or more complainants or one or more of the parties concerned with the cause of action;
  6. The complaint must not pertain to the same cause of action, for which any proceedings before any court, tribunal or arbitrator or any other forum is pending or a decree or Award or order has been passed by any such court, tribunal, arbitrator or forum;
  7. The complaint must not be frivolous or vexatious in nature;
  8. The complaint must fall under the period of limitation prescribed under the Indian Limitation Act, 1963 for such claims; and
  9. The complainant must have filed along with the complaint, copies of the documents, if any, which he intends to rely upon, and a declaration that the complaint is maintainable under Clause 9-A.

Roadmap while availing the Scheme

Once the complainant is satisfied that the aforesaid conditions are satisfied, it will have to take the following route to make the application:

  1. Make a complaint, as per Annex II of the Scheme, to the Ombudsman under whose jurisdiction the concerned NBFC falls. The complaint can be made either by the aggrieved customer himself or by his authorized representative;
  2. Where extra clarification or documents is required from the customer, the same is to be provided;
  3. Ombudsman shall send a copy of the complaint to the branch or registered office of the NBFC named in the complaint, under advice to the designated Nodal Officer (NO);
  4. Ombudsman may require NBFC to provide information or furnish certified copies of any document relating to the complaint which is or is alleged to be in its possession;
  5. Endeavour should be made to promote a settlement of the complaint by agreement between the complainant and the NBFC through conciliation or mediation. He/ she may convene a meeting of NBFC and the complainant together to promote an amicable resolution;
  6. If complaint is still not settled by agreement, Ombudsman shall pass an award of either allowing or rejecting the case after giving both parties an opportunity of being heard;
  7. The Ombudsman shall take into account the evidence being placed, the underlying principles on which the practices, directions, instructions and guidelines issued by the Reserve Bank from time to time and such other factors which in his opinion are relevant to the complaint;
  8. A copy of the Award shall be sent to the complainant and the NBFC free of cost;
  9. An Award shall take effect only when the complainant furnishes to the NBFC and the Ombudsman concerned within a period of 30 days from the date of receipt of copy of the Award, a letter of acceptance of the Award in full and final settlement of his claim;
  10. Unless an appeal is filed, the NBFC shall then comply with the Award and intimate compliance of the same to the complainant and the Ombudsman;
  11. Award or appeal rejection can be appealed against within 30 days of receipt of such communication.

Conclusion

The Ombudsman scheme plays a very important role in the banking system. Considering the growing importance of NBFCs in the country, introduction of this became essential. However, effectiveness of any initiative depends on how well the beneficiaries of the same are informed; same will be the case with this Scheme as well. This Scheme will turn out to be fruitful only if the same borrowers are educated about this. RBI must also take some initiative to achieve that as well

[1] https://rbidocs.rbi.org.in/rdocs/PressRelease/PDFs/PR23654E42140EAC6347D1A9D08AF62F5BF2E9.PDF

[2] https://rbidocs.rbi.org.in/rdocs/Content/PDFs/NBFC23022018.pdf

[3] http://vinodkothari.com/2018/02/rbis-ombudsman-storm-tough-road-ahead-for-nbfcs/

[4] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11546&Mode=0

Adjudication of penalties under SEBI: SC ruling gives controlled discretion to Adjudicating Officer

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-Ruling of Bhavesh Pabari overrules Roofit Industries

By Smriti Wadehra (smriti@vinodkothari.com)

A three member Bench of the SC recently overruled its earlier decision in Roofit Industries Ltd vs SEBI, and provided a controlled discretion to the Adjudicating Officer in fixing penalties for offences under the SEBI Act as well Securities Contract Regulation Act (SCRA) as a result of  the ruling, the Adjudicating Officer shall not be constrained by the minimum extent of penalty laid in SEBI Act and may, where circumstances so warrant, either waive off the penalty completely or may assign a penalty less than the so called minimum. Thus, the adjudication of penalties may be expected to be more commensurate with the gravity of the offence, than was so far possible primarily due to the position arising out of Roofit ruling. Read more →

RBI’s 12th February circular: The Last Word Becomes the Lost World

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RBI’s 12th February circular:

The Last Word Becomes the Lost World

Abhirup Ghosh (abhirup@vinodkothari.com)

The 12th February 2018 circular of the Reserve Bank of India (RBI)[1] (Circular), arguably one of the sternest of measures requiring banks to stop ever-greening bad loans, and resolve them once for all, with a hard timeline of 6 months, or mandatorily push the matter into insolvency resolution, was aimed at being the last word, overriding several of the previous measures such as CDR, JLF, SSSS-A, etc. However, with the Supreme Court striking it down, in the case of Dharani Sugars and Chemicals Limited vs Union of India and Ors.[2], the mandate of the RBI in directing banks with how to deal with stressed loans has fallen apart. While the SCI has used very technical grounds to quash the 12th Feb circular, the major question for the RBI is whether it should continue to micro-manage banks’ handling of bad loans, and the major question for the banks is when will they grow up into big boys and stop expecting RBI to tell them how to clean up the mess on their balance sheet. Read more →

Basics about formation of Nidhi companies

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By CS Megha Saraf

corplaw@vinodkothari.com

 

Nidhi as the Hindi word denotes “sampatti” is a type of public company which may be incorporated with an exclusive object of cultivating the habit of thrift and savings amongst its members, deposits from, and lending to, its members only, for their mutual benefit. The same is a type of company which may be incorporated under Section 406 of the Companies Act, 2013, read with the applicable rules, as a public company with a minimum paid-up equity share capital of Rs. 5 lakhs. Although the activities of a Nidhi company is similar to that of a non-banking financial company, as to accepting deposits and granting loans, however, they have been exempted from the purview of the RBI Act, 1934 by virtue of the RBI Master Direction- Exemptions from the provisions of RBI Act, 1934.

Requirements for incorporating a Nidhi company

In order to incorporate a Nidhi company, it shall have:

  1. atleast 200 members;
  2. Net Owned Funds of Rs. 10 lakhs or more;

(Note: Net Owned Funds= aggregate of paid up equity share capital + free reserves – accumulated losses and intangible assets appearing in the last audited balance sheet)

  1. Unencumbered term deposits of atleast 10% of the outstanding deposits;
  2. Ratio of Net Owned Funds to deposits not more than 1:20;
  3. Issuance of shares of nominal value of atleast Rs. 10 each;
  4. To allot a minimum of 10 equity shares or shares equivalent to Rs. 100.

In order to clarify point no. 4, let us take an example; Company X has 20 equity shares of face value of Rs. 10 each. Mr. A, an individual shall be required to subscribe atleast 10 equity shares in order to deposit Rs. 2000 in the Company. Further, as evident, such subscription of equity shares shall not provide any interest to the deposit holder, but, shall form part of the shareholders’ funds of the company.

Requirements w.r.t deposits and loans

As mentioned above, the objective of a Nidhi company is to take deposits and provide loans to its members. The Ministry of Corporate Affairs (“MCA”) being the regulator of Nidhi companies has regulated the norms for taking deposits and providing loans which are as follows:

Deposits

The Nidhi company shall be allowed to accept deposits with the following timelines:

  1. Fixed deposits- 6 to 60 months
  2. Recurring deposits- 12-60 months
  • Recurring deposits relating to mortgage loans- Maximum period shall correspond to the repayment period of loans granted.

Interest rate on deposits

  1. Savings Account- Maximum 2% above the rate allowed by nationalized banks
  2. Fixed and Recurring deposits- At par with the RBI rate

Loans

A Nidhi company can provide loan to its members as per the following ceiling limits:

  1. Where total amount of deposits from its members is less than Rs. 2 Cr- Rs. 2 lakhs
  2. Where total amount of deposits from its members is more than Rs. 2 Cr but less than Rs. 20 Cr- Rs. 7.50 lakhs
  3. Where total amount of deposits from its members is more than 20 Cr but less than Rs. 50 Cr- Rs. 12 lakhs
  4. Where total amount of deposits from its members is more than Rs. 50 Cr- Rs. 15 lakhs

Interest rates of loans

The interest charged on any loan given by a Nidhi company shall not exceed 7.5% above the highest rate of interest offered on deposits by Nidhi and shall be calculated on reducing balance method.

General restrictions or prohibitions

Similar to a NBFC, there are certain restrictions or prohibitions on Nidhi companies as well.

Some of the major restrictions or prohibitions of a Nidhi company are that it shall not:

  1. carry on the business of chit fund, hire-purchase finance, leasing finance, insurance or acquisition of securities issued by any body corporate;
  2. open any current account with its members;
  3. accept deposits from or lend to any person, other than its members;
  4. carry on the business other than the business of borrowing or lending in its own name;
  5. take deposits or lend money to any body corporate;
  6. issue of advertisements in any form soliciting deposits;
  7. pay brokerage in order to mobilize deposits from members or for deployment of funds or for granting loans

Compliances to be made by Nidhi companies

Nidhi companies shall be required to do the following compliances:

  1. Filing of return of statutory compliances in e-Form NDH-1– Within 90 days of the close of first F.Y. and where applicable, the second F.Y.
  2. Filing of non-compliance with the conditions mentioned w.r.t incorporation of a Nidhi company such as minimum no. of members, Net Owned Funds etc. in e-Form NDH-2– Within 30 days of the close of first F.Y.
  3. Filing of half-yearly return in e-Form NDH-3– Within 30 days of the conclusion of each half year.

 

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