Guidelines on Corporate Governance for NBFCs: Key Principles and Practices

 

In order to enable NBFCs to adopt best practices and greater transparency in their operations the RBI vide its Master Direction No. RBI /DNBR/ 2016-17/45. DNBR.PD.008/03.10.119/2016-17 dated 1st September, 2016 (updated as on 17th February, 2020 issued the guidelines. These guidelines are applicable for NBFC-Systematically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016.

 

The provisions of these directions shall apply to the following:

 

1. Systemically Important Non-Deposit taking Non-Banking Financial Companies (NBFC-ND-SI) registered under the RBI Act, 1934.
2. Deposit taking Non-Banking Financial Companies (NBFC-D) registered under the RBI Act, 1934.
3. NBFC-Factor registered under section 3 of the Factoring Regulation Act, 2011, with an asset size of Rs. 500 crore and above.
4. Infrastructure Debt Fund – Non-Banking Finance Companies (IDF-NBFC) registered under the RBI Act, 1934.
5. Non-Banking Finance Companies – Micro Finance Institutions (NBFC-MFIs) registered under the RBI Act, 1934, with an asset size of Rs. 500 crore and above.
6. Non-Banking Finance Companies - Infrastructure Finance Companies (NBFC-IFC) registered under the RBI Act, 1934, with an asset size of Rs. 500 crore and above.

 

These categories are collectively referred to as 'applicable NBFCs' in the directions.

 

Chapter XI of the captioned Master Directions deals with the Corporate Governance and provides as under:

 

1. Audit Committee:

 

All Applicable NBFCs shall constitute an Audit Committee, consisting of not less than three members of its Board of Directors.

Explanation I: The Audit Committee constituted by an on-banking financial company as required under Section177 of the Companies Act, 2013 shall be the Audit Committee for the purposes of this paragraph.

 Explanation II: The Audit Committee constituted under this paragraph shall have the same powers, functions and duties as laid down in Section 177 of the Companies Act, 2013.

 

The Audit Committee must ensure that an Information System Audit of the internal systems and processes is conducted at least once in two years to assess operational risks faced by the NBFCs.

 

2. Nomination Committee:

All Applicable NBFCs shall form a Nomination Committee to ensure ‘fit and proper’ status of proposed/ existing directors.

Explanation I: The Nomination Committee constituted under this paragraph shall have the same powers, functions and duties as laid down in Section 178 of the Companies Act, 2013.

 

3. Risk Management Committee:

To manage the integrated risk, all Applicable NBFCs shall form a Risk Management Committee, besides the Asset Liability Management Committee.

Appointment of Chief Risk Officer   Need for Risk Management: NBFCs play a significant role in direct credit intermediation, necessitating the enhancement of risk management practices.   Applicability: NBFCs with asset size exceeding Rs. 50 billion in categories such as Investment and Credit Companies, Infrastructure Finance Companies, Micro Finance Institutions, Factors, and Infrastructure Debt Funds are required to appoint a CRO.   Qualifications and Experience: The CRO should be a senior official within the NBFC hierarchy and possess adequate professional qualifications and experience in risk management.   Fixed Tenure: The CRO is appointed for a fixed tenure, subject to approval by the Board. Any premature transfer or removal of the CRO requires Board approval and must be reported to the Department of Non-Banking Supervision and, if applicable, to stock exchanges.   Independence of the CRO: The Board must establish policies to ensure the independence of the CRO. The CRO should have direct reporting lines to the MD & CEO or the Risk Management Committee (RMC) of the Board. If reporting to the MD & CEO, the RMC/Board should meet the CRO without the presence of the MD & CEO on a quarterly basis. The CRO should not have any reporting relationship with the business verticals of the NBFC and should not be given any business targets. Additionally, the CRO should not be assigned any other responsibilities ('dual hatting').   Role of the CRO: The CRO should be involved in the identification, measurement, and mitigation of risks. They should review all credit products (retail or wholesale) for inherent and control risks. While the CRO can advise on credit proposals, their role in decision-making should be limited.   Committee Approach in Credit Sanction Process: If the NBFC follows a committee approach in the credit sanction process for high-value proposals, and the CRO is a decision-maker, the CRO should have voting power. All committee members involved in the credit sanction process are individually and collectively liable for all aspects, including risk perspectives related to the credit proposal.

 

Fit and Proper Criteria

All applicable NBFCs shall -

(i) Ensure that a policy is put in place with the approval of the Board of Directors for ascertaining the fit and proper criteria of the directors at the time of appointment, and on a continuing basis;

(ii) Obtain a declaration and undertaking from the directors giving additional information on the directors;

(iii) Obtain a Deed of Covenant signed by the directors;

(iv) Furnish to the Bank a quarterly statement on change of directors, and a certificate from the Managing Director of the applicable NBFC that fit and proper criteria in selection of the directors have been followed. The statement must reach the Regional Office of the Department of Non-Banking Supervision of the Bank where the company is registered, within 15 days of the close of the respective quarter. The statement submitted by applicable NBFC for the quarter ending March 31, shall be certified by the auditors.

Provided that the Bank, if it deems fit and in public interest, reserves the right to examine the fit and proper criteria of directors of any NBFC irrespective of the asset size of such NBFC.

 

Disclosure and transparency:

Applicable NBFCs must regularly update the Board of Directors on:

i. Progress made in establishing a robust risk management system and implementing risk management policies and strategies.

ii. Adherence to corporate governance standards, including committee composition, roles and functions, meeting frequency, and compliance with coverage and review functions.

Annual Financial Statements Disclosure (since March 31, 2015):

i. Registration, license, or authorization obtained from other financial sector regulators.

ii. Ratings assigned by credit rating agencies, along with any changes in ratings during the year.

iii. Penalties imposed by regulatory authorities, if applicable.

iv. Information about joint ventures and overseas subsidiaries, including their geographical location and partners.

v. Asset-liability profile, extent of financing provided to parent company products, details of non-performing assets (NPAs) and their movement, disclosure of off-balance sheet exposures, structured products, securitization, assignment transactions, and other relevant disclosures.

 

Rotation of partners of the Statutory Auditors Audit Firm

All applicable NBFCs shall rotate the partner/s of the Chartered Accountant firm conducting the audit, every three years so that same partner shall not conduct audit of the company continuously for more than a period of three years. However, the partner so rotated shall be eligible for conducting the audit of the applicable NBFC after an interval of three years, if the applicable NBFC, so decides. The applicable NBFC shall incorporate appropriate terms  in the letter of appointment of the firm of auditors and ensure its compliance.

 

Framing of Internal Guidelines:

All applicable NBFCs shall frame their internal guidelines on corporate governance with the approval of the Board of Directors, enhancing the scope of the guidelines without sacrificing the spirit underlying the above guidelines and it shall be published on the company’s web-site, if any, for the information of various stakeholders.

 

Article Compiled by:-

Mayank Garg

(LegalMantra.net Team)

+91 9582627751

Disclaimer: Every effort has been made to avoid errors or omissions in this material in spite of this, errors may creep in. Any mistake, error or discrepancy noted may be brought to our notice which shall be taken care of in the next edition In no event the author shall be liable for any direct indirect, special or incidental damage resulting from or arising out of or in connection with the use of this information Many sources have been considered including newspapers, Journals, Bare Acts, Case Material. Charted Secretary etc.

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