November 2022

CARO 2020 - Tighter Controls Over NBFCs

Bhavesh Vora, Chartered Accountant

INTRODUCTION

Non-Banking Financial Companies (“NBFCs”) are financial entities performing functions akin to that of a bank, except they cannot accept demand deposits, issue cheques, or notes on themselves and provide Deposit Insurance and Credit Guarantee Corporation cover. They have established themselves as an integral part of the financial system; few of the large NBFCs have even outgrown certain small banks. There are different types of NBFCs; a separate Registration Certificate is issued based on the nature of activities elected by the applicant company. The industry, until today, has played a pivotal role in financial inclusion programmes, offering various products suitable to different classes of society. In hindsight, it was also observed that it carries a huge potential to affect the public interest adversely if not regulated prudently. The regulator, over time, has taken many initiatives to minimize systemic risk and enhance the quality and coverage of compliance in the industry.

Clauses pertaining to NBFCs in CARO 2016 were one such attempt to preserve public interest, which proved to be highly successful. Hence, in the light of recent disruptions in the NBFC industry, the Revised Companies (Auditor’s Report) Order, 2020 (“CARO”) has been rolled out. This report has introduced additional clauses, entrusting Auditors to report on crucial regulatory aspects over NBFCs and those entities which undertake the business of Non-Banking Financial Activities. The other clauses also seek to closely check the Core Investment Companies (one of the many types of NBFCs). These clauses are as under:

Clause (xvi) of Companies (Auditor’s Report) Order, 2020 requires the auditor to report on the following:

(a) Whether the company is required to be registered under section 45-IA of the Reserve Bank of India Act, 1934 (2 of 1934) and if so, whether the registration has been obtained;

(b) Whether the company has conducted any Non-Banking Financial or Housing Finance activities without a valid Certificate of Registration (CoR) from the Reserve Bank of India as per the Reserve Bank of India Act, 1934;

(c) Whether the company is a Core Investment Company (CIC) as defined in the regulations made by the Reserve Bank of India, if so, whether it continues to fulfil the criteria of a CIC, and in case the company is an exempted or unregistered CIC, whether it continues to fulfil such criteria;

(d) Whether the Group has more than one CIC as a part of its structure, if yes, indicate the number of CICs which are part of the Group;



UNDERSTANDING THE RELEVANT REGULATORY PROVISIONS

Section 45-IA of the Reserve Bank of India Act, 1934 (“RBI Act”) pertains to the registration of the company as a Non-Banking Financial Company for conducting of a Non-Banking Financial Institut

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