The Bombay High Court has held that compliance with the phased NOF requirements prescribed under the RBI Notification dated March 27, 2015 was mandatory, and failure to meet the NOF threshold by the cut-off date entitled the RBI to cancel the certificate of registration under Section 45-IA(6) of the Reserve Bank of India Act, 1934. The Court further held that a company cannot avoid cancellation by showing that its NOF improved only after the prescribed deadline, especially where its financial position had been in negative for the relevant years and the claim of subsequent compliance was supported only by unaudited accounts. The High Court therefore upheld the RBI’s cancellation orders as well as the appellate order passed by the Department of Financial Services, Ministry of Finance.
The Division Bench comprising Justice Bharati Dangre and Justice Manjusha Deshpande noted that Section 45-IA(1)(b) of the Reserve Bank of India Act, 1934 makes it mandatory for an NBFC to maintain the prescribed net owned funds (NOF) in order to commence or carry on business, and that the RBI’s Notification dated March 27, 2015 had statutory force. The Bench recorded that the petitioner’s NOF was negative on March 31, 2016 and March 31, 2017, namely Rs. (-)26.14 lakhs and Rs. (-)2.84 crores respectively, and therefore the company had failed to meet even the relaxed phased targets of Rs. 100s lakh by April 01, 2016 and Rs. 200 lakhs by April 01, 2017.
The Bench also noted that before the RBI, the company did not submit audited financial statements and relied only on an unaudited statement for March 31, 2018. It held that later improvement in NOF after the cut-off date could not be treated as compliance with the RBI’s directions. The Bench emphasized that the RBI is an expert statutory body regulating NBFCs and that judicial review in such financial matters is limited, particularly where the regulator has found that allowing such a company to continue would not serve public interest.
Briefly, Mane Finance Private Limited, an NBFC registered under the Companies Act, had obtained its certificate of registration from the RBI on Sep 09, 1999 under Section 45-IA of the Reserve Bank of India Act, 1934. The RBI’s revised regulatory framework and Notification dated March 27, 2015 required existing NBFCs with lower net owned funds (NOF) to achieve NOF of Rs. 100 lakhs before April 01, 2016 and Rs. 200 lakhs before April 01, 2017. The RBI issued a show-cause notice dated May 07, 2018 to the company on the ground that it had failed to achieve the required NOF by the prescribed date. In reply, the company sought time and later relied on an unaudited balance sheet as on March 31, 2018 to claim that its NOF had risen to Rs.12.63 crores. Despite this, the RBI cancelled its certificate of registration and the Appellate Authority, Department of Financial Services, Ministry of Finance, upheld that decision.
