RBI moves to check raising of surrogate funds by NBFCs

The Reserve Bank of India (RBI) is working with the ministry of corporate affairs to introduce suitable measures to plug the regulatory gap that allows non-banking financial companies (NBFCs) to raise surrogate deposits.

In its second Financial Stability Report released on Thursday, the apex bank said NBFCs were exempt from the provisions of section 67 of the Companies Act, 1956, which requires that issuance of shares or debentures to more than 49 investors be made through public issuance.

According to analysts, this means that NBFCs, particularly those not regulated by the apex bank, could issue debt or quasi-debt instruments to a large number of both retail and institutional investors on a private placement basis.

This amounts to raising of public deposits outside the regulatory framework, they add.

According to the RBI, specific concerns in that regard have come up in the past in the context of private placement of convertible preference shares (CPS) by a few NBFCs.

It observed that internationally, the tightening of the regulatory regime for the banking sector has raised the possibility of increased regulatory arbitrage vis-a-vis the non-banking financial sectors.

According to the RBI, in India too, certain areas would need to be constantly monitored in view of the strong cross-linkages between the various segments of the financial sector.