Wishing you a very happy new year....

RBI to stop NBFCs from raising surrogate deposits

The Reserve Bank of India is in the process of formulating guidelines in conjunction with the ministry of corporate affairs, to plug a regulatory gap that permits surrogate raising of deposits by NBFCs (Non Banking Financial Companies).  RBI said in its second Financial Stability Report, released on Thursday. NBFCs are exempt from the provisions of Section 67 of the Companies Act, 1956, in terms of which the issuance of shares or debentures to more than 49 investors needs to be through public issuance. This means that NBFCs, particularly those not regulated by the Reserve Bank, could issue debt or quasi-debt instruments to a large number of retail or institutional investors on a private placement basis. This would be tantamount to raising public deposits outside the extant regulatory framework. Specific concerns in this regard have arisen in the past in the context of private placement of Convertible Preference Shares.