The Reserve Bank of India (RBI), in its Master Directions (Direction) for NBFCs, has outlined the requirement of obtaining prior written permission of RBI for a change in management of the NBFC which would result in a change in more than 30 percent of the directors, excluding independent directors (IDs). With respect to this specified direction, following are few FAQs to provide clarity around the practical implementation of the provision. Readers are encouraged to provide feedback and suggestions on the same.
How to calculate the threshold limit of 30%?
As per the directions, the following methodology is to be considered:
Is prior approval required for the appointment of independent directors?
No, the appointment of an independent director does not require prior approval.
Is approval required for the appointment of directors who are liable to retire by rotation?
Yes, prior approval shall be required in case of a fresh/first-time appointment of a director who is liable to retire by rotation. However, approval shall not be required before subsequent re-election arising out of such retirement.
Should directors liable to retire by rotation be included in the total number of directors while determining the 30% limit?
Yes, directors liable to retire by rotation should form part of the total number of directors while calculating the percentage threshold.
Should reappointment of any director be considered for the purpose of taking approval?
Reappointment of any existing director shall not require prior approval as the same does not lead to a change in existing composition.
Will prior approval of RBI be required in case of the appointment of a nominee director?
The appointment of any nominee director, resulting in a change of more than 30%, will require prior approval from the RBI.
In a scenario where the appointment of an additional director triggers the requirement of prior approval, is the same required to be obtained at the time of appointment as 'additional director' or before regularization? Approval/intimation would be required at which stages?
Prior approval of RBI will be required before appointment as 'additional director.'. Post regularization, intimation of the same shall be duly furnished.
Will an alternate director be considered in the calculation of the total number of directors? Will prior approval be required for appointing an alternate director?
An alternate director will not be separately considered for the purpose of determining the total number of directors, as the director to whom he/she is alternate to is considered. Prior approval is not required as the appointment of an alternate director does not lead to any change in management due to an alteration in the total composition of the Board. However, intimation of such an appointment must be given to RBI.
There are 8 directors on the board of the company, out of which 2 are IDs and 2 others are liable to retire by rotation. On October 10 '22, 2 directors (non-IDs) tender their resignation. Subsequently, in the ensuing board meeting of the company held on November 1 '22, 2 new directors (non-IDs) are proposed to be appointed. Does the above scenario trigger change in management and prior approval from RBI?
As discussed above, resignation of a director does not require any prior approval; hence, post-resignation, intimation of the same shall only be sent to RBI along with relevant details. Further, the proposal to appoint 2 new directors in the meeting held on Nov 1, '22 would require prior approval as the change exceeds 30%. Accordingly, the company shall have to apply for prior approval before the appointment of the directors.
In the scenario mentioned in 9. above, what shall be the effective date of appointment of the 2 new directors?
The appointment of 2 new directors shall be effective from either the date of receipt of RBI approval or any other date thereafter as decided by the Board.
What will be the effective date of resignation of the director?
- Date of tendering the resignation or
- Effective date stated by the director in the letter of resignation or
- Date of acceptance of the resignation by the Board or
- Date of intimation of the resignation to RBI? The effective date mentioned by the director in his/her letter of resignation shall be considered as the effective date of resignation unless the director is bound by any specific time period or conditions of appointment.
Is prior approval required in case of the resignation of directors? How can the same be substantiated from the directions?
Resignation of a director does not require prior approval from RBI but only requires intimation of the same to be given. The same can be inferred due to the following reasons:
- In the directions specifying the details of the 'application for prior approval,' the word 'proposed directors' is mentioned, which makes it apparent that prior approval is required only in case of appointment and not in case of resignation.
- The requirement of obtaining RBI's approval to onboard any executive or non-executive director arises from the fact that the regulation intends to ensure the credibility of persons who would be governing the working of an NBFC.
Is approval required on superannuation?
As stated in response to 12. above, resignation or cessation of directorship does not require any prior approval from RBI. Hence, superannuation being at par with resignation or cessation does not require prior approval.
What is the process of obtaining prior approval?
The process of obtaining the approval involves putting an application to the regional office of the RBI under whose jurisdiction the registered office of the company is situated. The application has to be accompanied by specific details of the director in relevant annexures. The application needs to be submitted physically.
Whether post facto approval can be taken?
Application for post-factor approval may be considered by RBI on a case-to-case basis. However, the company should apply for prior approval only to avoid being subjected to any penal action.
Whether approval is required for the appointment of a director on account of any direction given by any court or other regulator?
The directions do not provide for any such exception. Hence, where an order by any court or regulator mandates the appointment of directors, which results in a change of management in excess of 30%, an application for prior approval must be made to seek approval/confirmation of the appointment on a case-by-case basis.
Whether a single application can be filed for more than 1 person?
A single application can be filed for obtaining approval for more than 1 person at a given point of time. However, details of each director in separate annexures should be clearly outlined.
What are the 'fit and proper' criteria of appointment of a director?
'Fit and proper' criteria for the appointment of a director involve putting in place a board-approved policy to outline criteria for screening and evaluation of directors who are proposed to be onboarded by the NBFC. Such criteria may be defined by NBFCs as per their discretion; however, general parameters include educational qualification, experience, and competency in the financial sector, integrity in conduct, etc. Though as per the Directions, systemically important non-deposit-taking NBFCs and deposit-taking NBFCs are required to mandatorily have such a criterion in place; however, all NBFCs must strive to put in place such criteria to ensure good governance and transparency.
Is the disqualification of a director as defined in the Companies Act, 2013 also applicable on NBFCs?
A director disqualified under the said Act shall be treated as disqualified for all purposes and under all laws; hence, they will be considered disqualified for the purpose of NBFCs as well.
If a director is onboarded in non-compliance with these directions, what is the validity of the actions undertaken by such a director during that period?
The directions do not specify the validity of acts of a director in case of non-compliance of the same. However, as per our view, when an appointment is identified to be in non-compliance with the Directions, actions undertaken shall simultaneously be deemed to be invalid unless the appointment is subsequently confirmed by a post facto approval.
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