Delhi High Court asks RBI to reconsider Cancellation of Registration Certificate of an NBFC

Delhi High Court asks RBI to reconsider Cancellation of Registration Certificate of an NBFC

The Appellate Authority ought to have considered the submissions of the petitioner with due application of mind and whether the petitioner deserved such a drastic action for a minor shortfall

The Delhi High Court, by two judges bench of Justices Vipin Sanghi and Rekha Palli on 29 January 2021 issued directions to the Appellate Authority of the Reserve Bank of India (RBI) to reconsider the cancellation of the registration certificate of the petitioner - Shubh Lakshmi Capital Limited - a Non-Bank Financial Company (NBFCs), on grounds of deficit in its Net Owned Fund (NOF).

The Court also asked the Authority to give the petitioner similar treatment which was inflicted on the other NBFCs who had suffered similar cancellation and whose cancellation was directed to be reviewed by the Appellate Authority or recalled by the RBI itself.

The petitioner, Shubh Lakshmi Capital Limited claimed to be a registered Non-Banking Financial Institution (NBFI) and its certificate of registration had been cancelled on the ground that it had failed to attain the Net Owned Fund (NOF) of Rs 200 lakh (Rs 2 crore) before 1 April 2017, due to failure in fulfilling the conditions mentioned under Clauses (a-g) of Section 45–IA(4) of the Reserve Bank of India Act, 1934.

The petitioner in the aforementioned case had submitted before the Court that before issuing the cancellation order, the RBI had sent a Show-Cause Notice demanding the petitioner to show cause as to why action be not initiated against the petitioner for not meeting the NOF requirement of Rs. 200 lakh as on 31 March 2017.

The petitioner replied to the notice and had informed RBI that the Company had informed RBI the total sum is about Rs 2 crores and it would be difficult to include the profit and loss account for the calculation of net wealth every year as that will fluctuate every year.

The petitioner had requested RBI to drop the above notice issued against the company and requested to not remove company's name from its records and cancel its Registration Certificate as the company's net worth was above Rs 2 crore.

The RBI, on the other hand, contended that the requirement of meeting the NOF benchmarked of Rs 200 lakh by the cut-off date of 31 March 2017 is sacrosanct and the period for meeting the requirement cannot be extended.

Consequently, the RBI did not accept the explanation offered by the petitioners and proceeded to cancel the registration by the impugned order.

Aggrieved by this, the petitioner proceeded to file an appeal against the order before the Appellate Authority contending that it had, in any event, attained the NOF requirement of Rs 200 lakh as on 31 March 2018. However, his appeal was rejected by the Appellate Authority through an order dated 18 November 2019.

The Delhi High Court observed that in the present case, the petitioner's argument that it met the NOF requirements as on 31 March 2017, was not accepted by the RBI. The Appellate Authority ought to have considered the submissions of the petitioner with due application of mind whether the stand of the petitioner's original Auditor - on the basis of which the petitioner believed that it met the NOF requirement of Rs 200 lakh, was correct or not, and; even if not correct, whether the petitioner was deserving of such a drastic action of cancelling its Certificate of Registration for a minor shortfall - which was, in any event, made up as on 31 March 2018, it should have received due consideration by the Appellate Authority.

The Court asserted that the petitioner was also entitled to expect similar treatment at the hands of the Authorities, including the Appellate Authority, as was inflicted upon the other NBFCs who had suffered similar cancellation of their Certificate of Registration as NBFCs, and whose cancellation was directed to be reviewed by the Appellate Authority or recalled by the RBI itself.

Accordingly, the Court set aside the order passed by the Appellate Authority and remanded the matter back to the Appellate Authority to reconsider it. The parties have been directed to appear before the Appellate Authority on 22 February 2021 for hearing.