Court directs fresh application process for M.K.G Financial Services without influence from previous cancellation, following failure to meet the Rs. 2 crore NOF mandate.
In a significant ruling, the Delhi High Court has upheld the Reserve Bank of India's (RBI) decision to cancel the registration of M.K.G Financial Services Private Limited as a Non-Banking Financial Company (NBFC). The court, comprising Justices Prathiba M. Singh and Madhu Jain, ruled that the cancellation order issued by the RBI on September 12, 2018, stands firm due to the petitioner's failure to meet the prescribed Net Owned Fund (NOF) requirement of Rs. 2 crore before the order was communicated.
The case revolved around the regulatory framework introduced by the RBI, which required all NBFCs to maintain a minimum NOF of Rs. 2 crore by April 1, 2017. M.K.G Financial Services, having been registered as an NBFC since August 19, 1999, failed to achieve this financial benchmark within the stipulated timeframe. Consequently, the RBI issued a Show Cause Notice on May 2, 2018, followed by the cancellation order four months later.
M.K.G Financial Services contended that it had achieved the NOF requirement shortly after the cancellation order was communicated. The company claimed that it reached the Rs. 2 crore mark on September 21, 2018, just days after the cancellation order was received. However, the court observed that the NOF was not achieved prior to the issuance and communication of the cancellation order, thus negating the possibility of setting aside the RBI's decision.
The High Court further noted that the petitioner's subsequent documentation, including bank statements, did not suffice to substantiate the NOF claim without an auditor's certificate considering the liabilities of the NBFC. This led to the conclusion that the cancellation order could not be overturned.
Despite this setback for M.K.G Financial Services, the court provided a pathway for future compliance. It directed that any fresh application for NBFC registration submitted by the petitioner shall be considered by the RBI in accordance with current regulations, uninfluenced by the previous cancellation.
This ruling underscores the judiciary's stance on regulatory compliance for NBFCs, emphasizing the importance of adhering to financial norms set forth by the RBI. The decision is expected to resonate across the financial services sector, reinforcing the necessity for timely compliance with regulatory mandates.
Bottom Line:
Non-Banking Financial Companies (NBFC) - Cancellation of NBFC registration by RBI due to failure to achieve the required Net Owned Fund (NOF) within the stipulated time - Court held that the cancellation order cannot be set aside or remanded back if NOF was not achieved before the order's issuance - Directed that any fresh application by the Petitioner shall be considered as per extant provisions without being influenced by the earlier cancellation order.
Statutory provision(s):
Banking Regulation Act, 1949
