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nature of such activities undertaken by them.

There is specific reporting requirement under CARO, 2020 under clause 3 (xvi)(b) which requires auditor to
report whether the company has conducted any non-Banking financial or housing finance activities without
a valid Certificate of Registration (CoR) from the Reserve Bank of India as per the Reserve Bank of India Act,
1934.

QNO Registration and Regulation of NBFCs Old Course – (SM21)
514.500 TITANIUM CNO—NBFC.040 New Course – (SM23)

Shubham & Associates are going to start the audit of NBFCs. They have not performed much work for
the NBFCs in the past years. You are required to explain the requirements related to registration and

regulation of NBFCs which an auditor needs to keep in his mind while planning the audit of NBFC which
would help this firm.
➢ An auditor should know following points regarding registration and regulation of NBFCs:
Under Section 45–IA of the RBI Act, 1934, no NBFC shall commence or carry on the business of a non-
banking financial institution without
• obtaining a certificate of registration issued by the RBI; and
• having a net owned fund (NOF) of ` 25 lakhs (₹ Two crore since April 1999) not exceeding two
hundred lakhs rupees, as the RBI may, by notification in the Official Gazette, specify.
(The RBI (Amendment) Act (1997) provided an entry point norm of ` 25 lakh as the minimum NOF
which was revised upwards to ` 2 crore for new NBFCs seeking grant of certificate of registration (CoR)
on or after 21 April 1999).

A company incorporated under the Companies Act and desirous of commencing business of non-
banking financial institution as defined under Section 45–IA of the RBI Act, 1934 can apply to the RBI in
prescribed form along with necessary documents for registration. The RBI issues CoR after satisfying
itself that the conditions as enumerated in Section 45-IA of the RBI Act, 1934 are satisfied.

However, to obviate dual regulation, certain categories of NBFCs which are regulated by other
regulators are exempted from the requirement of registration with RBI viz. Venture Capital
Fund/Merchant Banking companies/Stock Broking Companies registered with SEBI, Insurance
Company holding a valid CoR issued by IRDA, Nidhi Companies as notified under Section 406 of the
Companies Act, 2013, Chit Companies as defined in clause (b) of Section 2 of the Chit Funds Act, 1982
or Housing Finance Companies regulated by National Housing Bank.

The RBI has issued directions to NBFCs on acceptance of public deposits, prudential norms like capital
adequacy, income recognition, asset classification, provision for bad and doubtful debts, risk exposure
norms and other measures to monitor the financial solvency and reporting by NBFCs.

Directions were also issued to auditors to report non-compliance with the RBI Act and regulations to
the Reserve Bank, Board of Directors and shareholders.

QNO Regulation of NBFCs – Case Old Course – (N23M)
514.600 TITANIUM CNO -- NBFC.040

Super Non-Bank Limited, a “Systemically Important Non-Deposit Taking Non-Banking Financial Company”,
was operating appropriately till the start of COVID-19 Pandemic. Due to unforeseen conditions during the
Pandemic and after that, the operating revenue of the NBFC started decreasing. Following were the
position of Net Owned Funds of the company during the last 4 financial years:

Financial Year Net Owned Funds
FY19-20 ₹ 15 Crore
FY20-21 ₹ 6 Crore
FY21-22 ₹ 4 Crore
FY22-23 ₹ 1.5 Crore

Super Non-Bank Limited appointed Mr Shyam as their statutory auditor for the FY 22-23. Mr Shyam
identified that the Net Owned Funds of the company have been less than ₹ 2 Crore since June 2022.
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