loan: NBFC ‘third party lending’ to come under auditors’ scrutiny

Various funding arrangements recorded by non-banking financial companies (NBFCs) are likely to come under the scrutiny of auditors from the FY22 audit, which begins in the next few weeks.

The Ministry of Corporate Affairs (MCA) last year tightened the rules for company audits, asking companies to provide a fresh declaration that they have not paid money to an intermediary with the understanding that the intermediary will replace In the loan, or fund, will give it to one. third company.

While the rules will be applicable to all companies, market participants say they will have a significant impact on NBFCs that regularly enter such arrangements.

This development assumes significance as there have been several cases over the years where promoters of NBFCs have transferred the money of the lender to private entities, who have transferred this money to third party companies.

The new rules mandate company auditors to evaluate such funding arrangements and determine whether they are in violation of foreign exchange and anti-money laundering regulations.

The Institute of Chartered Accountants (ICAI), which regulates auditors, on Monday issued a guidance note on how auditors are required to approach this new law. In the guidance note, ICAI said that the new rules “put heavy responsibility on the auditors as the reporting under these rules is very broad.”

A person with direct knowledge of the matter said, “The rule is expected to apply to banks and NBFCs as well as this section is applicable to all companies under the Companies Act, and no specific exemption has been provided for NBFCs. ”

To understand the implications of these rules, consider an NBFC A that lends money to an intermediary company B. A also enters into a tacit understanding that B will use the money received from A to loan or fund a separate company, C.

Auditors say such arrangements are not illegal in themselves, though the Prevention of Money Laundering Act (PMLA) and Foreign Exchange Management Act (FEMA) guidelines have to be followed. The auditors have been put in charge of checking whether such rules have been followed or not.

“What has happened in the past is that NBFCs sent money to foreign intermediaries, who in turn pumped money into domestic companies. Such an arrangement can be considered round-tripping,” said an auditor working for a large four firm.

Originally published at Pen 18