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Corporate Governance in NBFCs and How it Tackles Corporate Frauds?

Governance in NBFCs
Karan Singh
| Updated: May 11, 2021 | Category: NBFC

The Corporate Governance in NBFCs is dissimilar and unique. It is due to its activities are less transparent. Furthermore, such financial institutions differ from many other companies or entities when it comes to the difficulty and range of their business risks. Hence, the structure of corporate business in NBFCs is vital, and it must be enhanced.

An Overview of Corporate Governance in NBFC

It means the set of process, systems, and principles by which an entity is governed. They lay down the procedures as to how an entity can be directed and controlled in a way that it can execute its goals and objectives such that it adds to the company’s value and is useful for stakeholders also.

Importance of Corporate Governance in NBFCs

The following factors can conclude the importance of corporate Governance in NBFCs:

Importance of Corporate Governance in NBFCs
  1.  Necessary for Mergers and Acquisitions: Corporate Governance in NBFCs is vital, especially during restructuring events such as mergers and acquisitions. It aids an entity or a company to distinguish between good or bad deals. Mergers and Acquisitions can also progress the quality of Corporate Governance.
  2. Risk Mitigation and Compliance: Governance, risk mitigation, and compliance concerning each other. An entity or a company is governed by principles that work precisely to make sure that compliance is unstated on the company lawfully. If a company stays well-organized in its operations, it can be undertaken any risk arising out of any events, whether technological or economical.
  3. Improves Organizational Efficiency: Such corporate Governance plays an essential role in determining industrial competitiveness. Enhanced corporate Governance in NBFCs delivers enhanced corporate performance and also gives improved financial results.
  4. Fortify Shareholder Value: Corporate Governance fortifies the shareholder contentment.  It is vital to protect the valuations of a company as the primary aim of corporate Governance is to get the most out of the shareholders’ concerns.

Current steps by NBFCs for improved Corporate Governance in NBFCs

Following are the current steps by Non-Banking Financial Companies in India for corporate Governance in NBFCs:

  • Introduction of citizen’s deed or agreement in NBFCs;
  • Duty of the BODs (Board of Directors) and top level of Management for good Corporate Governance;
  • Constitution of committees like ALM or Asset Liability Management Committee, Management, and investor’s complaints committee;
  • Implementation of the idea of Know Your Customer (KYC);
  • Continuing implementation of prudential norms as mentioned by RBI (Reserve Bank of India[1]).

Moral Issues in Corporate Governance

Corporate fraud is a word used to indicate a scam or fraud that occurs within a company by its owners or managers and involves on purpose dishonesty to trick the investors, general public, or lending institutions, thereby resulting in monetary gains to the people or to an organization.

Most of the corporate frauds come into the category of asset cheating, money laundering & frauds done by any senior management, accounting frauds and regulatory non-compliance.

The practices mentioned above harm the image of our monetary and economic system. Organizations are needed to be thoughtful and cautious about such concerns and issues. They must adopt pro-active and anti-fraud method as opposed to being reactive.

How to solve such moral issues facing corporate Governance in NBFCs?

Following are some vital factors that can be the key to solve such issues:

issues facing corporate Governance in NBFCs
  1. Data Examine and Management: The ability of an organization to create revenue, manage expenses and vindicate risks are recognized by their ability or retain, retrieve, store, and share the rising data. Efficient data management can attract a massive customer base and enhance customer relationship and thereby earning more revenue.
  2. Forensic Accounting: It is a field concerning the accountancy profession wherein accountants execute their accounting skills, investigatory, and auditing skills to find out the bankruptcy, frauds, and other litigations. The responsibility of such forensic accountants in searching for corporate frauds has been broadly spoken about. But, it’s still in its early stages in India.
  3. The Policy of Whistle Blowing: It is taken as a precious tool in an organization’s corporate governance plan. It defines the internal policy designed to provide employees with the option of reporting any suspicious activity to the Management, which amounts to the violation of the company’s norms or code of conduct.
  4. Sound Risk Management Structure: Because of the happening of major financial losses, a lot of importance is given to the reinforcement of the practices of risk management for financial and non-financial institutions, in the case of financial institutions, much consideration to the financial risk such as credit, market risk and liquidity.
  5. Code of Conducts for BODs: Individual has often questioned the requirement for the corporate board, but time & again it has been proven that its presence has made the difference during an organizational emergency.
  6. External and Internal Control System: The permitted procedure and policies followed by the Management to bring out some smooth and correct operation of the business is the meaning of Internal Control System. It aids in avoiding different forms of risks, such as improper maintenance of accounts, scams, and unapproved transactions, which can harm the financial performance of an organization.
  7. Role of Independent Auditor: The primary purpose of formulating a set of codes for corporate Governance in NBFCs is to improve the auditing process to hold the interest of all inventors & stakeholders. The auditor holds the authority to detain the offender, remove bias from the financial report of the company and impartially report. A lot of importance has been given to the role of an auditor concerning corporate Governance. It is because auditors are legally responsible for detecting frauds.

Conclusion

Having robust corporate Governance in NBFCs is vital. It will also aid in tackling some of the significant ethical facing corporate Governance. The Corporate Governance in NBFCs is dissimilar and unique. It is due to its activities are less transparent.

Read our article:What are the Key Differences Between Fintech and NBFC?

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Karan Singh

A legal writing enthusiast, a wanderer, and a zealous reader. After gaining a lot of knowledge about the diverse legal topics and developing research skills, Karan joined the league of legal content writers to deliver quality-rich blogs.

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