Amid IL&FS crisis, 4,000 cancelled NBFCs come under I-T lens for violations

Income-Tax department examining data received from RBI, FIU to check potential tax evasion

The income-tax (I-T) department is probing more than 4,000 non-banking finance companies (NBFCs) whose licences have been cancelled by the Reserve Bank of India (RBI). 

According to I-T sources, the department is looking into the origin of assets in the balance sheets of these NBFCs, and whether they were disclosed.

Further, tax officials are examining whether the loans sanctioned by these firms have been used by their borrowers for genuine business purposes. 

The RBI last month shared the city-wise data with the department. The data has details on companies that are associates/group firms of large state-owned banks and corporate houses, said a tax source privy to the development.

The department is in the process of gathering the books of accounts and financials of these NBFCs. According to a source, loan-book growth in these companies was twice that of banks, which raised doubts.

The department has also found asset-liability mismatch in these NBFCs, which it will investigate. It has information on this from the Financial Intelligence Unit (FIU). Early this year, the FIU put up a list of 9,236 NBFCs that were non-compliant and had not fulfilled obligations under the Prevention of Money Laundering Act (PMLA).

The anti-money laundering law imposes obligations on reporting entities, including NBFCs, to verify the identities of clients, maintain records, and furnish information to the FIU. It also classified them under the high-risk category and sought immediate action.

Under PMLA rules, an NBFC is required to appoint a principal officer registered with the FIU to file tax returns on a monthly basis for cash transactions of Rs 1 million and above.

"It was observed that several of these NBFCs had not even red-flagged the suspicious transactions, which are in the form of cash, transfer from one account to another, and so on," said another tax source.   

Banking experts are of the view that the central bank has not been supportive of "para banking" because they are over-leveraged.

"The reason is that NBFCs use a lot of public funds, and many of them are over-leveraged. So it is necessary to have regulatory control over such practices. As far as action by law-enforcement agencies is concerned, there is a potential risk of illicit transactions via these platforms as over-leveraging leads to multiplication of balance sheet. So it is appropriate to have proper checks and balances of these firms," said Ashvin Parekh, managing partner, Ashvin Parekh Advisory Services.

The central bank cancelled more than 4,000 licences as of September 11. Many of these NBFCs have failed to meet the eligibility criteria of having net-owned funds of Rs 20 million while some of them have surrendered the registration owing to inadequate funds.

The issues around NBFCs have come under the spotlight as defaults at debt-laden Infrastructure Leasing & Financial Services have spooked the financial sector. After this, a fund house sold short-term bonds of Dewan Housing Finance (DHFL) at high yields, raising fears of liquidity crunch for the sector.  

Cracking the whip 

• As of September, RBI cancelled registrations of over 4,000 NBFCs

• Data shared with I-T department 

• I-T is looking into the balance sheets, loan accounts of these NBFCs

• Prima facie, these firms have a huge asset-liability mismatch 

• I-T looking at PMLA violation as a lot of them are non-complaint

• Early this year, FIU had put 9,000 NBFCs in high-risk category