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CS Professional · Banking and Insurance - Laws and Practice · Overview of Indian Banking System

Kaveri Capital, an NBFC, is in distress. After inspecting its books, the Reserve Bank decides it is in the public interest to preserve its critical activities and frames a scheme under section 45MBA of the RBI Act, 1934 that splits viable and non-viable businesses into separate units, and reduces the managing director's pay. Which statement is correct?

The scheme may create Bridge Institutions, which are temporary arrangements, and the managing director whose pay is reduced gets no compensation. Section 45MBA allows amalgamation, reconstruction or splitting, and sub-section (3) denies compensation for pay reductions or share cancellations under the scheme.

  1. AThe scheme may establish Bridge Institutions, and the managing director whose pay is reduced is not entitled to any compensationCorrect
  2. BBridge Institutions are permanent entities that replace the NBFC
  3. CThe managing director may claim compensation equal to the pay reduced
  4. DThe Reserve Bank can use the scheme only for amalgamation, not for splitting

Explanation

Section 45MBA(1)(c) allows splitting into units with viable and non-viable businesses vested separately, creating Bridge Institutions, which are temporary arrangements. Section 45MBA(2)(a) permits reducing pay, and 45MBA(3) says affected persons are not entitled to compensation. The other options contradict these provisions.

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