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CA Final · Advanced Auditing, Assurance and Professional Ethics · Special Features of Audit of Banks & Non-Banking Financial Companies

Vindhya Finance Ltd, an NBFC, holds 25% equity in Sutlej Traders Pvt Ltd, which uses a registered brand name of Vindhya. The Reserve Bank wants to examine Sutlej's books. Management tells the auditor that, since Sutlej is not a subsidiary, the Reserve Bank has no power over it. Which conclusion aligns with Section 45NAA?

Management is wrong. Under Section 45NAA, a group company includes an entity sharing a registered brand name and one in which equity of twenty per cent or more is held. Sutlej meets both, so the Bank can call for information and inspect or audit its books notwithstanding the Companies Act.

  1. AManagement is wrong; Sutlej is a 'group company' (both by common brand name and by 20%+ equity investment), so the Bank may call for statements and cause an inspection or audit of its booksCorrect
  2. BManagement is right; the Bank's power extends only to subsidiaries
  3. CManagement is right, because the Companies Act, 2013 overrides the Bank's power in all cases
  4. DThe Bank may act only if the holding is 51% or more

Explanation

Section 45NAA defines group company to include entities related by common brand name and by investment in equity shares of twenty per cent and above, in addition to subsidiary, joint venture, associate, promoter-promotee and related party relationships. Sutlej qualifies on two limbs. Sub-section (2) empowers the Bank, notwithstanding the Companies Act, 2013, to inspect or audit it. Management's subsidiary-only argument is incorrect.

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