PTC India’s Financial Crisis and the Need for Greater Transparency in NBFC Operations
PTC India’s Financial Crisis and the Need for Greater Transparency in NBFC Operations
Mahendra Lodha, a director (finance) and chief financial officer, has been chosen as temporary managing director and CEO.
The recent financial crisis at PTC India Financial Services Limited (PFS), a prominent non-banking financial company (NBFC), has once again highlighted the crucial issue of governance in the NBFC sector.
The crisis at PFS has raised concerns about the robustness of corporate governance practices within NBFCs, underscoring the need for enhanced regulatory oversight and transparency in the sector. This article delves into the PTC India Financial crisis and its implications for NBFC governance in India.
Back in the spotlight are concerns about NBFC governance because of the current crisis at PTC India Financial Services (PTC India Financial). The most recent event was the announcement by the firm that Pawan Singh, the managing director and CEO, had taken a leave of absence following a Reserve Bank of India (RBI) mandate.
Mahendra Lodha, the organization’s finance director and chief financial officer, has been named acting managing director and CEO.
The action follows the Securities and Exchange Board of India’s (Sebi) May show-cause notice to the MD, CEO, and non-executive chairperson concerning corporate governance concerns made by the independent directors.
An email for comments from business spokespersons still needs to be answered.
After three independent directors, Thomas Mathew, Santosh B. Nayar, and KS Vikamsey, resigned from PTC India Financial in January 2022, claiming failures in governance and compliance, financial authorities began to scrutinize the subsidiary of PTC India.
PTC India Financial Services Limited, a subsidiary of PTC India Limited, is a leading infrastructure finance company providing financial solutions to power projects. In 2022, PFS faced severe liquidity issues, leading to a default on its debt obligations. This triggered a ripple effect in the financial market, impacting the company’s credit rating and investor confidence.
Rakesh Kacker, an independent director of PTC India, later left the board due to problems with corporate governance at the subsidiary’s infrastructure financing division.
While PTC India Financial and its parent have refuted these accusations, the former hired a third party to conduct a forensic audit of its financials.
In addition to other findings, the forensic audit report notes instances of modification of sanction terms, non-compliance with pre-disbursement requirements, disbursements made for clearing past dues or evergreening, disproportionate disbursement of funds, and delayed presentation of crucial information to the board.
The forensic audit report notes additional observations, such as instances of modification of sanction terms, non-compliance with pre-disbursement requirements, disbursements made for clearing past dues or evergreening, disproportionate disbursement of funds, and delayed presentation of crucial information to the board.
In December 2022, two additional independent directors left the company due to several problems, including differing opinions between the directors and management over the findings of the forensic audit report, restrictions on the forensic audit’s scope, and management’s lack of cooperation with the forensic auditor.
In addition to others, the lender is exposed to Danu Wind Park, NSL Nagapatnam Power, and Infratech. Additionally, it has given financial support for renewable energy projects totalling about 15,000 Megawatt. As of March 31, its total loan assets and non-fund-based obligations against sanctioned loans were worth $7,339 crore.
The happenings at PTC India Financial have illuminated significant corporate governance flaws, a subject that the Indian NBFC industry is all too familiar with.
Nevertheless, according to a few analysts, increased private equity engagement in the NBFC industry has improved governance standards. A senior official at a credit rating agency noted on the condition of anonymity that independent directors at these non-bank firms are now more aggressive than they were in the past, which has raised governance standards for the industry as a whole.
“The PTC India Financial problem is not a sign of a more significant governance problem at NBFCs. It is a unique situation that has received particular attention. You can’t generalize the problem, according to R Gandhi, a former RBI deputy governor.
Factors Contributing to the Crisis:
- Weak Risk Management: The crisis at PFS has shed light on the inadequate risk management practices prevalent in some NBFCs. It revealed a lack of prudent lending policies, inadequate assessment of borrower creditworthiness, and weak collateral management.
- Overreliance on Short-Term Funding: NBFCs, including PFS, heavily rely on short-term borrowing to finance long-term assets, creating a maturity mismatch. This exposes them to liquidity risks, especially during periods of market stress, as witnessed in the PFS crisis.
- Governance and Board Oversight: Questions have been raised about the efficacy of the company’s board in overseeing its operations and risk management practices. The crisis has underscored the need for an entire board, independent directors, and more robust internal controls within NBFCs.
Implications for NBFC Governance:
- Regulatory Scrutiny: Due to the PFS crisis, regulatory bodies, including the Reserve Bank of India and the Securities and Exchange Board of India, have strengthened their control over NBFCs.
Stricter regulations and enhanced supervision are expected to be implemented to ensure better governance, risk management, and compliance practices.
- Transparency and Disclosure: The crisis highlights the importance of greater transparency and disclosure standards in the NBFC sector. Investors and stakeholders need comprehensive and accurate information to make informed decisions. Regular and timely disclosures should be mandatory regarding financials, risk exposures, and related-party transactions.
- Strengthening Risk Management: The PFS crisis calls for NBFCs to strengthen their risk management frameworks. Companies should adopt robust credit assessment procedures, prudent lending practices, and effective collateral management to mitigate risks effectively.
- Independent Directors and Board Composition: The crisis has exposed the need for more independent and diverse board composition in NBFCs. Independent directors with relevant expertise can provide adequate oversight, challenge management decisions, and safeguard the interests of all stakeholders.
- Capital Adequacy and Liquidity: Regulators will likely mandate higher capital adequacy requirements and stricter liquidity norms for NBFCs. This would ensure that these entities maintain sufficient buffers to withstand market disruptions and reduce the risks associated with short-term funding.
The financial crisis at PTC India, Financial Services Limited, has spotlighted the governance issues prevailing in the NBFC sector. It highlights the urgent need for enhanced regulatory oversight, improved risk management practices, and better transparency and disclosure standards. By addressing these challenges, NBFCs can restore investor confidence, strengthen their resilience, and contribute to the overall stability of the financial system. Effective governance and risk management are crucial for the sustainable growth and development of the NBFC sector in India.
