RBI/2026-27/165 | DOR.FIN.REC.No.139/03.10.001/2026-27 | June 24, 2026
Background
The Reserve Bank of India (RBI) had issued the Reserve Bank of India (Non-Banking Financial Companies – Governance) Directions on November 28, 2025, prescribing comprehensive governance standards for Non-Banking Financial Companies (NBFCs) across the Scale Based Regulatory (SBR) Framework. These Directions were issued under the powers vested in the Reserve Bank under the Reserve Bank of India Act, 1934, the National Housing Bank Act, 1987, and the Factoring Regulation Act, 2011.
The SBR Framework classifies NBFCs into four layers — Base Layer, Middle Layer, Upper Layer, and Top Layer — based on their size, activity, and perceived risk. NBFCs in the Upper Layer (NBFC-UL) are subject to enhanced regulatory and governance requirements, including stringent board composition norms, mandatory committees, and enhanced disclosure obligations, given their systemic significance.
The Amendment
On June 24, 2026, the RBI issued the Reserve Bank of India (Non-Banking Financial Companies – Governance) Amendment Directions, 2026, effecting a targeted modification to the existing Governance Directions.
The sole amendment inserts a proviso after Paragraph 43 of the principal Directions, reading as follows:
"Provided that these provisions shall not be applicable to NBFC-UL which are fully owned and controlled by Government."
This proviso carves out NBFC-Upper Layer entities that are wholly owned and controlled by the Government of India from the applicability of the governance provisions contained in Paragraph 43 of the Directions.
Statutory Basis
The Amendment Directions have been issued in exercise of the powers conferred under:
- Sections 45JA, 45K, 45L and 45M of the Reserve Bank of India Act, 1934
- Sections 29A, 30A, 31 and 32 of the National Housing Bank Act, 1987
- Section 3 (read with Section 31A) and Section 6 of the Factoring Regulation Act, 2011
Effective Date
The Amendment Directions came into force with effect from the date of issuance, i.e., June 24, 2026.
Regulatory Rationale
The exemption reflects a well-established principle in Indian financial regulation — that entities fully owned and controlled by the sovereign operate under a distinct accountability framework anchored in parliamentary oversight, government audit mechanisms, and public sector governance structures. Applying private-sector-oriented governance mandates on such entities in identical measure may result in regulatory redundancy rather than enhanced prudential outcomes.
This amendment is consistent with similar carve-outs seen across other RBI frameworks, where government-owned financial institutions are treated as a distinct class given the nature of their ownership, mandate, and accountability.
Key Takeaway
NBFC-UL entities that are fully owned and controlled by the Government are now exempt from the governance provisions under Paragraph 43 of the NBFC Governance Directions, 2025. All other NBFC-UL entities — including those with partial government ownership — continue to remain subject to the full rigour of the Governance Directions.
Compliance teams and boards of privately-held or partially government-owned NBFC-ULs should note that this exemption is narrow in scope and does not extend beyond entities meeting the dual threshold of full ownership and full control by the Government.
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