SAHU & ASSOCIATES: 1. What is NBFC ?

Any Non-Banking company carrying business of financial institution as its "principle business" will be a Non-Banking Financial Company more commonly known as "NBFC".

Activities included in the definition of financial institutions:

- Financing,

- Whether by giving loans, advances or otherwise

- Acquisition of shares, stocks or securities

- Hire purchase

- Insurance – excluded by notification

- Management of chits, kuries, etc

- Money circulation schemes

Exclusion to NBFC:

- If principal business is industrial, trading, etc.

2. How to check if the principle business is of financial institutions ?

Financial activity is considered as principal business of the company when:

- a company's financial assets constitute more than 50 per cent of the total assets (netted off by intangible assets) financial assets to include all assets that are financial in nature, exception: cash, bank deposits, advance payment of taxes and deferred tax payments

- income from financial assets constitute more than 50 per cent of the gross income.

A company which fulfils both these criteria will be registered as NBFC.

3. Are NBFC's required to be registered with Reserve Bank of India (RBI) ?

In general, NBFC has to register itself with the Reserve Bank of India under section 45-IA of the Reserve Bank of India Act, 1934. But there are certain category of NBFC which need not require registration with RBI but requires registration with other regulatory authority, for example:

- Venture Capital Fund/Merchant Banking companies/Stock broking companies registered with SEBI,

- Insurance Company holding a valid Certificate of Registration issued by IRDA,

- Nidhi companies as notified under Section 620A of the Companies Act, 1956,

- Chit companies as defined in clause (b) of Section 2 of the Chit Funds Act, 1982,

- Core Investment Company with asset size of less than Rs. 100 crore, and those with asset size of Rs. 100 crore and above but not accessing public funds are exempted from registration with the RBI

4. What are the types of NBFC registered with RBI ?

Based on the nature of business it can be classified into following category:

- Asset Finance Company (AFC)

- Investment Company (IC)

- Loan Company (LC)

- Infrastructure Finance Company (IFC)

- Systemically Important Core Investment Company (CIC-ND-SI)

- Infrastructure Debt Fund

- Micro Finance Institution (NBFC-MFI)

- Factors (NBFC-Factors)

- Mortgage Guarantee Companies (MGC)

- Non-Operative Financial Holding Company (NOFHC)

- Residuary Non-Banking Companies (RNBCs)

5. Can all the NBFC registered with RBI accept deposits ?

All NBFCs are not entitled to accept public deposits. Only those NBFCs to which the Bank had given a specific authorisation and have an investment grade rating are allowed to accept/ hold public deposits to a limit of 1.5 times of its Net Owned Funds.

Also, NBFCs cannot accept deposits from NRIs except deposits by debit to NRO account of NRI provided such amount does not represent inward remittance or transfer from NRE/FCNR (B) account.

6. Can Proprietorship/Partnership Concerns associated/not associated with registered NBFCs accept public deposits?

No. Proprietorship and partnership concerns are un-incorporated bodies. Hence, they are prohibited under the RBI Act 1934 from accepting public deposits.

Such unincorporated entities, if found accepting public deposits, are liable for criminal action. Further NBFCs are prohibited by RBI from associating with any unincorporated bodies.

7. What are the requirements for registration with RBI?

A company incorporated under the Companies Act, 2013 and desirous of commencing business of non-banking financial institution as defined under Section 45 I(a) of the RBI Act, 1934 should comply with the following:

- it should be a company registered under The Companies Act, 2013

- It should have a minimum net owned fund of Rs. 200 lakh.

8. What is the procedure for application to the Reserve Bank for Registration?

The procedure for registration of NBFC will be as follows:

- The main objective of the company needs to be altered to include NBFC activities

- Check the eligibility of the company for registration as NBFC

- Download the e-from from https://cosmos.rbi.org.in/. At this stage, the applicant company will not need to log on to the COSMOS application and hence user ids are not required.

- Get the required certificate from statutory auditor / chartered accountant.

- Arrange other supporting documents

- Fill up and submit the softcopy of e-form at RBI website (https://cosmos.rbi.org.in/)

- Obtain the printout of successful submission of the softcopy. Mention the date of submission on the print if date is not appearing on print.

- Prepare the hardcopy of the application in triplicate and submit two copies of the same to the regional office of RBI and keep one copy with you for future reference.

Commencement of business:

- NBFC must commence its business within 6 months from the date of Certificate of Registration (COR)

- If not commenced within 6 months the date of Certificate of Registration, the COR will stand cancelled

- No change in control is permitted till the commencement of business

9. What are the supporting documents to be submitted to RBI for NBFC registration ?

Different type of NBFC may have different documentation requirements, below are few basic documentation requirements: -

- Certified copies of Certificate of Incorporation and Certificate of Commencement of Business in case of public limited companies.

- Certified copies of extract of only the main object clause in the MOA relating to the financial business.

- Board resolution stating that:

a) the company is not carrying on any NBFC activity/stopped NBFC activity and will not carry on/commence the same before getting registration from RBI

b) the company has not accepted any public deposit, in the past (specify period)/does not hold any public deposit as on the date and will not accept the same in future without the prior approval of Reserve Bank of India

c) the company has formulated "Fair Practices Code" as per RBI Guidelines

- Copy of Fixed Deposit receipt & bankers certificate of no lien indicating balances in support of NOF

- For companies already in existence, the Audited balance sheet and Profit & Loss account along with directors & auditors report or for the entire period the company is in existence, or for last three years, whichever is less, should be submitted

- Copy of the certificate of highest educational and professional qualification in respect of all the directors

- Banker's report in respect of applicant company, its group/subsidiary/associate/holding company/related parties, directors of the applicant company having substantial interest in other companies The Banker's report should be about the dealings of these entities with these bankers as a depositing entity or a borrowing entity.

- Certificate from Statutory Auditor / Chartered Accountant.

10. What are legal consequences for companies lending or making investments as their principal business without a Certificate of Registration from the Reserve Bank?

The Reserve Bank can impose penalty or fine on them or can prosecute them in a court of law.

Disclaimer:

The information contained in this article is for general information purposes only. While the article endeavours to keep the information up to date and correct, there is no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability or availability with respect to the content of the article.

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