A. NON-BANKING FINANCIAL COMPANY:
Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 2013 or any other previous law and is engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, and chit business.
B. DIFFERENCE BETWEEN A NBFC AND A BANK:
NBFC’s are also engaged in the process of lending and making investments. However, it cannot carry on the following:
- Cannot accept demand deposits;
- Do not form part of the payment and settlement system and cannot issue cheques drawn on itself;
- The deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in the case of banks.
C. REGISTRATION WITH RESERVE BANK OF INDIA:
In terms of Section 45-IA of the RBI Act, 1934, no Non-Banking Financial Company can commence or carry on the business of a non-banking financial institution without obtaining a certificate of registration from the Bank and having a Net Owned Funds of ₹ 200 lakhs.
D. PROCESS OF REGISTRATION:
Registration with the Reserve Bank is an online process and thereafter submit a physical copy of the application to the Regional Office of the Reserve Bank of India. The application needs to be submitted online on RBI’s Website https://cosmos.rbi.org.in in an excel format available on the website. The Applicant Company would get a Company Application Reference Number for future tracking or checking the status of the form.
E. TYPES OF NBFC:
1. There are two types of NBFC
- Non-Banking Financial Company – Non–Deposit Taking (NBFC–ND)
- Non-Banking Financial Company –Deposit Taking (NBFC–D)
2. Further, the (NBFC–ND) is classified as follows:
a. Type I – NBFC-ND not accepting public funds/ not intending to accept public funds in the future and not having customer interface/ not intending to have customer interface in the future
b. Type II – NBFC-D accepting public funds/ intending to accept public funds in the future and/or having customer interface/intending to have customer interface in the future.
3. Based on size the NBFC are classified as:
a. Systematically Important NBFC – asset size is of ₹ 500 cr or more as per the last audited balance sheet.
b. Non-Systematically Important NBFC – asset size is of less than ₹ 500 cr as per the last audited balance sheet.
4. Based on Activity the NBFC’s are classified as:
a. Asset Finance Company
b. Investment Company
c. Loan Company
d. Infrastructure Finance Company
e. Systematically Important Core Investment Company
f. Infrastructure Debt Fund
g. Micro Finance Institution
h. NGFC- Factors
i. Mortgage Guarantee Companies
j. Non-Operative Financial Holding Company
F. CONCEPT OF PRINCIPAL BUSINESS CRITERIA:
The financial activity to be established as the principal business of the company is when a company’s financial assets comprise more than 50 percent of the total assets and income from financial assets comprise more than 50 percent of its gross income earned as at the end of the year as per the latest audited financial statements.
G. CASE STUDY:
M/s. ABC Private Limited is a Company incorporated under the Companies Act, 2013 on 01.01.2020 with an object of carrying finance activities. Mr. A, B, and C are the Directors of the Company where Mr. A is a retired Banking Official; Mr. B is an M.Com in Banking and Finance and Mr. C is a Businessman. Mr. A, B, D, and E are the promoters and shareholders of the Company. Mr. A, B, and D are related to each other while E is an unrelated shareholder. Further Mr. C is a director in M/s. XYZ Private Limited, a company incorporated under companies Act, 1956 and Mr. A and Mr. B are the partners of M/s. BLF, a Partnership Firm.
The Company to start its business operation is required to get it registered with the Reserve Bank of India. The following are the basic documents required to be physically submitted to RBI post online application on RBI’s Website https://cosmos.rbi.org.in:
- Certified copies of Certificate of Incorporation, Memorandum of Association and Articles of Association of the Company.
- Board Resolution stating that the company has not accepted public funds in the past and do not intend to accept public funds in the future without prior approval of RBI and does not have any customer interface as on date and will not have any customer interface in the future without prior approval of RBI.
- Copy of Fixed Deposit Receipt & bankers certificate of no lien indicating balances in support of NOF
- Latest Audited Balance Sheet and Profit & Loss Account along with directors & auditors report thereon.
- Bankers Report in respect of Applicant Company, its group/subsidiaries/related parties, directors of the Company.
Based on further documents/information/queries sought by the Reserve Bank of India, it is desirable to submit the following additional documents:
- CIBIL Report of Company, Promoters, Shareholders from an RBI registered agency.
- Copy of Audited Balance Sheet and Profit & Loss Account along with directors & auditors report of group/subsidiaries/related parties for the last three years.
- Business Plan of the applicant company along with 3 years of projected Balance Sheet and profit statement.
- Experience certificates and work profile of Directors.
On verification of the physical application submitted by the applicant company to the Regional Office of the Reserve Bank of India, the company may be called upon for further documents, clarifications, and information. The further documents, clarifications, and information are communicated by the Reserve Bank of India within a span of 15-20 days through the registered Email ID of the applicant company.
Following are the few examples of queries/clarification that may be sought by the Reserve Bank of India
- CIBIL Report of related parties i.e., M/s. XYZ Private Limited and M/s. BLF.
- Net-worth Certificate of the applicant company; Mr. A, Mr. B, and Mr. C, Directors of the company; Mr. A, Mr. B, Mr. D, and Mr. E, Shareholders of the Company; M/s. XYZ Private Limited and M/s. BLF, related parties.
- Whether the related parties are regulated by any Financial Regulators?
- A certificate from Chartered Accountant that the related entities do not meet the principal business criteria.
Further, the applicant company may be called upon for the information based on the documents submitted by the Company.
On submission of all the documents and clarification as sought by the Reserve Bank of India, the Director(s) of the Company may be called upon for personal interview to the Regional office of the Reserve Bank of India. This is the final stage in the process of application for Registration of Certificates to the Reserve Bank of India. The Reserve Bank of India grants the Certificate of Registration to a Non-Banking Financial Company within a span of 3-4 Months.
In the recent past, the NBFC’s are one of the leading sources for raising funds and lending. NBFC’s have acquired a major part of banking business and banking-related services. The NBFC Registration with Reserve Bank of India is one of the stringent processes with very strict rules and regulations of the RBI Act.
Authors: Prashant Jain, Co-Founder & Partner; Nisha Jhawar, Associate.
Disclaimer: The content of this article is intended to provide a general guide to the subject matter. For any queries, the authors can be reached at (i) prashant@samistilegal.in (ii) nisha@rna-cs.co.in.
Updated as on March 02, 2020.
Image generation credits: https://www.canva.com/templates/
