Introduction On NBFC

1. What is a Non-Banking Financial Company (NBFC)?

• A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 / 2013
• 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, chit business
• But does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property.
• A non-banking institution which is a company and has principal business of receiving deposits under any scheme or arrangement in one lump sum or in installments by way of contributions or in any other manner, is also a non-banking financial company (Residuary non-banking company).

2. Definition of ''non-banking financial company''

Section 45-I(f) of RBI Act 1934:

(i) a financial institution which is a company;

(ii) a non-banking institution which is a company and which has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner, or lending in any manner;

(iii) such other non-banking institution or class of such institutions, as the Bank may, with the previous approval of the Central Government and by notification in the Official Gazette, specify;]

3. Definition of ''financial institution'

Section 45-I(c) of RBI Act 1934:

''financial institution'' means any non-banking institution which carries on as its business or part of its business any of the following activities,namely:-

i) the financing, whether by way of making loans or advances or otherwise, of any activity other than its own:

ii) the acquisition of shares, stock, bonds, debentures or securities issued by a Government or local authority or other marketable securities of a like nature:

iii) letting or delivering of any goods to a hirer under a hire-purchase agreement as defined in clause (c) of section 2 of the Hire-Purchase Act,1972:

iv) the carrying on of any class of insurance business;

v) managing, conducting or supervising, as foreman, agent or in any other capacity, of chits or kuries as defined in any law which is for the time being in force in any State, or any business, which is similar thereto;

vi) collecting, for any purpose or under any scheme or arrangement by whatever name called, monies in lumpsum or otherwise, by way of subscriptions or by sale of units, or other instruments or in any other manner and awarding prizes or gifts, whether in cash or kind, or disbursing monies in any other way, to persons from whom monies are collected or to any other person,

[but does not include any institution, which carries on asits principal business,-

(a) agricultural operations; or(aa) industrial activity; or]

(b) the purchase or sale of any goods (other than securities) or the providing of any services; or

(c) the purchase, construction or sale of immovable property, so however, that no portion of the income of the institution is derived from the financing of purchases, constructions or sales of immovable property by other persons;]

4. What does conducting financial activity as "principal business" mean?

• Financial activity as a principal business is when a company's financial assets constitute more than 50 per cent of the total assets and
• income from financial assets constitutes more than 50 per cent of the gross income.
• A company that fulfils both these criteria will be registered as NBFC by RBI.
• The term 'principal business' is not defined by the Reserve Bank of India Act. The Reserve Bank has defined it so as to ensure that only companies predominantly engaged in financial activity get registered with it and are regulated and supervised by it.
• Hence if there are companies engaged in agricultural operations, industrial activity, purchase and sale of goods, providing services or purchase, sale or construction of immovable property as their principal business and are doing some financial business in a small way, they will not be regulated by the Reserve Bank.
• Interestingly, this test is popularly known as 50-50 test and is applied to determine whether or not a company is into financial business.

Disclaimer: This article sets forth our views based on the completeness and accuracy of the facts stated and any assumptions that were included. We disclaim any kind of liability whatsoever regarding the article stated above. Our views are not binding on any authority or Court, and hence, no assurance is given that a position contrary to the article expressed herein will not be asserted by any authority and/or sustained by any tax authority or appellate authority or a Court of law.

• Ref.: 1. https://www.rbi.org.in/commonperson/English/Scripts/FAQs.aspx?Id=1167
• 2. RBI Act 1934