A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 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.
A non-banking institution which is a company and has the principal business of receiving deposits under any scheme or arrangement by any mode is also a non-banking financial company (Residuary non-banking company).
Exclusions from the definition
It does not include a company whose principal business is the following:
- Agricultural Activity
- Industrial Activity
- Purchase or sale of any goods excluding securities
- Sale/ purchase / construction of any immovable property or providing of any services.
What does Principal business means?
The term "principal business" is not defined by the Reserve Bank of India Act. The Reserve Bank of India has defined financial activity as the principal business to bring clarity to the entities that will be monitored and regulated as NBFC under the RBI Act. The criteria is is called the 50-50 test.
PRINCIPAL BUSINESS (50-50) CRITERIA FOR REGISTRATION AS NBFC
To be registered as NBFC, the company has to fulfill the following criteria (both conditions together) for determining the principality of business-
- The company's financial assets must constitute more than 50% of the total assets
- The income from financial assets must constitute more than 50% of the total income.
NBFCs that need not be Registered with RBI?
Following NBFCs are not required to obtain any registration with the Reserve Bank of India under the idea that they are regulated by other regulators
- Core Investment Companies – (assets are less than 100 crore or public funds not taken)
- Merchant Banking Companies
- Companies that are engaged in the business of stock-broking
- Companies engaged in the business of Venture Capital
- Housing Finance Companies
- Insurance companies holding a certificate of registration issued by IRDA
- Nidhi Companies as notified under Section 620(A) of the Companies Act 1956
- Chit Fund Companies as defined in the Sec 2 clause (b) of the Chit Fund Act, 1982
What is the Procedure to Incorporate an NBFC?
It is governed by the Ministry of Corporate Affairs as well as the Reserve Bank of India. The License for operation is obtained from the RBI and it is incorporated as a company under applicable laws of the land.
- A company should first be registered under the Companies Act 2013 or should already be registered under the Companies Act 1956 as either a Private Limited or a Public Limited Company
- The minimum net owned funds of the Company: The requirement of Minimum Net Owned Fund has been increased from Rs 2 Crores to Rs 10 Crores (Vide RBI Circular DOR.CRE.REC.No.60/03.10.001/2021-22 dated 22nd October 2021. It must be ensured that the Authorized Capital of the NBFC is not less than Rupees Ten Crores.
- 1/3rd of the Directors must possess finance experience.
- The company must have a detailed business plan for five years.
- The company must comply with the requirements for capital compliance and FEMA.
- The CIBIL records of the Company and Directors should be clean.
- After all of the above conditions have been satisfied,the online application on the website of RBI, cosmos.rbi.org.in should be filled and submitted along with the requisite documents.
- A CARN (Company Application Reference Number)Number will be generated.
- A hard copy of the application also has to be sent to the regional branch of the Reserve Bank of India.
- After the application is properly scrutinized, the License will be given to the Company.
As per Section 45-1A of the RBI Act,1934, NBFCs are required to obtain a Certificate of Registration (CoR) from the Reserve Bank of India to commence/carry on business of NBFI in terms of Section 45-1A of the RBI Act,1934. The said section also prescribes the minimum Net Owned Fund (NOF) requirement to be fulfilled by the Companies applying for NBFC Licenses to commence business.
What are the Benefits of NBFC Company Registration?
- NBFC grant loans at lower Interest Rates as compared to Banks.
- NBFC process Loan Applications quickly as compared to Banks.
- Rules and regulations applicable to NBFCs are less stringent as compared to Banks.
- NBFC have easy to meet eligibility criteria, which broadens their range of customers.
The author can also be reached at ca.surbhi28@gmail.com
Disclaimer: This document contains information for general guidance only. We do not accept any responsibility for any loss incurred by any person as a result of any matter in this document.
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