NBFC Registration in India
Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 involved in the principal business of lending, investments in shares/stocks/bonds/debentures, leasing, hire-purchase, insurance business, chit business or involved in the receiving of deposits under any scheme or arrangement. NBFC are under the purview of the Reserve Bank of India (RBI) and in this article we visit the procedure for NBFC Registration in India and some of the regulations which govern its operations.
Non-Banking Financial Company
A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 with activities similar to that of a bank, except for the following differences:
- NBFC’s cannot accept demand deposits
- NBFC’s cannot issue cheque drawn on itself
- Bank deposits are insured by Deposit Insurance and Credit Guarantee Corporation. However, deposits in NBFC’s are not insured.
NBFC’s like banks except for the above differences are engaged in the business of making loans and advances, acquisition and trading of shares/stocks/bonds/debentures/securities, 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. Also a company which is in the 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.
Categories of Non-Banking Financial Company (NBFC)
NBFC’s are mainly categorized into deposit taking NBFC’s and non-deposit taking NBFC’s. Deposit taking NBFC’s and non-deposit taking NBFC’s are further classified based on their size. Within this broad categorization, there are again many types of NBFC’s like Asset Finance Company, Investment Company, Loan Company, Infrastructure Finance Company, Systemically Important Core Investment Company, Infrastructure Debt Fund, Micro Finance Institution and Factors.
As per Section 45-IA of the RBI Act, 1934, no company can commence or carry on business of a non-banking financial institution without obtaining a certificate of registration and without having a Net Owned Funds of Rs. 200 lakhs. The requirement for registration as a NBFC are a company incorporate under Section 3 of the Companies Act, 1956 and having a minimum net owned funds of Rs.200 lakhs. Net owned funds is the balance of “owned funds” minus the amount of investment in shares of subsidiaries, companies in the same group and all other NBFCs, book value of debentures, bonds, outstanding loans and advances including hire purchase and lease finance made to and deposits with subsidiaries and companies in the same group. Owned funds is the aggregate of paid-up equity capital , preference shares which are compulsorily convertible into equity, free reserves , balance in share premium account and capital reserves representing surplus arising out of sale proceeds of asset, excluding reserves created by revaluation of asset, after deducting therefrom accumulated balance of loss, deferred revenue expenditure and other intangible assets.
Application for becoming an NBFC must be made in the requisite form to Regional Office of the Reserve Bank of India. A list of documents required to be submitted along with the NBFC application can be accessed here: NBFC List of Document Required.
Financial Companies NOT Regulated by RBI
The Reserve Bank of India regulates and supervises companies which are engaged in financial activities as their principal business. A company which has financial assets of more than 50% of its total assets and derives more than 50% of its gross income from such assets is termed as a NBFC and regulated by the Reserve Bank of India. However, some financial businesses have specific regulators and are given exemption from Reserve Bank od India from its regulatory requirements. For instance, Insurance Regulatory and Development Authority (IRDA) regulates insurance companies, Securities Exchange Board of India (SEBI) regulates Merchant Banking Companies, Venture Capital Companies, Stock Broking companies and Mutual funds, National Housing Bank (NHB) regulates housing finance companies, Department of Companies Affairs (DCA) regulates Nidhi companies and State Governments regulate Chit Fund Companies.
Deposit Taking NBFCs
Deposits are monies collected in any manner, other than that collected by way of share capital, contribution of capital by the partners of a partnership firm, security deposit, earnest money deposit, advance consideration for purchase of goods, services or construction, loans taken from banks, financial institutions and money lenders and subscription to chit funds. Monies collected in any manner other than these would be termed as deposits. All NBFCs cannot accept public deposits. Only NBFCs that hold a deposit accepting Certificate of Registration can accept deposits. Moreover, RBI is of the purview that only nationalized banks can accept deposits and hence has not authorized any NBFC started after 1997 to accept deposits.
Penalties for Deposit Taking without Authorization
If any unincorporated entity (Proprietorship / Partnership) or an NBFC without authorization to take deposit is found accepting public deposits, it is liable for criminal action. Also, if NBFCs associate themselves with proprietorship/partnership firms accepting deposits in contravention of RBI Act, they are also liable to be prosecuted under criminal law or under the Protection of Interest of Depositors (in Financial Establishments) Act, if passed by the State Governments.