Non Banking Financial Company
A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 2013 ( or any earlier enactments) 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 instalments by way of contributions or in any other manner, is also a non-banking financial company (Residuary non-banking company). Financial activity as principal business is when a company’s financial assets constitute more than 50 per cent of the total assets and 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 by RBI. Interestingly, this test is popularly known as 50-50 test and is applied to determine whether or not a company is into financial business.
NBFCs lend and make investments and hence their activities are akin to that of banks; however there are a few differences as given below:
- NBFC cannot accept demand deposits;
- NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself;
- Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks.
In terms of Section 45-IA of the RBI Act, 1934, no Non-banking Financial Company can commence or carry on business of a non-banking financial institution without a) obtaining a certificate of registration from the Bank and without having a Net Owned Funds of Rs. 25 lakhs (Rs. Two crore since April 1999). Financial Services Organisation and its Registration Process 185 However, in terms of the powers given to the Bank, to obviate dual regulation, certain categories of NBFCs which are regulated by other regulators are exempted from the requirement of registration with RBI viz. 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 or formed under section 406 of the Companies Act, 2013, Chit companies as defined in clause (b) of Section 2 of the Chit Funds Act, 1982,Housing Finance Companies regulated by National Housing Bank, Stock Exchange or a Mutual Benefit company.
BENEFITS OF INCORPORATING AN NBFC
- Competitive Interest Rates ,
- Quick Processing,
- Less Rules and Regulations,
- Loan available for Individuals with Poor Credit Rating
Incorporation of NBFC’s
The procedure for incorporating a Non Banking Finance Company (NBFC) is the same as any other company. Form RUN for approval of name should contain financing as the principal activity. Their principal business, to be stated in the MOA, while registering under the Companies Act shall be lending credit, making investments in various types of shares and stocks, leasing, hire-purchase, insurance business, chit business, and receiving deposits under any scheme or arrangement.
Since the Net Owned Funds of the entity should be not less than Rs. Two Crore, it must be ensured that the Authorised Share Capital of the NBFC is not less than Rs. Two Crore
Registration Process with Reserve Bank of India
After incorporation of the company, the NBFC must obtain certificate of registration. Before applying for registration, the company should ensure the following:
(a) It should have minimum one director from NBFC background or senior Bankers as full-time director in the company
(b) Clean CBIL records
(c) Understanding of NBFC / Finance business
In terms of Section 45-IA of the RBI Act, 1934, a Non-banking Financial company can commence or carry on business of a non-banking financial institution only after
(a) obtaining a certificate of registration from the Reserve Bank of India and
(b) having a Net Owned Funds of Rs. Two Crore.
Procedure for filing application with Reserve Bank of India
(1) The applicant company is required to apply online and submit a physical copy of the application along with the necessary documents to the Regional Office of the Reserve Bank of India.
(2) The application can be submitted online by accessing RBI’s secured website https://cosmos.rbi.org.in.
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(3) Thereafter, the company has to submit the hard copy of the application form (indicating the online Company Application Reference Number) along with the supporting documents, to the concerned Regional Office.
(4) The company can then check the status of the application from the above mentioned secure address, by keying in the acknowledgement number.
Certain documents are also required to be filed with the application with the Reserve Bank of India for registration. These are listed below.
- 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
- 4 Copy of Fixed Deposit receipt & bankers certificate of no lien indicating balances in support of NOF
- Audited balance sheet and Profit & Loss account along with directors & auditors report
- Banker’s report in respect of applicant company.