NBFC is the acronym form for the Non-Banking Financial Company. It is also one of the types of business structure which is an approved financial institution by the RBI (Reserve Bank of India[1]) and is registered under the Companies Act, 2013. Further, NBFC Financial Institution is a type of business structure =, which is engaged in providing loans and advances, acquisition of the shares/stocks/debentures/bonds/securities issued by the either by the Government or by the local authority.
Furthermore, the NBFC does not include those institutions whose primary business is industrial activities, agricultural activities or construction of sale or purchase of the immovable property. Lastly, in this article we will be dealing about the various terms, conditions and requirements for incorporating NBFC Financial Institution.
Pre-Conditions for the NBFC Registration
There are a few requirements for obtaining NBFC Registration, which have to be fulfilled to get registered. As per Section 45-IA of the RBI Act[1], the following listed conditions should be fulfilled before incorporating a company as a registered NBFC –
Registration – The establishment should be as a Registered Company under the Companies Act, 2013 or under the previous Companies Act, 1956 and must follow ROC (Registrar of Companies) Compliances.
Net Owned Fund – The Company must have a minimum net owned fund of Rs 2 Crore or more.
Director’s Qualification – At least one Full-time Director of the company must be from an NBFC or from Banking background or having ten years of experience in the field of Finance.
Clean Credit History – CIBIL (Credit Information Bureau of India Limited) records must be clean, and its Directors and its members must be of good character.
Unique Business Plan – The business plan should be detailed in nature and ready for operations for the period of next 5-years
FDI Compliance – For any type of foreign investment, the company must be in compliance with the FEMA (Foreign Exchange and Management Act) 1999.
Understanding of the NBFC business, Compliances, RBI regulations, Disclosures for instance Obligations under the PML rule, Taxation
How to Register NBFC in India?
Registration of NBFC Financial Institution is done as per the provisions of the Companies Act 2013 and the RBI Act, 1934. It has a significant role in executing the financial functions of our economy. Further, the NBFCs fulfil the demands of the banking system whenever the banks fail to offer loans and advances. That’s why they are often characterized by short processing in time.
Furthermore, an NBFC is that company which has the prime business of receiving deposits under any scheme prescribed or an arrangement made, in a lump sum or in installments by way of the contributions.
NBFCs are mostly classified into two categories which are the Deposit-taking Non-Banking Financial Company (NBFC) and the Non-Deposit taking Non-Banking Financial Company (NBFC). Moreover, it is important to carry out the NBFC process as per the prescribed RBI regulations. Also, in the case of non-compliance with the prescribed provisions, a hefty penalty is imposed on the defaulter NBFC.
Further, the applicant company is required to apply online and also submit a physical copy of the application together with the required documents to the Regional Office of the RBI. The concerned application can also be submitted online by accessing RBI’s official website. After that, the concerned company can check the status of its application from the mentioned secure address, or by keying in the acknowledgement of the Company Application Reference Number.
How is an NBFC distinct from a Bank?
Point of Difference
NBFC’s
Banks
Act of Regulation
They are regulated under the Companies Act, 2013
They are regulated under the Banking Regulation Act, 1949
Demand
Deposits
Cannot accept
Can accept
Drawing a Cheque
Cannot
issue or draw any cheques on its own
Can issue cheques freely
Deposit
Insurance Facility
Not available for the NBFC depositors
It is available for the bankers
Advantages of taking NBFC License in India
It offers loans and credit facilities on the basis of alternative credit scoring model
Can easily trade in the money market instruments
It provides wealth management in the form of managing portfolios of stocks and shares
NBFC Financial Institution act as the last resort for borrowing as these are capable of reaching there where banks don’t
NBFCs are the largest back-up for ushering finance into the country
It prepares for the feasibility, industry and market studies for the companies.
The modern methods exercised by the NBFCs have overcome key challenges that had plagued conventional lending.
NBFCs have made use of technological advancements such as the use of mobile phone, internet, which has also reduced the demand and reliance on the bank branches.
Some of the specific roles and function of an NBFC are as follows –
Development of the sectors like infrastructure
Help and increase the wealth creation
Substantial employment generation
To provide finance to the economically weaker section
Helps in economic development
A huge contribution towards the state exchequer
NBFC provides the facility of long term audit and specialized credit
Helps in the development of the financial markets
RBI Compliances for
NBFC
Following are the RBI compliances which are to be followed by an NBFC –
Adoption of Fair Practice Code
Secretarial compliances
CIC Registration
C-KYC Registration
COSMOS Registration
CERSAI Registration
FIU-IND Registration
File NBS-9 on the COSMOS, an online platform of the RBI
Compliance of the KYC Anti-money Launderings
Compliances
required to be followed by an NBFC after obtaining Certificate of Registration
There are certain compliances that are to be followed after the NBFC License process is complete. Further, there are various circulars, guidelines, and notifications issued by the RBI, and these are published in the public domain from time to time. Furthermore, these NBFC compliances are required to be mandatorily complied with. Following listed are the compliances –
Following listed are the documents required in the process of obtaining NBFC License –
Certified copies of the Certificate of Commencement of the Business and the Certificate of Incorporation in case of the companies.
Certified copies of the Articles of Association (AOA) and the Memorandum of Association (MOA) of the concerned company
Copy of the PAN (Permanent Account Number) or the CIN (Corporate Identity Number) allotted in favour of the company.
Directors profile separately filled and duly signed by each director.
Certificate from the respective NBFCs (Non-Banking Financial Corporation) from where the Directors have gained NBFC experience
The CIBIL (Credit Information Bureau of India Limited) Data concerning the Directors of the company
Certified copy of the Board Resolution for the formulation of the “Fair Practices Code”.
Board Resolution particularly approving the submission of the application form and authorizing signatory
Board Resolution stating that the concerned company does not hold and has not accepted any kind of public deposit and will not accept to receive the same in future also without any previous approval of the RBI (Reserve Bank of India)
Board resolution stating the company concerned is not carrying on any kind of NBFC activity or the stopped NBFC activity and will not carry on the same in future also prior to getting the registration from RBI.
Financial Statements of the past two years of the Unincorporated Bodies, if any,
Statutory Auditors Certificate declaring that the company neither accepts nor is holding any Public Deposit.
Details of the Authorized Share Capital along with the latest shareholding pattern of the concerned company including the percentages
Copies of the Fixed Deposit receipt and bankers certificate indicating the balances are in support of the Net Owned Funds
All the details of the Profit and Loss account along with the Audited Balance Sheet of the past three years together with directors and auditors report for such shorter period as are available
All the details related to the bank balances, bank accounts, complete postal address of the branch, bank loan, credit facilities which are availed
Self-attested Bank Statements or the Income Tax returns etc
The detailed business plan of the concerned company for the next three years providing details of its
The Thrust of business,
Market segment
Projected balance sheets, cash flow statement, and the asset and income pattern statement without any part of public deposits.
Procedure for Applying for NBFC License
Following listed are the steps involved in the process of obtaining NBFC License –
Step 1 – Firstly, a company is required to be formed with a minimum net worth of Rs. 2 crores (in the form of an equity share company and not as a preference share capital)
Step 2 – After the formation of the company, the next step is to open a Bank Account.
Step 3 – Now, apply online for generating a Certificate of Registration to the RBI (Reserve Bank of India). Further, the online application should be as per the prescribed format together with the information required regarding the documents and enclosures. After that, a CARN (Company Application Reference Number) is generated.
Step 4 – Afterwards, the applicant is required to submit the hard copy of the required documents to the Regional Office of the RBI together with the enclosures.
Step 5 – Then, after proper and due verification and approval of the submitted application form, the regional office forwards the concerned application to the Central office of the RBI (Reserve Bank of India), there they go through an examination and inspection in order to Grant the Certificate.
Step 6 – If all the prescribed terms under section 45-I A of RBI Act, 1934 are duly complied with, then the certificate will be issued.
Penalties for the
Non-Compliance of RBI Regulation
The Reserve Bank of India has the authority to impose a penalty on the defaulting NBFC Financial Institution for the violation of the provisions mentioned under the RBI Act. Such penalties are listed as follows –
The business when carried on without obtaining a certificate of registration, the Reserve Bank has the authority to impose a fine of not less than Rs. 1 Lakh which can extend up to Rs. 5 Lakh or even twice the amount involved in such infringement, whichever is more.
The business carried out without obtaining a certificate of registration is an offence which is punishable with an imprisonment of not less than one year.
If in case the default is continued by the company concerned, then penalty imposed may go up to Rs.25, 000 per day after the first day of such default.
In case of any other infringement, a fine may be imposed of a maximum of Rs. 5,000 by the Reserve Bank of India
If in case there is a non-compliance with the orders of the NCLT, then it is punishable with the imprisonment up to three years along with a fine of Rs. 50 every day during which such non-compliance continues.
If in case any auditor fails to comply with the directions issued by the Reserve Bank of India, he or she will be liable to pay a fine up to Rs. 5,000.
Conclusion
In last, we can say that NBFC Financial Institution have a significant role in the development of the infrastructure, the creation of wealth, and economic development. Incorporating NBFC financial institution is a complex process, and the government has always encouraged for obtaining NBFC registration since they play a crucial role in channelizing and mobilizing the financial resources in the right direction. For incorporating NBFC and obtaining its registration the applicant company should comply with the all the guidelines regarding the registration process. Lastly, if the Reserve Bank of India (RBI) is duly satisfied with the documentation and other compliance, it will grant the certificate of registration in no time.
Shivani has completed her B com LLB (Hons) and has the experience of writing various research papers during her college time. Earlier she was working as an Associate in a law firm, but her interest in writing made her pursue content writing as a career. Her core area of interest is in writing about various legal enactments, tax and finance.
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