NBFC: Things to know before Incorporating this Financial Institution

Monisha Chaudhary

10 Jul, 2023

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 –

1. 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.
2. Net Owned Fund – The Company must have a minimum net owned fund of Rs 2 Crore or more.
3. 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.
4. 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.
5. Unique Business Plan – The business plan should be detailed in nature and ready for operations for the period of next 5-years
6. FDI Compliance – For any type of foreign investment, the company must be in compliance with the FEMA (Foreign Exchange and Management Act) 1999.
7. 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?

Advantages of taking NBFC License in India

1. It offers loans and credit facilities on the basis of alternative credit scoring model
2. Can easily trade in the money market instruments
3. It provides wealth management in the form of managing portfolios of stocks and shares
4. NBFC Financial Institution act as the last resort for borrowing as these are capable of reaching there where banks don’t
5. NBFCs are the largest back-up for ushering finance into the country
6. NBFC advises the companies in the process of merger and acquisition
7. It prepares for the feasibility, industry and market studies for the companies.
8. The modern methods exercised by the NBFCs have overcome key challenges that had plagued conventional lending.
9. 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.

Types of NBFC’s

Following listed are the types of NBFC’s –

1. Asset Finance Company (AFC)
2. Investment Company
3. Loan Company
4. Mortgage Guarantee Company
5. Infrastructure Finance Company
6. Core Investment Company
7. Housing Finance Company
8. Micro Finance Company
9. Mutual benefit Finance Company
10. Chit Fund Company Housing Finance Company
11. Residuary Non-Banking Company

Role and Function of NBFC in India

Some of the specific roles and function of an NBFC are as follows –

1. Development of the sectors like infrastructure
2. Help and increase the wealth creation
3. Substantial employment generation
4. To provide finance to the economically weaker section
5. Helps in economic development
6. A huge contribution towards the state exchequer
7. NBFC provides the facility of long term audit and specialized credit
8. 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 –

1. Adoption of Fair Practice Code
2. Secretarial compliances
3. CIC Registration
4. C-KYC Registration
5. COSMOS Registration
6. CERSAI Registration
7. FIU-IND Registration
8. File NBS-9 on the COSMOS, an online platform of the RBI
9. 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 –

1. Statutory Audit
2. Income Tax Returns Filing
3. Tax Audit
4. GST (Goods and Service Tax) Returns Filing
5. ROC (Registrar of Companies) Returns
6. And all the other Compliances and Returns required by a competent authority.

NBFC Registration

• One Stop Service Provider for Securing NBFC License
• Assistance in meeting RBI Compliance

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Documents required for obtaining NBFC License

Following listed are the documents required in the process of obtaining NBFC License –

1. Certified copies of the Certificate of Commencement of the Business and the Certificate of Incorporation in case of the companies.
2. Certified copies of the Articles of Association (AOA) and the Memorandum of Association (MOA) of the concerned company
3. Copy of the PAN (Permanent Account Number) or the CIN (Corporate Identity Number) allotted in favour of the company.
4. Directors profile separately filled and duly signed by each director.
5. Certificate from the respective NBFCs (Non-Banking Financial Corporation) from where the Directors have gained NBFC experience
6. The CIBIL (Credit Information Bureau of India Limited) Data concerning the Directors of the company
7. Certified copy of the Board Resolution for the formulation of the “Fair Practices Code”.
8. Board Resolution particularly approving the submission of the application form and authorizing signatory
9. 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)
10. 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.
11. Financial Statements of the past two years of the Unincorporated Bodies, if any,
12. Statutory Auditors Certificate declaring that the company neither accepts nor is holding any Public Deposit.
13. Details of the Authorized Share Capital along with the latest shareholding pattern of the concerned company including the percentages
14. Copies of the Fixed Deposit receipt and bankers certificate indicating the balances are in support of the Net Owned Funds
15. 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
16. All the details related to the bank balances, bank accounts, complete postal address of the branch, bank loan, credit facilities which are availed
17. Self-attested Bank Statements or the Income Tax returns etc
18. The detailed business plan of the concerned company for the next three years providing details of its
19. The Thrust of business,
20. Market segment
21. 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 –

1. 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)
2. Step 2 – After the formation of the company, the next step is to open a Bank Account.
3. 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.
4. 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.
5. 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.
6. 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 –

1. 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.
2. 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.
3. 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.
4. In case of any other infringement, a fine may be imposed of a maximum of Rs. 5,000 by the Reserve Bank of India
5. 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.
6. 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.

Read our article:Major challenges faced by NBFCs & their solutions