The Concept of Principal Business Criteria (PBC) of RBI for NBFC

Principal Business Criteria

It is observed that sometimes many registered companies (ROC registered) carry out NBFC activities like Loaning/lending/advancing/ investing in the securities/leasing/factoring or microfinance lending etc. during their course of its normal business activities. Although, these companies are not registered with RBI as NBFC or not having their main object in Memorandum of Association (MoA) as NBFC activities they unknowingly or inadvertently carry out NBFC activities substantially in volume and value. Thus their original/main object of company i.e trading/manufacturing/ selling of any product, etc. remained at a very low volume as it deviates from its main activity. This type of business pattern may not be intended by the company but may take place without any knowledge of the RBI regulations in respect of NBFC. Sometime this may be a temporary phase for the company also. In other words, though such companies are not formally registered with RBI as NBFC, they are deemed to be NBFC as per the regulations of the RBI and as such companies have violated the rules of RBI for carrying out NBFC activities without formal NBFC registration with RBI. Though such a company considers itself as a normal company in the spirit it is NBFC. For this, the RBI has stipulated certain guidelines for this type of company to ascertain if it is an NBFC and this is known as Principal Business Criteria (PBC) doctrine.

Read our article:What are the Regulatory Requirements of Non-Banking Financial Company in India?

Now let’s discuss the concept of Principal Business Criteria in detail!

What is the Principal Business Criteria?

The financial activity to be established as the principal business of the company is when a company’s financial assets (as explained earlier) comprise more than 50 percent of the total assets and income from financial assets comprise more than 50 percent of its gross income earned as at the end of the year. This condition must be supported by the figures of the audited balance sheet of the company. A company which satisfies both these criteria will be deemed as NBFC by RBI regulation though it is not registered with the RBI. In fact, the term ‘principal business’ is not clearly defined by the Reserve Bank of India Act. The Reserve Bank regulation expect and ensure that only companies mainly engaged in financial activity obtain registration from it and further are regulated and supervised by it. Further, if such companies are carrying on business like agricultural operations, manufacturing activity, purchase and sale of goods, providing any kind of services or purchase, sale of immovable property as their main principal business and are undertaking some financial business in a small way and volume, they will not come under the Reserve Bank purview for regulation. Popularly this test is known as a 50-50 test for NBFC purpose and is applied to verify if or not a company is into the financial business of NBFC. This test is applicable for an unregistered entity with the RBI and not to a registered NBFC as such.

READ  Money Lending License in Uttar Pradesh

As per the provision of RBI Press Release no. 99/1269 dated April 8, 1999, a company is considered as an NBFC if it holds financial assets more than 50 percent of its total assets (net of intangible assets and accumulated loss) and further income from these financial assets is more than 50 percent of its gross income. Both these tests are required to be satisfied.

This also involves that NBFCs under the current regulation can undertake non-financial activities along with financial activities, as NBFCs registered with the RBI, which could face risk to its financial activities. Further, there are also operational risks in monitoring such companies as their business modules are inconsistent with financial activities.

Thus financial activity as per the definition under Section 45-I c of the RBI Act, 1934 must be an important part of the business for a company to be considered as a financial institution (NBFC). Further, there could be systemically important financial companies (having asset size more than Rs. 500 crores) not fulfilling one of the twin criteria determined for principal business but having large financial assets that could have financial implications for the entire sector must be a financial institution and registered with RBI for the regulation purpose.

What are the Implications of such Companies?

It is the obligatory responsibility of the auditors of such company to report to the RBI as and when he finalizes the balance sheet of such company. It is his duty to report such fact to the RBI[1].

READ  Now Mutual Funds Investment May not be Desirable Source of Capital for Firms and NBFCs

When such a company fulfilling both the criteria of PBC as stipulated by the RBI will have two options for it as follow:

  1. Either it approaches to RBI and requests for condonation and submits a formal application for NBFC registration if it has plans to continue NBFC activities in future also.
  2. Or to approach and requests the RBI to grant time period to liquidate its financial assets below 50% as shown in the Balance The company must submit a time-bound program to RBI to liquidate its financial assets supported by the Board Resolution etc. and an undertaking to stop this in the future. Undertaking any NBFC activities without registration would attract civilly as well as a criminal liability as per the rules of the RBI.

Read our article:New Trend in NBFC Business Model, Challenges and a Scalable Business model

If the company plans to register as NBFC, the company will have to submit the required documents/ certificates, etc. along with the prescribed forms to RBI. It is obligatory for the company to stop all its NBFC activities further till it obtains the Certificate of Registration from the RBI.

The RBI has a list of the documents and information mentioned on its website to be submitted for NBFC registration. The documents and information differ for different category of NBFC and they are clearly mentioned on the RBI website.

Thus, it is PBC guideline which enables any company to realize its status as NBFC if even undertaken financial activities inadvertently without any intention to violate the rules, regulations or norms of the RBI. The company is liable for such violation though it has been done inadvertently.

Trending Posted