NBFC

Procedure for Applying for NBFC License

NBFC has a phenomenal role to play in the Indian economy to have a sound source of funding. Sharing the broadening of financial services role they have come near to a banking system in meeting the shocks of the economy. In this article we described about Procedure for Applying for NBFC License.

What do you understand by NBFC?

NBFC is nothing but a financial institution who acts alike Bank but not a Bank. As defined by RBI, Non-Banking Financial Companies is Company registered under NBFC whose principal business is to grant loans and advance, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority, leasing, hire-purchase, insurance business, chit business, receive deposits under any scheme or arrangement.

Why do you on Register NBFC?

As stated above NBFC deals with financial activities^[1] it requires to be regulated. RBI has sent notices to thousands – tens of thousands perhaps – of companies asking them whether they are NBFCs. And, if yes, why they have not registered. This is worrying because if a Company is an NBFC is not registered then it demands serious consequences for the Company and its concerned directors/officers. For example, the law provides for minimum and mandatory punishment of one year for non-registration as NBFC.

In perhaps, the lawmakers made a radical and unduly broad law in 1997. It required any and every company engaged in specified finance activities to register as NBFC first even if it intended to use own funds for its business and not accept any public deposits. No minimum size companies are exempt from registration.

And now these notices. The process of responding and disposal will be lengthy and time consuming for the companies, their auditors and of course the Reserve Bank of India itself. The defining whether a Company is an NBFC or not is subject to qualitative and/or quantitative criteria.

There are other concerns too. The significances of non-registration are not just the stringent punishment of imprisonment for non-registration and fine. The question is what would happen of consequential non-compliances. A registered NBFC is required to comply with several directions, particularly relating to Prudential Norms. It is possible that these would not have been followed.

The responsibility of reporting whether a Company is NBFC or not is on their auditors too by specific Directions addressed to them. Non-compliance by them may levy fine, in some cases prosecution and also reference to the Institute of Chartered Accountants of India.

When is NBFC License with RBI Required?

The Reserve Bank of India regulates and organizes Non-Banking Financial Companies which are into the principal business of lending or acquisition of shares, stocks, bonds, etc., or financial leasing or hire purchase or accepting deposits.

Financial activity as the principal business is when a company fulfills the following conditions:

• Financial assets constitute more than 50 percent of the total assets.
• Revenue from financial assets constitutes more than 50 percent of the gross income.

The RBI has not defined the Principle business under the Act but for the purpose of the financial activity, it has set conditions to be fulfilled before taking License.

Therefore, companies involved in agricultural operations, industrial activity, purchase and sale of goods, providing services or purchase, sale or construction of immovable property as their principal business and are doing some financial activity in a small way, will not require NBFC registration.

In addition to the above below financial companies are not required to get the license of NBFC. Since such NBFCs are regulated by other regulators.

• Housing Finance Companies
• Merchant Banking Companies
• Stock Exchanges
• Companies engaged in the business of stock-broking/sub-broking
• Venture Capital Fund Companies
• Nidhi Companies
• Insurance companies
• Chit Fund Companies

What are the Types of NBFC License?

The following are the categories of NBFC Companies:

Asset Finance Company (AFC): A company which is a financial institution carrying on as its principal business the financing of physical assets.

Investment Company: A company which is a financial institution carrying on as its principal business the acquisition of securities.

Loan Company: A company which is a financial institution carrying on as its principal business the providing of finance whether by making loans or advances but does not include Asset Finance Company.

Infrastructure Finance Company: A Company that deploys at least 75 percent of its total assets in infrastructure loans, has a minimum Net Owned Funds of Rs. 300 crore.

Systemically Important Core Investment Company: A Company with an asset size of over Rs.100 crores and accepts deposits, involved in the business of acquisition of shares and securities which satisfies certain conditions.

Micro Finance Institution: Micro Finance Institution is a non-deposit taking NBFC that is engaged in microfinance activities.

What is the procedure for Applying for NBFC License?

Conditions to Obtain NBFC License in India:

The applicant of NBFC shall comply with the following conditions:

• The applicant must be registered Company as per the provisions of Companies Act 2016 or earlier Companies Act 1956.
• The applicant shall be engaged in the financial activities mentioned in the Act. If at any time the financial flow of such business increase more than 50% the total capital asset of the Company that such company shall get NBFC Registration certificate.
• The applicant Company at the time of making an application for NBFC registration shall hold mi9nimum Paid up the capital fund of INR 2 Crore. Whereas the Foreign Company and foreign investor who wants to set NBFC shall hold paid-up equity capital of INR 5 Crore.

The Process of NBFC Registration In India:

There is the following process of NBFC Registration in India-

• The applicant shall file an application online in RBI’s secured website.
• After applying online application the applicant shall get a print of application and shall submit the same along with the required documents to the Regional Office of the Reserve Bank of India^[2].
• The Company shall click on “CLICK” button on the login page to apply for COSMOS.
• After clicking one excel sheet display in the window. The applicant shall download the application form.
• The company shall indicate the correct name of the Regional Office in the field “C-8” of the “Annex-I identification Particulars” in the Excel application form.
• After submission, the Company shall get a Company Application Reference Number for the CoR application filed on-line.
• The company shall 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.

The company can then check the status of the application from the above mentioned secure address, by inputting in the acknowledgment number.