What are the Regulatory Requirements of Non-Banking Financial Company in India?

Non-Banking Financial Company (NBFC) refers to a financial institution. It is a type of company engaged in the business of receiving loans and advances, acquisition of stocks or shares, leasing, hire-purchase, insurance business, chit business under Companies Act 2013. In this article, we will discuss the Regulatory Requirements of NBFC in India;

In India, The Reserve Bank of India regulates the registration of NBFC. NBFC regulations provide a variety of banking and non-banking services to the concerned people. They do not hold banking license but they have to follow the rules and regulations laid down by RBI.

The main business activity of the NBFCs is to raise capital funds from public depositors and investors and then lend to borrowers as per the rules and regulations prescribed by the Reserve Bank of India. NBFCs are becoming an alternative to the banking and financial sector. In NBFC there is a requirement of minimum net owned fund of Rs. 2 Crore.

The Regulatory Requirements of NBFC in India

NBFCs can commence its operations only after obtaining a “Certificate of Registration” from the RBI^[1].

NBFC Registration Requirements

• The company must be registered as a public limited company or private limited company in India.
• The company must have a minimum net owned fund of Rs.2 Crore.

*Provided that, net owned funds should be calculated according to the last audited balance sheet of the company.

• For a minimum period of 12 months and a maximum period of 60 months, NBFCs are allowed to accept/renew public deposits.
• NBFCs cannot accept deposits repayable on demand.
• NBFCs can offer interest rates not higher than the ceiling rate prescribed by RBI from time to time.
• Offering gifts/incentives or any other additional benefit to the depositors is not allowed.
• There is a requirement of minimum investment-grade credit rating.
• Repayment of deposits by NBFCs is not guaranteed by RBI.
• Furnishing hard copies of the list of documents with the regional office of the RBI.

What are the types of NBFCs on the basis of liabilities and activities?

Based on Liabilities:

• Deposit Accepting NBFCs (NBFCs-D) [Deposit Taking]
• Non-Deposit NBFCs (NBFCs-ND) [Non-Deposit Taking]
• Systematically Important NBFCs-ND (NBFCs-ND-SI)
• Others NBFCs-ND

Based on Activities:

• NBFC – Investment and Credit Company – (NBFC-ICC)

NBFC-ICC is a financial institution carrying on as its principal business- asset finance, the providing of finance whether by making loans or advances or otherwise for any activity other than its own and the acquisition of securities;

Suggested Read: RBI Merges Three Categories of NBFCs Into NBFC – Investment and Credit Company (NBFC-ICC) to Ease Operational Flexibility

• Equipment Leasing Company

Equipment Leasing Company is a financial institution carrying on its principal business of the activity of leasing of equipment.

• Hire Purchase Finance Company

Hire Purchase Finance Company is a financial institution carrying on as its principal business the activity of hire purchase transactions.

• Infrastructure Finance Company (IFC)

Infrastructure Finance Company is a type of NBFC with Net Owned Fund of Rs.300 Crore, Credit rating ‘A’ or equivalent credit rating, CRAR of 15% and 75% in infrastructure loans.

• Systemically Important Core Investment Company (CIC-ND-SI)

Systematically Important Core Investment Company (assets Rs. 100 crore and above) is a company that has deployed at least 90% of its assets in the form of investment in shares or debt instruments or loans in group companies. 60% should be invested in equity shares or those instruments which can be compulsorily converted into equity shares out of 90%. Such type of companies accepts public funds.

• Infrastructure Debt Fund (IDF-NBFC)

Infrastructure Debt Funds can be set up either as a trust or as a company and they are meant to infuse funds into the infrastructure sector.

In case Infrastructure Debt Funds set up as a trust, it would be a mutual fund called IDF-MF regulated by SEBI. The mutual fund would issue rupee-denominated units of five years of maturity to raise funds for infrastructure projects.

In case Infrastructure Debt Funds set up as a company, it would be NBFC regulations that will be regulated by the RBI. Such companies would be called IDF-NBFC. IDF-NBFC is a non-deposit taking NBFC that has Net Owned Fund of Rs 300 crores or more and which invests only in Public-Private Partnerships (PPP) and post-commencement operations date (COD) infrastructure projects which have completed at least one year of satisfactory commercial operation and becomes a party to a Tripartite Agreement.

• Non-Banking Financial Company-Micro Finance Institution (NBFC-MFI)

NBFC-MFI is a non-deposit NBFC having it’s 85% of assets in the form of microfinance. Microfinance should be in the form of loans given to those who have an annual income of Rs. 60,000 in rural areas and Rs. 120,000 in urban areas. Loans should not exceed Rs. 50000 and its tenure should not be less than 24 months.

• Non-Banking Financial Company – Factors (NBFC-Factors)

There is an acquisition of receivables by way of assignment of such receivables or financing, there against either by way of loans or advances or by the creation of security interest over such receivables but does not include normal lending by a bank against the security of receivables, etc.

NBFC-Factoring company should have a minimum Net Owned Fund of Rs. 5 Crore and its financial assets in the factoring business should constitute at least 75 percent of its total assets and its income derived from factoring business should not be less than 75 percent of its gross income.

• Housing Finance Company

Housing Finance Company is a type of company which is engaged in the principal business of financing of acquisition or construction of houses which includes the development of plots of lands for the construction of new houses.

• Chit Fund Company

They collect deposits from members on a periodic basis and distribute these funds among them as prizes. Members who enter into an agreement with chit Company subscribe for a definite period. The Chit Fund Act, 1982 governs the operations of the Chit Fund Company administered by the State Governments. While the deposit-taking activities are regulated by the Reserve Bank of India.

• Mutual Benefit Finance Company

Mutual Benefit Finance Companies also called “Nidhis”, are the non-banking finance companies that enable its members to pool their money with a predetermined investment objective. The main sources of funds are to share capital, member deposits, public deposits.

• Residuary Non-Banking Company

Residuary Non-Banking Company is a type of NBFC having a principal business of the receiving of deposits, under any scheme or arrangement or in any other manner and not being an investment, asset financing, and loan company. These types of companies are required to maintain investments as per directions of RBI, in addition to liquid assets.

What are the Documents Required for Registration as Type I – NBFC ND?

Following Documents required to be submitted to RBI along with the prescribed application form for NBFC registration as Type I – NBFC for obtaining certificate and Registration from RBI as NBFC:

• Certified copies of Certificate of Incorporation (COI) and Certificate of Commencement of Business in case of public limited companies.
• Certified copies of an extract of only the main object clause in the MOA relating to the financial business.
• A certified true copy of Board resolution stating that:
• The company is not carrying on any NBFC activity/stopped NBFC activity and will not carry on/commence the same before getting registration from RBI.
• The UIBs in the group where the director holds substantial interest or otherwise has not accepted any public deposit in the past /does not hold any public deposit as on the date and will not accept the same in future
• The company has formulated the “Fair Practices Code” as prescribed by the RBI Guidelines.
• The company has not accepted public funds in the past/does not hold any public funds as on the date and will not accept the same in the future without the approval of Reserve Bank of India^[2].
• The company does not have any customer interface as on date and will not have any customer interface in the future without the approval of Reserve Bank of India
• Copy of Fixed Deposit receipt & bankers certificate of no lien indicating balances in support of Net Owned Fund.
• Audited financial statements along with directors & auditors’ report from the date of incorporation of the company, or for the last three years, whichever is less, in case of existing companies.
• Banker’s report in respect of applicant company, its group/subsidiary/ associate/ holding company / related parties, directors of the applicant company having a substantial interest in other companies The Banker’s report should be about the dealings of these entities with these bankers as a depositing entity or a borrowing entity.

What are the Documents Required for Registration as Type II – NBFC-ND?

Following Documents required to be submitted to RBI along with the prescribed application form for NBFC registration as Type II – NBFC for obtaining certificate and Registration from RBI as NBFC:

• Certified copies of Certificate of Incorporation (COI) and Certificate of Commencement of Business in case of public limited companies.
• Certified copies of an extract of only the main object clause in the MOA relating to the financial business.
• A certified true copy of Board resolution stating that:
• The company is not carrying on any NBFC activity/stopped NBFC activity and will not carry on/commence the same before getting NBFC registration from RBI.
• The company has not accepted any public deposit, in the past (specify period)/does not hold any public deposit as on the date and will not accept the same in future without the prior approval of Reserve Bank of India.
• The UIBs in the group where the director holds substantial interest or otherwise has not accepted any public deposit in the past do not hold any public deposit as on the date and will not accept the same in the future.
• The company has formulated “Fair Practices Code” as per RBI Guidelines.
• Copy of Fixed Deposit receipt & bankers certificate of no lien indicating balances in support of Net Owned Fund
• For companies already in existence, the Audited balance sheet, and Profit & Loss account along with directors & auditors report or for the entire period the company is in existence, or for the last three years, whichever is less, should be submitted.
• Copy of the certificate of the highest educational and professional qualification in respect of all the directors.
• Copy of experience certificate, if any, in the Financial Services Sector (including Banking Sector) in respect of all the directors.
• Banker’s report in respect of applicant company, its group/subsidiary/ associate / holding company / related parties, directors of the applicant company having a substantial interest in other companies The Banker’s report should be about the dealings of these entities with these bankers as a depositing entity or a borrowing entity.

NBFC-Registration-documents-required

In Addition following documents are required to be submitted by the NBFC-MFI applicant

• Certified True Copy of the Board resolution stating that:

(a) The company will be a member of all the Credit Information Companies and will be a member of at least one Self-regulatory organization.

(b) The company will adhere to the regulations regarding the pricing of credit, Fair Practices in lending and non-coercive method of recovery as per RBI Guidelines.

(c) The company has fixed internal exposure limits to avoid any undesirable concentration in specific geographical locations.

(d) The company is not licensed under Section 8 of the Companies Act, 2013.

• Roadmap for achieving 85% qualifying assets.

In Addition following documents are required to be submitted by the NBFC-Factor applicant

Board Resolution enclosing roadmap regarding the company will have financial assets in the factoring business constituting at least 50% of its total assets and its income derived from factoring business will not less than 50% of its gross income (Specify the time frame).

In Addition following documents are required to be submitted by the NBFC-IDF applicant:

• No objection Certificate from RBI issued to NBFC-IFC for sponsoring the NBFC-IDF.
• Copy of Tripartite Agreement between the concessionaire, the Project Authority, and NBFC-IDF.
• Details of change in the management of the sponsor company during the last financial year to date, if any, and reasons thereof.
• Source of startup capital of the company with documentary evidence.
• NBFC-IDF would raise resources through the issue of either Rupee or Dollar denominated Bonds of minimum 5-year maturity.

What will be the NBFC Registration Procedure?

• Acquire DSC and Din for directors
• File Name approval application
• An affidavit from directors to fulfill RBI compliance
• Draft MOA & AOA
• File incorporation forms with necessary documents
• Obtain a certificate of registration from Registrar of Companies
• Deposit Net Owned Funds in the bank account opened for company
• Apply for registration with RBI under RBI Act, 1934.
• Applicant Company has to file an online application with the RBI on its official website.
• After this, an applicant will get a reference number to facilitate inquiry in the future.
• After this, it is required to submit the duplicate hard copies to the concerned regional office of RBI.
• The regional office shall check the accuracy of all submitted documents.
• The regional office will send the application for NBFC license to the central office.
• The central office of RBI grants NBFC registration only when the applicant company fulfills prescribed requirements under section 45-IA.
• NBFC must commence its business within 6 months from the date of Certificate of Registration

What are the Returns Required to be Submitted by Deposit-taking NBFC?

• NBS-1

Quarterly returns on deposit in the first schedule.

• NBS-2
  

Quarterly return on prudential norms.

• NBS-3
  

Quarterly return on liquid assets.

• NBS-4
  

The annual return of critical parameters by a rejected company holding public deposits.

• NBS-6
  

Monthly return on exposure to the capital market by deposit-taking NBFC with the total assets of Rs. 100 crore or more.

• ALM return
  

Half-yearly by NBFC holding public deposits of more than Rs. 20 Crore or asset size of more than Rs. 100 Crore.

• Audited Balance Sheet and Auditor’s Report by NBFC accepting public deposits.
• Branch Info Return

What are the Returns Required to be Submitted by Non-Deposit NBFC (NBFCs-ND-SI)?

• NBS-7
  

A quarterly statement of capital funds, risk-weighted assets, risk assets ratio, etc.

• NBS-2
  

Monthly return on important financial parameters of NBFCs-ND-SI.

• ALM Returns
  

Monthly- statement of short-term dynamic liquidity in format NBS-ALM-1.

Half Yearly- Statement of structural liquidity in format NBS-ALM2

Half Yearly- Statement of interest rate sensitivity in format NBS-ALM-3

• Branch info return
  

Quarterly return on important financial parameters of non-deposit taking NBFCregulations in India having assets of more than ₹ 50 crores and above but less than ₹ 100 crores. Basic information like name of the company, address, Net Owned Fund, profit/loss during the last three years has to be submitted quarterly by non-deposit taking NBFCs with asset size between ₹ 50 crores and ₹ 100 crores.

What are the Required Compliances for NBFC-ND with RBI?

Annual Compliances

S.No.	Particulars	Time Limit
1	Unaudited March Monthly return/NBS7	on or before 30th June
2	Audited March Monthly return/NBS7	Upon completion
3	Statutory Auditors certificate on Income & Assets	on or before 30th June
4	Information about Cos having FDI/Foreign Funds	on or before 30th June
5	Resolution of Non-acceptance of Public Deposit	before the commencement of the new Financial year
6	File Audited Annual Balance Sheet and P&L Account	One month from the date of signoff
7	Declaration of Auditors to Act as Auditors of the Company	annual basis

Monthly Compliances

S.No.	Particulars	Time Limit
1	Monthly Return	by 7th of every month
2	Upload monthly	by 7th of every month

Periodical Compliances

S.No.	Particulars	Time Limit
1	Appointment of Director(Annexure-III)	within 30 days of appointment
2	Upload monthly return	within 30 days of the resignation
3	Resignation of Director	–

What are the Required Compliances for NBFC-ND With NSE?

S.No.	Particulars	Time limit
1	Filing of Listing Agreement of Issued Series	Within 30 days of Issuance
2	Publishing of Unaudited Half-yearly Result in two newspaper	Within 30 days from the end of Half-year
3	File Half-yearly Audited Result with NSE via mail	Within 30 days from the end of Half-year
4	File Quarterly result (Balance Sheet and P&L) via mail	Within 90 days from the end of Quarter
5	Filing Umbrella Information Memorandum/Shelf Offer Document + below letters:  1. Letter from CRISIL for filing UIM 2. Letter from AXIS Bank (Debenture Trustee) for filing UIM 3. A certified true copy of the resolution authorizing the filing of UIM 4. A certified true copy of the blanket resolution covering Debt issuances for filing UIM 5. Certify compliance as per Chapter VI of SEBI (DIP) Guidelines 2000 &Sch-II of Companies Act,1956 6. Obtain In-principle approval letter from NSE post-filing	At the end of the Financial Year

What is the Difference between Banks & NBFCs?

Here are the following differences between NBFC and Bank:

• Banks are the government authorized financial intermediary that aims at providing banking services to the general people. Whereas NBFC provides banking services to people without carrying a bank license.
• NBFC is incorporated under the Companies Act whereas a bank is registered under the Banking Regulation Act, 1949.
• NBFCs are not allowed to accept deposits that are repayable on demand whereas banks accepts demand deposits.
• In NBFC, foreign Investments up to 100% is allowed. Whereas in the case of private sector banks they are eligible for foreign investment, but which would be no more than 74%.
• Banks are an integral part of the payment and settlement cycle while NBFC is not a part of this system.
• It is mandatory for banks to maintain reserve ratios like CRR or SLR. Whereas in the case of NBFC it is not required to maintain reserve ratios.
• Deposit insurance facility is allowed to the depositors by Deposit Insurance and Credit Guarantee Corporation (DICGC)^[3]. In the case of NBFC, this type of facility shall not be available.
• Banks can create credit whereas in the case of NBFC they are not involved in the creation of credit.
• Banks can provide transaction services to its customers such as providing overdraft facility, issue of traveler’s cheque, transfer of funds, etc. Whereas these type of services cannot be provided by NBFC.

Comparison Chart

Basis	NBFC	Bank
Meaning	They provide banking services to people without holding Bank licenses.	It is a government authorized financial intermediary which aims at providing banking services to the public.
Regulated under	Companies Act 2013	Banking Regulation Act 1949
Demand Deposit	Cannot be accepted	Can be accepted
Foreign Investment	Allowed up to 100%	Allowed up to 74% for private sector banks
Payment and Settlement system	Not a part of the system.	An integral part of the system.
Maintenance of Reserve Ratios	Not required	Mandatory
Deposit insurance facility	Not available	Available
Credit creation	NBFC does not create credit	Banks create credit.
Transaction services	Cannot be provided by NBFC	Provided by Banks

NBFC Post Incorporation Compliances

Sr. No.	Compliances
1.	Registration to become a member of all CICs
2.	FIU-IND Registration
3.	Central KYC Registration
4.	CERSAI
5.	Submission of Financial Information to Information Utilities
6.	Adoption of Fair Practice Code
7.	Adoption of Anti Money Laundering Policy & IT Policy
8.	Filing of timely return with RBI
9.	Convene Statutory Meetings
10.	Maintenance of Accounts
11.	Income Tax Return Filing
12.	GST Return Filing
13.	MCA Compliances

Suggested Read: All About NBFC Prudential Norms & NBFC Compliances

What is the NBFC Takeover?

NBFC Takeover requires prior approval of the Reserve Bank of India. Minor changes in the management or control are outside the purview of the takeovers whereas, in case of significant changes, it is required to obtain prior approval of the RBI.

Prior approval of the Reserve Bank of India is required in the following conditions:

• The takeover of NBFC or acquisition of control, which may or may not results in the change in management.
• Variation in the shareholding of an NBFC, which is resulting in 26% acquisition or transfer of the paid-up capital including progressive increases over the period of time.
• Change in the management by way of change in more than 30% of the directors of the NBFC.

What are the RBI regulations in relation to the NBFC Takeover?

RBI has specified the following norms which are required to be followed by NBFC’s:

• Takeover or acquisition of an NBFC requires prior approval of RBI whether there is a change in management or not.
• Approval should be written approval.
• Prior approval of RBI will be required in case of acquisition or transfer of shareholding for more than 10%.
• No RBI approval will be required in case there is a change in shareholding for more than 26% for the reason of buyback/reduction in share capital but this reduction/buyback should have been approved by the competent authority.
• In case of a change in the directors of the company, more than 30% of the prior written approval shall be required.
• Change in the direction of the company requires a prior public notice at least 30 days prior to the announcement of such change.

Prior approval of the Reserve Bank of India is not required in the following conditions:

• In case shareholding goes beyond 26% due to the buyback of shares or reduction in the capital by obtaining the approval of a competent court.
• Change in the management by 30 % inclusive of Independent Directors or by rotation of the directors on Board.

Application for Prior Approval of RBI

The next step is to make an application to the RBI for the approval on the letterhead of the company along with the following required documents:

• Information on Proposed directors and shareholders.
• Information regarding sources of funds required for acquiring shares in the NBFC by the proposed shareholders.
• Declaration by all the proposed directors and shareholders stating their non-association with any entity accepting deposits.
• Declaration by all the proposed directors and shareholders stating their non-association with any entity to whom Certificate of Registration is denied by the RBI.
• Statement regarding non-criminal background as well as non-conviction under section 138 of the Negotiable Instruments Act by all the proposed directors as well as shareholders.
• Bankers’ Report with regard to proposed directors and shareholders.

An application shall be submitted to the Regional Office of the Department of Non-Banking Supervision in whose control the Registered Office of the NBFC is located. All the queries raised by the RBI shall be timely answered in respect of the takeover so as to avoid any unforeseen delay in the approval. Usually, an application for the NBFC takeover procedure goes through a processing time of three to four months in the normal course of business.

The requirement of Prior Public Notice in Case of Change in Management/Control

Public notice shall be given in one leading national and one local newspaper in case of transfer of ownership or control by the sale of shares or whether with or without transfer of shares, it shall be given at least 30 days prior to effecting such sale or transfer.

Following are the indications of the public notice:

• Intention to sell or transfer ownership/control
• Particulars of the transferee
• Reasons for such sale or transfer of ownership/ control

After the fulfillment of all the above-given conditions:

• Share Purchase Agreement is prepared and signed.
• Management is handed over, and
• In case of remaining consideration, it shall be paid off within 31 days of the public notice in the newspaper or as mutually agreed upon by all the parties.

Subsequently, all the assets of the target company as shown in the balance sheet will be liquidated and liabilities will be paid off and the acquirer will receive a clean balance in the bank on the name of the company which will be calculated on the basis of net worth as on the date of the takeover.

What will be the NBFC Takeover Procedure?

• Memorandum of Understanding

The first step is the signing of the MOU i.e. Memorandum of Understanding with the proposed company, it specifies that both the companies agree to enter into an agreement of takeover. It is signed by both the directors of the Acquirer Company and Target Company. While the signing of MOU, token money is given by Acquirer Company to the target company. It shall also specify the responsibilities and requirements of each company.

• Convene Board Meeting

After signing of MOU, Board Meeting shall be convened in both the companies to discuss the following matters:

a. To fix day, date, time and place of convening Extra Ordinary General Meeting.

b. For passing a resolution in EGM.

c. In relation to the takeover scheme, reply to the query of RBI.

• Public Notice

After obtaining the RBI approval, public notice shall be made to invite any objection of the public which is taking place due to take over in two newspapers within 30 days of such approval.

• The signing of the Share Transfer agreement

After the expiry of the 31st day of the notice in the newspaper, a share transfer agreement shall be signed and the remaining consideration shall be paid by the acquirer company.

• NOC from Creditors

Target Company shall obtain NOC from its creditors before the transfer of business from Target Company to Acquirer Company.

• Transfer of Assets

After this, transfer of assets shall take place in case no objections have been received and RBI approved the scheme. But the transfer should not contravene any clause of the agreement.

• Valuation the entity
  

The valuation shall be done in accordance with the rules provided by the RBI. The technique adopted for valuation shall be the Discounted Cash Flow (DCF) Method, this will represent the net present value of the entity. After the evaluation, a certificate shall be obtained by the Chartered Accountant briefing the method adopted for valuation.

• Notice to Regional Office
  

After the process of valuation and approval of the takeover scheme, NBFC shall submit an application to the Regional Office of RBI. The application shall be on the letterhead of the company. Any change in management of the NBFC after the takeover should also be intimated on a continuous basis to RBI.