AS per Companies Act deposit is defined as under:“deposit” comprises of any kind of receipt...
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.
NBFCs functions are regulated and supervised by RBI according to the provisions mentioned in Chapter III B of the RBI Act 1934. NBFC registration must be done according to rules & regulations given in Section 45-IA of the RBI Act 1934. It must be duly registered as per Companies Act 2013.
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.
NBFCs can commence its operations only after obtaining a “Certificate of Registration” from the RBI.
*Provided that, net owned funds should be calculated according to the last audited balance sheet of the company.
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;
Equipment Leasing Company is a financial institution carrying on its principal business of the activity of leasing of equipment.
Hire Purchase Finance Company is a financial institution carrying on as its principal business the activity of hire purchase transactions.
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.
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 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.
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.
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 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.
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 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 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.
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:
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:
(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.
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).
Quarterly returns on deposit in the first schedule.
Quarterly return on prudential norms.
Quarterly return on liquid assets.
The annual return of critical parameters by a rejected company holding public deposits.
Monthly return on exposure to the capital market by deposit-taking NBFC with the total assets of Rs. 100 crore or more.
Half-yearly by NBFC holding public deposits of more than Rs. 20 Crore or asset size of more than Rs. 100 Crore.
A quarterly statement of capital funds, risk-weighted assets, risk assets ratio, etc.
Monthly return on important financial parameters of NBFCs-ND-SI.
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
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.
|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|
|1||Monthly Return||by 7th of every month|
|2||Upload monthly||by 7th of every month|
|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||–|
|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|
Here are the following differences between NBFC and 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|
|1.||Registration to become a member of all CICs|
|3.||Central KYC Registration|
|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|
Suggested Read: All About NBFC Prudential Norms & NBFC Compliances
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:
RBI has specified the following norms which are required to be followed by NBFC’s:
Prior approval of the Reserve Bank of India is not required in the following conditions:
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:
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.
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:
After the fulfillment of all the above-given conditions:
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.
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.
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.
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.
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.
Target Company shall obtain NOC from its creditors before the transfer of business from Target Company to Acquirer Company.
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.
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.
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.
Recommended Article: All About NBFC Prudential Norms & NBFC Compliances.