Surrendering the NBFC license: Reasons and procedure

Rajdeep Saini

02 Nov, 2020

The term NBFC stands for Non-Banking Financial Company which has great significance in India. It fulfills the role of providing sound financial funding in the economy. Hence, the Reserve Bank of India (RBI) is the only body that is responsible for supervising and regulating the NBFC to assure the growth of financial institutions. The number of NBFCs has declined over the period of time due to the cancellation of the NBFC license by the RBI on account of voluntary surrender of NBFC registration. Apart from this, another reason for cancellation is non-compliance with the requirements of the Net Owned Funds (NOF) Criteria.

Conditions of obtaining NBFC license

It is mandatory for every NBFC (Non Banking Financial Company) to acquire a license/ certification of registration from the RBI before initiating any business activities.

The following conditions are required to be fulfilled by every NBFC at the time of registration

• All the business entities are compulsorily required to get registered as per the provision of the Companies Act 2013.
• All the entities are required to commence the financial activities as per the provisions of the RBI Act, 1934.
• Every business entity must get its NBFC license certificate/ registration if the financial flow of the business increases and it exceeds the limit of 50% of the total assets of the company.
• A minimum paid-up capital support of Rs two crores is required as a Net Owned Fund by the company.
• In a situation to make sure that the company is in a position to pay off the future and present depositor claims and has enough earning prospect and furthermore, the affairs of the company are not harmful to both future and present investors, then the Reserve Bank of India^[1] may ask the business to inspect its books of records and accounts.

Surrender of NBFC license registration

The company is empowered to surrender the NBFC registration in the following cases:

• In cases where an NBFC comes to an end to carry on a business of NBFI (Non-Banking Financial Institution) in India.
• In cases, where NBFC has failed to obey with any provision of Certificate of Registration particularly under the Act and supplementary conditions specified by the RBI at the time of issue of Certificate of Registration.
• In situations where NBFC fails to accomplish the provisions mentioned with respect to the associations and capital of the Company.
• In cases, where the NBFC falls short to perform any direction issued by the Reserve Bank of India (RBI).
• In cases, where the NBFC does not succeed to retain the book of accounts in accordance with the necessities of any law and  provisions of the Act or Reserve bank of India directions.
• In cases where the NBFC falls short to offer or submit for scrutiny of its books of account and other applicable documents.
• In cases where an NBFC has been barred from accommodating the deposits by the order made by the Bank under the requirements of this Chapter, and such order has been in force for a period of more than 3 months.

Effects of the surrender of NBFC License Registration

When the company surrenders all of its certificates, the company will not be able to deal with other businesses of a non banking financial institution. The Reserve Bank of India allows the Certificate of registration. These NBFCs who have surrendered their NBFC Registration approved to them by the Reserve Bank of India will limit themselves to carry on further business. The non banking financial company will decide to surrender NBFC registration as ‘non- banking finance company’ cannot accept any form of public deposits.

The powers related surrender of the NBFC registration is been provided under Section 45-IA (6) of the Reserve Bank of India Act, 1934, the reserve bank will further cancel their Certificate of Registration of companies who surrender their registration for the non-banking financial companies to the Reserve Bank of India.

The companies shall not transact the business of a non-banking financial institution, as mentioned under clause (a) of section 45-of the Reserve Bank of India Act, 1934. Now NBFCs cannot take part in the business activities as mentioned under the non banking financial institutions.

Case law illustration under NBFC license Registration

Any form of business body can enter into the business of money lending, but it is important to get registered under the relevant legislation. The Apex courts in the matter of Kaloji Talusappa Gangavathi vs. Khyanagouda and Ors (AIR 1970 SC 1420), observed that in order to restrain malpractices of the money lender and protect gullible creditors, the administration must compel such strict limitations by requiring such person to get hold of a license, preserve and furnish accounts and carry out other responsibilities. From time to time, the courts have dismissed the recovery suit filed by unregistered money lenders holding money lending contracts and dealings void in the deficiency of a money lending license.

Conclusion

Read our article:NBFC Registration Procedure with Reserve Bank of India