NBFC Registration Process & Cost for Different Types of Entities

NBFC Registration Process and Cost for Different Types of Entities

As per Section 45-IA of the RBI Act, 1934, no Non-banking Financial Company can commence or carry on the business of a non-banking financial institution without a) obtaining a certificate of registration from the Bank and without having a Net Owned Funds of Rs. 25 lakhs (Rs. Two crores since April 1999).

NON-BANKING FINANCIAL COMPANY – A INTRODUCTION

A company engaged in the business of loans and advances, acquisition of bonds/ debentures/ shares/stocks/securities issued by Government or local authority. It also deals with other marketable securities like leasing, hire-purchase, insurance business, chit business. It does not include any institution whose principal business is that of industrial activity, agriculture activity, purchase or sale of any goods (other than securities) or providing any services and construction/sale/purchase of immovable property as per the Companies Act 2013. NBFCs mainly have the business of receiving deposits under any arrangement or scheme in one lump sum amount or in instalments by way of contributions or in any other manner. An NBFC needs to pass a test called 50 50 test where a company’s financial assets constitute more than 50 per cent of the total assets and income from financial assets constitute more than 50 per cent of the gross income to get declared as an NBFC. The company fulfilling both these criteria can get NBFC license by RBI.

How NBFCs are different from the banks?

i. A bank can accept demand deposit whereas NBFC cannot.

ii. The deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is available to depositors of banks but in case of NBFC, it is not.

iii. Banks form part of the payment and settlement system and can issue cheques drawn on itself whereas NBFCs are not allowed to do that.

But some categories of NBFCs who are regulated by other regulators are exempted from the requirement of registration with RBI like

(1) Chit companies as defined in clause (b) of Section 2 of the Chit Funds Act, 1982 (2) Housing Finance Companies regulated by National Housing Bank, Stock Exchange or a Mutual Benefit company.

(3) Venture Capital Fund/Merchant Banking companies/Stockbroking companies registered with SEBI, (4) Insurance Company holding a valid Certificate of Registration issued by IRDA, (5) Nidhi companies as notified under Section 620A of the Companies Act, 1956 or formed under section 406 of the Companies Act, 2013,

CATEGORISATION OF NBFC’S

NBFCs are categorized

a. in terms of the type of liabilities into Deposit and Non-Deposit accepting NBFCs,

b. non-deposit taking NBFCs by their size into systemically important and other non-deposit holding companies

(NBFC-NDSI and NBFC-ND)

c. by the kind of activity they conduct. Within this broad categorization the different types of NBFCs are as follows:

I. Asset Finance Company (AFC)

II. Investment Company (IC)

III. Loan Company (LC)

IV. Systemically Important Core Investment Company (CIC-ND-SI)

V. Infrastructure Debt Fund: Non- Banking Financial Company

VI. Non-Banking Financial Company – Micro Finance Institution (NBFC-MFI):

VII. Infrastructure Finance Company (IFC)

VIII. Non-Banking Financial Company – Factors (NBFC-Factors)

NBFC- Non-Operative Financial Holding Company (NOFHC) Incorporation of NBFC’s

Incorporating an NBFC is as similar to incorporating a company as per companies act.

1. Form RUN is used for approval of name which should contain word financing to indicate it as the principal activity.

2. The MOA of the company needs to state the principal business as lending credit, making investments in various types of shares and stocks, leasing, hire-purchase, insurance business, chit business, and receiving deposits under any scheme or arrangement at the time of registering under the Companies Act

3. As, stated by the RBI, the Net Owned Funds of the entity cannot be less than Rs. 2 Crore or the authorized Share Capital of the NBFC need to be at least than Rs. 2 Crores

Registration Process with RBI

Once the Company is Incorporated as per the companies act it needs to obtain a certificate of registration from RBI. And the applicant company should check the following eligibility norms before doing so: –

a. There need to be minimum one director from NBFC background or senior Bankers as full-time director in the company

b. Understanding of NBFC / Finance business

c. Clean CBIL records

In terms of Section 45-IA of the RBI Act, 1934, a Non-banking Financial company can commence or carry on the business of a non-banking financial institution only after

a. obtaining a certificate of registration from the Reserve Bank of India and

b. having a Net Owned Funds of Rs. Two Crore.

But to obviate dual regulation, few categories of NBFCs which are regulated by other regulators are exempted from the requirement of registration with RBI, as they are governed by the regulations of specific departments and Acts respectively. Such types of NBFCs are: –

a. Venture Capital Fund/Merchant Banking companies/Stockbroking companies registered with SEBI,

b. Chit companies as defined in clause (b) of Section 2 of the Chit Funds Act, 1982,

c. Housing Finance Companies regulated by the National Housing Bank,

d. Insurance Company holding a valid Certificate of Registration issued by IRDA,

e. Nidhi companies as notified under the Companies Act,

f. Stock Exchange or a Mutual Benefit company

Procedure for Filing Application with Reserve Bank of India

1. The company wish to incorporate an NBFC need to apply online as well as submit a physical copy of the application along with  the few documents to the Regional Office of the Reserve Bank of India.

(1) The RBI’s secured website for online application is https://cosmos.rbi.org.in and the applicant company can do so by accessing into it. ( At this stage, the applicant company will not need to log on to the COSMOS application and hence user ids are not required)

(2) The applicant company may click on “CLICK” for Company Registration on the login page of the COSMOS Application. Where a the window showing the Excel application form available for download would be displayed. The applicant company can then download a suitable application form (i.e. NBFC or SC/RC) from the above website, key in the data and upload the application form.

(3) The applicant company must note to indicate the correct name of the Regional Office in the field

“C-8” of the “Annex-Identification Particulars” in the Excel application form. The company would then get a Company Application Reference Number (CARN) for the CoR application filed on-line.

(4) After this, the applicant company need to 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.

(5) The applicant company can then check the status of the application from the above mentioned secure address, by keying in the acknowledgement number.

Registration Process for a Few Specific Kind of NBFCs:-

Registration Process Asset Reconstruction Company

The procedure for incorporating Asset Reconstruction Company is almost the same as the incorporation of other types of NBFCs but few ways it differs as below :-

1. The company need to be incorporated under the Companies Act, 2013 . The company could be a private company or a public company.

2. After incorporation, the company need to register itself with the Reserve Bank of India.

3. As notified by RBI, an Asset Reconstruction Company need to have a Net Owned Funds (NOF) of Rs. 2 Crores or such higher amount as may be specified. A Notification in 2017, stated that the requirement of Net Owned Fund has been fixed at Rs. 100 Crore on an ongoing basis. So it is advisable to keep Authorized Capital as Rs 100 cr. for the incorporation of Asset Reconstruction Company from the date of notification. This has been done keeping in mind the greater role envisaged for ARC’s in resolving stressed assets and also the regulatory changes governing the sale of stressed assets by banks to ARC’s.

Note: – ARC’S which already registered with RBI as on the date of the said notification and not having the minimum revised Net Owned Fund need to achieve the minimum Net Owned Fund of Rs. 100 Crore latest by March 31, 2019 and the same shall be duly certified by the Statutory Auditors.

Quarterly statements in the Format SCRC 1 and SCRC 2 on owned funds, assets acquired, securitized and reconstructed assets, assets realized during the year, value of financial assets unresolved at the end of the year, value of security receipts pending for redemption, etc. are to be submitted to RBI within 15 days from the close of the quarter to which it pertains which can be filed online on the Bank’s website, https://cosmos.rbi.org.in

Asset Reconstruction Companies (ARC’S) are governed by the Securitization Companies and Reconstruction Companies (Reserve Bank) Guidelines and Directions, 2003 issued by the Reserve Bank of India as amended from time to time.

Steps of Incorporation: –

(i) Every ARC shall apply for registration in the form of the application specified vide Notification No.DNBS.1/CGM (CSM)-2003 dated March 7 in 2003, issued by the Reserve Bank of India and obtain a certificate of registration from the Bank as provided under Section 3 of the SARFAESI Act, 2002.

(ii) The ARC’s seeking registration from the RBI shall submit their application in the format (Annexed to

Notification No. DNBS.1/CGM(CSM)-2003 dated March 7, 2003) specified by the Bank, duly filled in with all the relevant annexures / supporting documents to the Chief General Manager-in-Charge, Department of Non-Banking Regulation, Central Office, Reserve Bank of India, Centre 1, World Trade Centre, Cuffe Parade, Colaba, Mumbai 400 005.

(iii) An ARC, which has obtained a certificate of registration issued by the Bank under Section 3 of the Act, can undertake both securitisation and asset reconstruction activities;

(iv) (a) An ARC shall commence business within six months from the date of grant of Certificate of Registration by the Bank; RBI may grant an extension for a further period not exceeding 12 months.

(b) Provisions of section 45 -IA, 45-IB and 45-IC of RBI Act,1934 shall not apply to the non-banking financial company, which is an ARC registered with the Bank under Section 3 of the SARFAESI Act, 2002.

Housing Finance Company Registration Process :

The procedure for incorporating a Housing Finance Company (HFC) is the same as any other company but few ways the incorporation process differs as below: –

1. Form RUN is used for approval of name which should contain housing financing as the principal activity.

2. The MOA need to state the principal activity as providing finance for housing and related matters at the time of registering under the Companies Act

3. As the Net Owned Funds of the entity can not be less than Rs. Ten Crore, the Authorised Share Capital of the NBFC need to be at least Rs. Ten Crore.

Steps of incorporation: –

Along with these a company registered under the Companies Act and want to commence the business of a housing finance institution should comply with the following-

(i) either it should primarily transact or has as one of its principal objects of transacting the business of providing finance for housing, whether directly or indirectly; and

(ii) it should have a minimum net owned fund of Rs. 10 crores.

NHB after satisfying itself on the fulfilment of following conditions provided under sub-section (4) of Section 29A of the National Housing Bank Act, 1987 may grant a Certificate of Registration:

(i) HFC is or shall be in a position to pay its present or future depositors in full as and when their claims accrue.

(ii) Affairs of the HFC are not being or are not likely to be conducted in a manner detrimental to the interest of its present or future depositors.

(iii) General character of the management or the proposed management of the HFC shall not be prejudicial to the public interest or to the interests of its depositors.

(iv) HFC has an adequate capital structure and earning prospects.

(v) Public interest shall be served by the grant of certificate of registration to the HFC to commence or carry on the business in India.

(vi) Grant of the certificate of registration shall not be prejudicial to the operation and growth of the housing finance sector of the country; and

(vii) Any other condition, the fulfilment of which in the opinion of the NHB, shall be necessary to ensure that the commencement of or carrying on the business in India by an HFC shall not be prejudicial to the public interest or in the interests of the depositors.

HFCs are mainly categorized in terms of the type of liabilities, by NHB, into Deposit and Non-Deposit accepting HFCs and are issued Certificate of Registration accordingly. Micro Finance Institution( MFI) Registration Process

Steps

1. company could be private or public and need to be incorporated under Companies Act 2013.

2. After incorporation, the company has to register itself with the Reserve Bank of India, as a Micro Finance Institution is regulated by the Reserve Bank of India.

The list of documents to be filed with RBI for registration are given below:

1. Certified copies of Certificate of Incorporation.

2. Certified copies of extract of only the main object clause in the MOA relating to the financial business.

3. 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 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 a 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 “Fair Practices Code” as per RBI Guidelines

4. Copy of Fixed Deposit receipt & bankers certificate of no lien indicating balances in support of NOF

5. 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 last three years, whichever is less, should be submitted

6. Copy of the certificate of the highest educational and professional qualification in respect of all the directors

7. Copy of experience certificate, if any, in the Financial Services Sector (including Banking Sector) in respect of all the directors

8. Banker’s report in respect of the applicant company, its group/subsidiary/associate/holding company/related parties, directors of the applicant company having 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.

Few other documents also need to be submitted in addition to registering as Type II-NBFC-ND by the NBFC-MFI applicant:

(i) 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 Organisation

(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 25 of the Companies Act, 1956 / Section 8 of the Companies Act, 2013.

(ii) Roadmap for achieving 85% qualifying assets.

CONCLUSION: –

The incorporation process is more or less the same for all kind of NBFCs but it differs in a few ways depending upon the types and functions.

Why one needs the help of a legal consultant?

Incorporating a company is a huge task and it is difficult for a common man or group of people to do it without the help of experts like an advocate, CA, CS, CMA senior bankers to get the documentation done properly in one go. By taking legal help one can also avoid the unnecessary delay of incorporation and fine for wrong filling or application. Most of the legal firms also give post-registration compliance support which can help new businesses immensely as they have to follow compliance norms strictly during the period of in-principle approval.