Non Baking Finance Company plays a important role in the Indian economy as it provides Loan to Startup, Entrepreneur to run their business. Mainly NBFC Entity registered in following three type of entity:-
Asset Finance Company (AFC) : An AFC is a company which is a financial institution carrying on as its principal business the financing of physical assets supporting productive/economic activity, such as automobiles, tractors, lathe machines, generator sets, earth moving and material handling equipment’s, moving on own power and general purpose industrial machines. Principal business for this purpose is defined as aggregate of financing real/physical assets supporting economic activity and income arising therefrom is not less than 60% of its total assets and total income respectively.
Investment Company (IC) : IC means any company which is a financial institution carrying on as its principal business the acquisition of securities,
Loan Company (LC): LC means any company which is a financial institution carrying on as its principal business the providing of finance whether by making loans or advances or otherwise for any activity other than its own but does not include an Asset Finance Company
To encourage the ease of doing business of NBFCs, Reserve Bank of India has issued notification dated February 22, 2019 and decided that in order to provide NBFCs with greater operational flexibility, harmonisation of different categories of NBFCs into fewer ones shall be carried out based on the principle of regulation by activity rather than regulation by entity.
Accordingly, it has been decided to merge the three categories of NBFCs viz. Asset Finance Companies (AFC), Loan Companies (LCs) and Investment Companies (ICs) into a new category called NBFC – Investment and Credit Company (NBFC-ICC).
The merged category has been defined as follows:
“Investment and Credit Company – (NBFC-ICC)” means any company which 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; and is not any other category of NBFC as defined by the bank in any of its master directions
Background of Harmonisation of different categories of NBFCs
Various categories of NBFCs have evolved over time pertaining to specific sector/asset classes. Regulations put in place for each NBFC category have also been somewhat different. At present, there are twelve such categories. The Committee on Comprehensive Financial Services for Small Businesses and Low Income Households (chaired by Dr. NachiketMor) and Internal Committee (Chairman: Shri G. Padmanabhan), which submitted their reports in January 2014 and April 2014 respectively, had recommended harmonisation of the various categories of NBFCs. The Reserve Bank is committed to such harmonisation and to move towards activity-based regulation replacing the current entity-based regulation for the NBFC sector. As a first step in this direction, deposit acceptance regulations were harmonised in November 2014. Further, with the recent rationalization and liberalization of ECB norms, differential rules applicable to various categories of NBFCs stand harmonised.
It has now been decided to harmonise major categories of NBFCs engaged in credit intermediation, viz., Asset Finance Companies (AFC), Loan Companies, and Investment Companies, into a single category. The proposed merger of existing categories would reduce to a large extent the complexities arising from multiple categories and also provide the NBFCs greater flexibility in their operations. It will cover 99% of the NBFCs by number.
Investment Cap
The release also mentioned that a deposit taking NBFC-ICC shall invest in unquoted shares of another company which is not a subsidiary company or a company in the same group of the NBFC, not exceeding twenty percent of its owned fund.
Experts believe the harmonisation will provide operational ease for both the regulator and the NBFCs
Eligibility Criteria to Register as NBFC -ICC
1. A company should be registered under the Companies Act, 1956/Companies Act 2013 as the case may be
2. Company should have a minimum net owned fund of ₹ 200 lakh (copy of Fixed Deposit of Rs. 200lakh required to attached in NBFC Application
3. One of the Director should be having exposure into Financial industry for running the Operations of NBFC.
4. Cibil score of all the Director should be more than 750.
Brief procedure to set up NBFC-ICC in India
To register/ Set up NBFC in India, Company has to apply online and Submit Original Copy of Application with Reserve Bank of India for the License to carry the business of NBFC-ICC. Following are the brief steps in this regards:-
Steps -1 :- Incorporate a company under a companies Act 2013 with minimum paid-up Capital of Rs. 2 Crores.
While Reserving the name of Company, a declaration is required to be attached in application ,declaring that the proposed company will not carry any Non-Banking Finance activity without prior permission of concerned authority i.e. Reserve Bank of India and we also further declare that as soon as company registers with MCA, will apply for the license required to run this business or any other business requiring license of the RBI or any other regulator
Step-2 :- Open current bank account of the Company and deposit 2 Cr. as per the shareholding of the members and keep this 2 Cr. as Fixed deposit which is free from all lien.
Step-3:- File online application with Reserve bank of India portal named (Cosmos) with all the annexures as prescribed
Step-4:- Two sets of Physical application in originally will be submitted to RBI Mumbai head branch.
Step-5 :-RBI scrutinize the application and ask for someinformation/clarification/submission
Step-6:-Draft Reply and Submit it to RBI within 30 days of receiving notice.
Step-7:- On being satisfied by RBI, Grant License Copy!
Frequently Asked Question
1. Which entity can apply for the NBFC-ICC Licence?
A private or public company registered under the companies Act 1956/2013 and having a minimum net owned fund of ₹ 200 lakh can apply for NBFC Licence to RBI
2. What is the time frame to register as NBFC-ICC Company?
The generally time frame to register as NBFC is approx 4-5 Months, rest its depend upon the applicant profile.
3. What are the essential documents required to be submitted along with the application form to the Regional Office of the Reserve Bank?
(i) CIBIL Report & ITR (last 3 years) of all directors
(ii) Certified copies of extract of only the main object clause in the MOA relating to the financial business
(iii) 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 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
(iv) Copy of Fixed Deposit receipt bankers certificate of no lien indicating balances in support of NOF
(v) Copy of the certificate of highest educational and professional qualification in respect of all the directors
(vi) Copy of experience certificate, if any, in the Financial Services Sector (including Banking Sector) in respect of all the directors
(vii) Banker’s report in respect of 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.
(viii) Net Worth Certificates of all directors and shareholders holding more than 10 %
(ix) Business Plan
(x) Projected Financial of next three year
4. What will be the ROC fees for setting up Company with the capital of Rs. 2 Crore?
The ROC fees will be around 3 lakhs to 3.5 Lakhs depending upon the state in which Company is going to registered.
5. Is it necessary that every NBFC should be registered with RBI?
In terms of Section 45-IA of the RBI Act, 1934, no Non-banking Financial company can commence or carry on business of a non-banking financial institution without obtaining a certificate of registration from the Bank
6. What action is taken if financial companies which are lending or making investments as their principal business do not obtain a Certificate of Registration from the Reserve Bank?
If companies that are required to be registered with the Reserve Bank as NBFCs, are found to be conducting non-banking financial activity, such as, lending, investment or deposit acceptance as their principal business, without seeking registration, the Reserve Bank can impose penalty or fine on them or can even prosecute them in a court of law. If members of public come across any entity which does non-banking financial activity but does not figure in the list of authorized NBFC on RBI website, they should inform the nearest Regional Office of the Reserve Bank, for appropriate action to be taken for contravention of the provisions of the RBI Act, 1934.
7.NBFCs are charging high interest rates from their borrowers. Is there any ceiling on interest rate charged by the NBFCs to their borrowers?
Reserve Bank of India has deregulated interest rates to be charged to borrowers by financial institutions (other than NBFC- Micro Finance Institution). The rate of interest to be charged by the company is governed by the terms and conditions of the loan agreement entered into between the borrower and the NBFCs. However, the NBFCs have to be transparent and the rate of interest and manner of arriving at the rate of interest to different categories of borrowers should be disclosed to the borrower or customer in the application form and communicated explicitly in the sanction letter etc.
8. What are the RBI Compliance to running NBFC Business?
| Particulars | Compliances | ||
| Filling of returns i.e.NBS-8/NBS-9 | NBS-8 (Annual return to be submitted by NBFCs having asset size between Rs 100 to Rs 500cr) | ||
| Statutory Auditor Certificate (SAC) | NBS-9 (Annual return to be submitted by NBFCs having asset size below Rs 100cr) | ||
| Every NBFC shall submit a Certificate from its Statutory Auditor every year to the effect that it is engaged in the business of non-banking financial institution requiring it to hold a Certificate of Registration granted under section 45-IA of the RBI Act. | |||
| Note:- NBS-8/9 has to file on RBI Cosmos Portal within 60 days (i.e 30th May) from the Close of Financial Year. | |||
| Membership of Credit Information Company(CIC) (With Four Agencies) | Credit information collected/maintained by CI updated regularly on a monthly basis or at such shorter intervals as may be mutually agreed upon between the CI and the CIC in terms of Regulation 10 (a) (i) and (ii) of the Credit Information Companies Regulations, 2006. Four agencies are : | ||
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| Registration of Company with Financial Intelligence Unit – India (FIU-IND) | NBFCs to register with the country’s financial intelligence unit (FIU-IND) and report details of clients as per the requirements under the Prevention of Money Laundering Act. | ||
| Registration of Company with CERSAI(Central Registry of Securitisation Asset Reconstruction and Security Interest) | |||
| S. No | Nature of transaction to be Registered | FORM | |
| 1 | Particulars of creation or modification of Security Interest in favour of secured creditors | FORM-I | |
| 2 | Satisfaction of any existing Security Interest | FORM-II | |
| 3 | Particulars of securitisation or reconstruction of financial assets | FORM-III | |
| 4 | Particulars of satisfaction of securitisation or reconstruction transactions | FORM-IV | |
| CKYC of Company | CKYC is a government initiative to bring KYC process of all financial sector entities under a single window. Mandatory for each company in finance sector to complete CKYC registration | ||
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IN NO EVENT THE AUTHOR SHALL BE LIABLE FOR ANY DIRECT, INDIRECT, SPECIAL OR INCIDENTAL DAMAGE RESULTING FROM OR ARISING OUT OF OR IN CONNECTION WITH THE USE OF THIS INFORMATION.
THE AUTHOR – CS MONIKA MALHOTRA (PRACTICING COMPANY SECRETARY) CAN BE REACHED AT [email protected] or +91-9599561517
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