The microfinance sector faces growing scrutiny over the misuse of legal provisions by Private Limited Microfinance Companies and Section 8 Companies, raising regulatory concerns. In the case of Private Limited Microfinance Companies, consultants often misuse the Rule 12 Declaration. While this declaration is meant to ensure that financial activities begin only after Reserve Bank of India (RBI) approval, some companies bypass this step and commence operations prematurely, violating regulatory norms. Similarly, Section 8 Companies, intended for non-profit activities, face misuse of the MGT-14 form. Instead of legitimate amendments to their Memorandum of Association (MOA), some consultants file it as an “Agreement” with a tailored MOA to sidestep mandatory approval from the Registrar of Companies (ROC). This practice allows companies to quickly alter their object clause without adequate regulatory scrutiny through a Straight Through Process (STP). These practices undermine legal compliance and pose risks to stakeholders. Ensuring adherence to established guidelines, obtaining necessary RBI approvals, and aligning company objectives with their intended operations are crucial to fostering ethical practices in the microfinance sector. Strict regulatory oversight and increased awareness can help address these concerns effectively.
Below, we discuss two key points about how these companies are being misused and what needs to be done to ensure legal compliance.
1. Private Limited Microfinance Companies: Misuse of Rule 12 Declaration
A common issue with Private Limited Microfinance Companies is the Rule 12 Declaration. When registering a private company intending to offer financial services, some consultants are advising their clients to attach a Rule 12 Declaration, which states that the company will not start any financial activities, such as lending, without prior approval from the Reserve Bank of India (RBI).
While the declaration itself is not problematic, the issue arises when companies proceed with financial activities without obtaining RBI approval. The Rule 12 Declaration is meant to ensure that the company understands it cannot legally offer financial services unless it is approved by the RBI. However, some companies ignore this step or begin financial operations prematurely, which is in violation of the law. This can lead to legal consequences for the company and its stakeholders.
FORMAT OF RULE 12 DECLARATION:
DECLARATION
{Rule 12 of Companies (Incorporation) Rules, 2014} Read with Rule 8(A)(1)(p) of Co (Inc.) Fifth Amendment Rules,2019
Name of the proposed Company:
XYZ MICROFINANCE PRIVATE LIMITED/ XYZ MICRO FINANCE PRIVATE LIMITED
We XYZ being the subscriber to the memorandum / named as first director in the articles, of the above named proposed company, hereby solemnly declare and affirm that:
1. Rule 12 of Companies (Incorporation) Rules, 2014 read with Read with Rule 8(A)(1)(p) of Co (Inc.) Fifth Amendment Rules,2019 will be completely complied with in future.
2. Provided that in case pursuing any of the objects of a company requires registration or approval from sectorial regulators such as Reserve Bank of India, Securities and Exchange Board of India, registration or approval, as the case may be, from such regulator shall be obtained by the company before pursuing such objects and a declaration in this behalf shall be submitted at stage of incorporation of the company.”
I, First director named in the Articles of Association of the proposed company XYZ MICRO FINANCE PRIVATE LIMITED solemnly declare, that the declaration given herein as stated above are true to the best of my knowledge and belief.
Signature of Declarant
2. Section 8 Companies: Misuse of MGT-14 to Register an Agreement
Another concerning practice involves Section 8 companies, which are typically set up as non-profit entities for social causes, including microfinance. These companies are required to have a clear object clause in their Memorandum of Association (MOA), specifically stating that they will engage in financial activities such as lending, and must obtain approval from the Registrar of Companies (ROC) or the Central Government (CPC) before they can begin their operations.
However, some consultants are misusing the MGT-14 form, which is meant for altering the object clause of a company. Instead of filing it for legitimate amendments, they are filing it as an “Agreement” and attaching a customized MOA that suits their clients’ needs, bypassing the required approval from the ROC. This practice is legally and ethically wrong, as the MGT-14 form should only be used for proper amendments to the company’s object clause and not as a shortcut to avoid regulatory checks. This process is often processed quickly through STP (Straight Through Process), allowing companies to operate without sufficient scrutiny.
Conclusion
These practices highlight the need for increased awareness and strict adherence to legal procedures in the microfinance sector. Private Limited Microfinance Companies must follow proper guidelines and obtain RBI approval before offering financial services, while Section 8 companies must ensure that their MOA aligns with their intended financial activities and comply with all approval processes. By following the correct procedures, microfinance companies can avoid legal issues and operate ethically, ultimately benefiting their clients and the communities they serve.
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