What is NBFC?
Non-banking financial companies (NBFCs), also known as non-banking financial institutions (NBFIs) are entities that provide certain bank-like and financial services but do not hold a banking license.
NBFCs are not subject to the banking regulations and oversight by federal and state authorities adhered to by traditional banks.
Investment banks, mortgage lenders, money market funds, insurance companies, hedge funds, private equity funds, and P2P lenders are all examples of NBFCs.
Since the Great Recession, NBFCs have proliferated in number and type, playing a key role in meeting the credit demand unmet by traditional banks
Ensuring healthy growth of the financial companies, NBFCs plays a critical role in the complete growth of a country. With RBI (Reserve Bank of India) playing the key role of a regulatory body and an authority to supervise and regulate NBFCs in India, it can exercise its powers under the Reserve Bank Of India Act, 1934, to issue or cancel the certificate of NBFC License in the country.
PROVISIONS RELATING TO NON-BANKING INSTITUTIONS RECEIVING DEPOSITS AND FINANCIAL INSTITUTIONS is in Reserve Bank of India Act, 1934 CHAPTER IIIB
Requirement of registration and net owned fund:-
(a) obtaining a certificate of registration issued under this Chapter; and
(b) having the net owned fund of twenty-five lakh rupees or such other amount, not exceeding two hundred lakh rupees, as the Bank may, by notification in the Official Gazette, specify.
(2) Every non-banking financial company shall make an application for registration to the Bank in such form as the Bank may specify:
Provided that a non-banking financial company in existence on the commencement of the Reserve Bank of India (Amendment) Act, 1997 shall make an application for registration to the Bank before the expiry of six months from such commencement and notwithstanding anything contained in sub-section (1) may continue to carry on the business of a non-banking financial institution until a certificate of registration is issued to it or rejection of application for registration is communicated to it.
(3) The Bank may for the purpose of considering the application for registration, require to be satisfied the following conditions are fulfilled :-
(a) that the non-banking financial company is or shall be in a position to pay its present or future depositors in full as and when their claims accrue;
(b) that the affairs of the non-banking financial company are not being or are not likely to be conducted in a manner detrimental to the interest of its present or future depositors;
(c) that the general character of the management or the proposed management of the non-banking financial company shall not be prejudicial to the public interest or the interest of its depositors;
(d) that the non-banking financial company has adequate capital structure and earning prospects;
(e) that the public interest shall be served by the grant of certificate of registration to the non-banking financial company to commence or to carry on the business in India;
(f) that the grant of certificate of registration shall not be prejudicial to the operation and consolidation of the financial sector consistent with monetary stability, economic growth and considering such other relevant factors which the Bank may, by notification in the Official Gazette, specify; and
(g) any other condition, fulfilment of which in the opinion of the Bank, shall be necessary to ensure that the commencement of or carrying on of the business in India by a non-banking financial company shall not be prejudicial to the public interest or in the interest of the depositors.
(4) The Bank may, after being satisfied that the conditions specified are fulfilled, grant a certificate of registration subject to such conditions which it may consider fit to impose.
(5) The Bank may cancel a certificate of registration granted to a non-banking financial company if such company –
(i) ceases to carry on the business of a non-banking financial institution in India; or
(ii) has failed to comply with any condition subject to which the certificate of registration had been issued to it; or
(iii) at any time fails to fulfil any of the conditions referred to in clauses (a) to (g)
(iv) fails – (a) to comply with any direction issued by the Bank; or
(b) to maintain accounts in accordance with the requirements of any law or any direction or order issued by the Bank; or
(c) to submit or offer for inspection its books of accounts and other relevant documents when so demanded by an inspecting authority of the Bank; or
(v) has been prohibited from accepting deposit by an order made by the and such order has been in force for a period of not less than three months:
Provided that before cancelling a certificate of registration on the ground that the non-banking financial company has failed to comply with the provisions of clause (ii) or has failed to fulfil any of the conditions referred to in clause (iii) the Bank, unless it is of the opinion that the delay in cancelling the certificate of registration shall be prejudicial to public interest or the interest of the depositors or the non-banking financial company, shall give an opportunity to such company on such terms as the Bank may specify for taking necessary steps to comply with such provision or fulfilment of such condition: Provided further that before making any order of cancellation of certificate of registration, such company shall be given a reasonable opportunity of being heard
Appeal against order by the aggrieved party:
A company aggrieved by the order of rejection of application for registration or cancellation of certificate of registration may prefer an appeal, within a period of thirty days from the date on which such order of rejection or cancellation is communicated to it, to the Central Government and the decision of the Central Government where an appeal has been preferred to it, or of the Bank where no appeal has been preferred, shall be final:
Provided that before making any order or rejection of appeal, such company shall be given a reasonable opportunity of being heard.
. The appeal can also be filed in case of delay along with the Condonation of Delay Application within reasonable time along with proper justification.
Delhi High Court
Reserve Bank Of India vs Appellate Authority For Nbfc … on 8 September, 2005
The Reserve Bank of India has filed this Petition assailing the Order of the First Appellate Authority for NBFC Registration Cases under Section 45-IA(7) of the Reserve Bank of India Act, 1934.
The Reserve Bank of India (Amendment) Ordinance, 1997, further to amend the Reserve Bank of India Act, provides several safeguards for the NBFCs so as to ensure their viability. These include compulsory registration of the NBFCs with Reserve Bank of Idia (RBI), stipulation of minimum net owned funds requirement, creation of reserve fund and transfer of certain percentage of profits every year to the fund and prescription of liquidity requirement. RBI has also been vested with powers to issue guidelies encompassing aspects such as income recognition, accounting standards, provision for bad and doubtful debts, capital adequacy, etc, which are intended to ensure sound and healthy operations and the quality of assets of these companies. RBI is also beig empowered to issue directions to the auditors of NBFCs, to order special audit of NBFCs, prohibit acceptance of deposits by NBFCs, and to make application for winding up of NBFCs. Whereas earlier the only recourse available to the depositors was to appoach to Court of Law for redressal of grievances, powers have been vested with the Company Law Board for directing the defaulting NBFCs to make repayment of the depositors/interest with a view to protect the interest of the depositors.
Sub-section (4) of Section 45-IA of the Act contains and enumerates all the factors which have to be kept in perspective to justify the grant or rejection of an application by an NBFC for a certificate of registration enabling it to commence or continue such business. It has not been contended before me that the Order that had been assailed before the Appellate Authority fails to address these factors, or in doing so arrives at an erroneous conclusion. The parameters within which the Appellate Authoriy could travel are circumscribed by a consideration of these very factors alone. In those rare cases where subsequent events have transpired which appear to have a significant impact on the impugned decision, the Appellate Authority may consider it apprpriate to remand the case for fresh consideration. However, it has not done so. It is not proper for the Appellate Authority to venture into an arena of facts dissimilar to those that were prevailing and had been presented to the Authority whose Order habeen appealed against. The only exception can be found in purely legal questions such as the application of a statutory provision.
It is immediately relevant to mention the Proviso to Sub-section (3) of Section 45-IA of the Act which places an embargo of six years in the aggregate in respect of the period in which an NBFC/applicant company can be allowed to continue business in order to fulfilll the requirement of the ‘net-owned fund’. This is indeed a salutary provision since it does not allow the efforts to comply with the requirements laid down in Section 45-IA to be open-ended. If this factor is lost sight of, the mischief whih is intended to be eradicated could be allowed to fester unendingly. Accordingly, at the time of filing of the application if some deficiencies are found to be in existence, the period in which these must be overcome and eradicated within a reasonably sort period. It is in this regard that the embargo of six years in the aggregate has been laid down. The Executive Director as well as the Appellate Authority, being creatures of the statute, cannot possibly ignore or transgress these statutory frontiers.
 India Kanoon