Meaning of NBFC, Types of NBFC, Formation Procedure, Compliances of NBFC By CS Riyanshi Chaudhary


MEANING OF NBFC

Meaning of NBFC Section 451 (f) of RBI act, 1934 “Non?banking financial company” means –

  • a “Financial Institution” which is a company;
  • a Non?Banking Institution which is a company and which has as its Principal Business the receiving of deposits, deposits, under any scheme or arrangement arrangement or in any other manner, or lending in any manner;
  • such other Non?Banking Institution or class of such institutions,

as RBI specifies specifies “Non?Banking Institution” ? means a company, corpora corporation or co?operative society.

Types of NBFCs

  • Liabilities Based Classification
  • Asset Based Classification
  • Size Based Classification
  • Liabilities Based Classification :-

 NBFCs having public deposits or NBFCs?D

 NBFCs not having public deposits or NBFCs?ND

  • Asset Based Classification :-

Mainly there are following types of NBFCs

  • Asset Finance Company
  • Investment Company
  • Loan Company
  • Core Investment Companies
  • Infrastructure Finance Companies
  • Factor
  • Micro Finance Institutions
  • Infrastructure Debt Funds
  • Size Based Classification :-

 In 2006, non?deposit deposit taking NBFCs with assets of Rs. 100 crore and above were labelled as Systemically important Non?Deposit taking NBFCs (NBFCs?ND?SI), and prudential regulations such as capital adequacy requirements, exposure norms along with, reporting requirements were made applicable to them

  • Asset Income Approach

In order to identify identify a particular company as an NBFC, consider both, the assets and the income pattern ? from the last audited balance sheet to decide principal business

 Financial Assets are more than 50 per cent of its Total Assets (netted off by Intangible Intangible Assets)

AND

Income from financial assets should be more than 50 per cent of the gross income

  • Investment Company:-

Investment Company means any company which is a financial institution carrying on as its Principal business of acquisition of securities.

50% of Total assets in investment Company

And

50% of Total Income arises from the Aforesaid Assets

  • Asset Finance Company

Asset Finance Company (AFC) would be defined as any company which is a financial institution carrying on as its principal business the financing of physical assets supporting productive / economic activity.

 60% of Total Assets in Financing Real /Physical Assets

&

60% of Total Income arises from the aforesaid Assets

  • Loan Company :-

Loan Company means any company 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

 50% of Total Assets in Lending

&

50% of Total Income arises from the aforesaid Assets .

  • Infrastructure Finance Co.:-

IFC means a non?banking company which deploys at least 75 per cent of its total assets in infrastructure loans

Minimum Net Owned  Funds – INR 300 Lakh

Acceptance of public deposit not allowed

  • Core Investment Companies CIC :-

Core Investment Companies means an NBFC which carries on the business of acquisition of shares and securities and which satisfies the following conditions:

Not less than 90% of Net Assets should be in the form of  Investment in Group Companies

AND

Not less than 60% of Net Assets are held as equity stake in Group Companies

  • NBFC Factor:-

 means a company which carries carries on factoring business as its principal business and satisfies the following criteria:

Min NOF  ? 5 Crores AND

At least 75% of its total assets should be financial assets AND

At least 75% of its gross income should be from factoring business

  • NBFC - MFI :-

An NBFC?MFI is defined as a non?deposit taking NBFC (other than a company licensed under Section 25 of the Companies Act, 1956) that fulfils the following conditions:

Min NOF (Net Owned Fund) ? 5 Crores AND

Not less than 85% of its net assets are in the nature of “qualifying assets”

  • IDF-NBFC :-

“IDF?NBFC” means a non?deposit taking NBFC that has Net Owned Fund of Rs 300 crores or more and which invests only in Public Private Partnerships (PPP) and post commencement operations date (COD) infrastructure projects which have completed at least one year of satisfactory commercial operation and becomes a party to a Tripartite Agreement.

  • Net Owned Fund Requirement

MIN. INR 200 LAKHS AT ALL THE TIME UNLESS OTHERWISE OTHERWISE SPECIFIED

Formation Procedure

  • A company with main object clause/ y ancillary clause for carrying out NBFI activities (check object clause)
  • Obtain checklist of requirements from RBI website
  • Fill up prescribed form, available on RBI website, according to instructions with the requirements
  • Fill up the e?form provide in excel formate
  • Get the required certifications of the statutory auditors/chartered auditors/Chartered Accountants (as the case may be)
  • Submit softcopy on RBI website before submission of the hard copy.
  • Obtain the printout of successful submission of the softcopy. Mention the date of submission on the print if date is not appearing on print.
  • Submit the hardcopy application in duplicate to regional office of RBI
  • Each page i-n the application file should be numbered
  • Prepare the application in triplicate so that a replica is with the applicant for future reference.

Commencement of Business :-

  • NBFC must commence its business business within 6 months from the date of CoR (Certificate of Registration)
  • If not commenced within 6 months , CoR will stand withdrawn
  • No change in control prior to commencement of its business.

Compliances ? Co’s Act, 2013 Borrowing Vs Lending

Passing of  Board Resolution under Section Section 179 of the Companies Act, 2013

Passing Shareholders Resolution under Section 180(1)(a) and Section 180(1)(c) of the Companies Act, 2013

 Preferential issue – Section 42 of the Companies Act, 2013 and Rules made there under

Compliance under Companies (Acceptance of Deposits) Rules, 2013 (yet to be notified) – will not be applicable if NBFC is a borrower.

 Compliances - SEBI Laws Borrowing Vs Lending

Compliance Compliance with applicable rules & regulations

Compliances - RBI Laws Borrowing Vs Lending

Issuance of Non?Convertible Convertible Debentures (Reserve Bank) Directions, 2010, as issued by the RBI (applicable if maturity period is upto 1 year)

RBI Circular dated July 27, 2013 (Raising Money through Private Placement by NBFCs?Debentures etc.)

Non?Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998

Master Circular on ECB Guidelines dated

Consolidated FDI Policy 2013 issued by DIPP.

 No. of Subsidiaries :-

  • Section Section 186(1) of the Companies Act 2013
  • Exemption to NBFCS – not avail bl a e
  • Two layers of investment companies are allowed
  • Horizontal Vs Vertical

 Loan Guarantee and Security to Specified Category:-

  • Section 185 of the Companies Act, 2013
  • Loan, Guarantee & security to Related Party
  • Exemption to those companies who provide the same in the ordinary course of business
  • Interest on the loan as per the rate prescribed by the RBI

 Investment, Loan, Guarantee etc.

  • Section 186 of the Companies Act, 2013
  • Exemption to those companies who are engaged in the business of financing of companies
  • Interpretation of the word ‘financing’ financing

FDI in NBFCs

  • Approval Route/FIPB approval
  • 18 categories under NBFC
  • Minimum Capitalization Norms
  • Not allowed to set up subsidiary for any other activity
  • Leasing & Finance covers only financial leases and not operating leases.

DISCLAIMER

The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, I assume no responsibility therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws. The user of the information agrees that the information is not a professional advice and is subject to change without notice. I assume no responsibility for the consequences of use of such information. IN NO EVENT SHALL I SHALL BE LIABLE FOR ANY DIRECT, INDIRECT, SPECIAL OR INCIDENTAL DAMAGE RESULTING FROM, ARISING OUT OF OR IN CONNECTION WITH THE USE OF THE INFORMATION.

This is only a knowledge sharing initiative and author does not intend to solicit any business or profession.

Author: CS Riyanshi Chaudhary

She can be contacted at riyanshich@gmail.com

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