The principal business of NBFC should be financial activities. What does conducting financial activity as “principal business” mean?

Financial activity as principal business is when a company’s financial assets constitute more than 50 per cent of the total assets (netted off by intangible assets) and income from financial assets constitute more than 50 per cent of the gross income. Although the term principal business has not been defined in the Act, but in FAQ issued by the RBI it has been cleared for better understanding and desirous company has to fulfil both the criteria. The  Reserve Bank has also defined it vide Press Release 1998-99/1269 dated April 08, 1999 so as to ensure that only companies predominantly engaged in financial activity get registered with it and are regulated and supervised by it. Hence, if there are companies engaged in agricultural operations, industrial activity, purchase and sale of goods, providing services or purchase, sale or construction of immovable property as their principal business and are doing some financial business in a small way, they will not be regulated by the Reserve Bank. Interestingly, this test is popularly known as 50-50 test and is applied to determine whether or not a company is into financial business.

Requirement for the registration of NBFC with RBI

Followings are the requirement for a company who intended to register as NBFC with RBI :

(i) It should be a company incorporated under Section 3 of the companies Act, 1956 or corresponding Section under the Companies Act, 2013;

(ii) It should have a minimum net owned fund of ₹10 crore. (The minimum net owned fund requirements for specialized NBFCs are NBFC-Infrastructure Finance Company (NBFC-IFC) – ₹300 crore; Infrastructure Debt Fund – NBFC (IDF-NBFC) – ₹300 crore; Mortgage Guarantee Company (MGC) – ₹100 crore; Housing Finance Company (HFC) – ₹20 crore, Standalone Primary Dealers (SPDs) which undertake only the core activities – ₹150 crore and SPDs which also undertake non-core activities – ₹250 crore; NBFC-AA – ₹2 crore; and NBFC-P2P – ₹2 crore).

(iii) The applicant company shall submit an application on PRAVAAH portal of Reserve Bank along with necessary documents prescribed under RBI's Press Release 2015-2016/2935 dated June 17, 2016.

The indicative list of documents should be furnished to the RBI along with the application form. It is mandatory to note here that lists are only indicative if RBI wants, may seek additional documents and informations for the same purpose.

1. Certified copy of Certificate of Incorporation.

2. Certified copy of extract of only the main object clause in the MoA relating to the proposed business.

3. Board resolution stating that:

a) 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.

b) 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.

c) the UIBs in the group have not accepted any public deposit in the past / do not hold any public deposit as on the date and will not accept the same in future.

d) the company does not have any customer interface as on date and will not have any customer interface in the future without the approval of Reserve Bank of India. (applicable only in case of TYPE I - NBFC-ND)

e) the company has formulated “Fair Practices Code” as per RBI Guidelines (not applicable for TYPE I - NBFC-ND)

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 or three financial years.

6. Highest educational and professional qualifications in respect of all the directors. However, it is not mandatory in case of TYPE I - NBFC-ND

7. Banker’s report in respect of applicant company and its directors. The Banker’s report should be about the dealings of these entities with these bankers as a depositing entity or a borrowing entity.

8. Credit Information Report in respect of applicant company and its directors.

9. Net-worth certificatee of shareholders holding substantial Interest (more than 10%) certified by statutory auditor.

The process of NBFC Registration can be concluded in following manner:

1. Company Registration

2. Draft and submit the NBFC Business Plan

3. Examination process by RBI

4. Application for NBFC Registration

5. Prepare and file document

6. Issue of NBFC Registration Certificate

The registration process takes around 90 days.  In some cases, due to regulatory delay, it may extent to 180 days. Regulatory delay may be overcome by the guidance of experts.

 

Conclusion

For the registration of NBFC fit and proper criteria should be maintained and fit and proper criteria can be determined by the appointment of key individual with relevant qualification and experience. The record of the individual should be clean with financial records. In addition to this KYC of all shareholders and directors are must. Professional background details of directors and shareholders need to be disclosed. RBI empowers the NBFC to meet the 50:50 criteria. Benefits of registration includes legal recognition, trust and credibility, access to funding, business expansion and customer confidence.

Author: Prahalad Kumar, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at  Khurana & Khurana, Advocates and IP Attorney.