Structured Biiz

NON BANKING FINANCIAL COMPANY

A Non-Banking Financial Company are the Company that are required to be registered under the Companies Act, 2013 (earlier the Companies Act, 1956) with a minimum Net Owned Fund requirement of Rs. 200 Lakhs and are also required to obtain a license to operate as a Non-Banking Financial Company from the Reserve Bank of India under section 45-IA of the RBI Act, 1934. They are majorly engaged in the business of loans and advances, deposits, investment funds, chit funds, acquisition of shares/stocks/debentures/bonds/securities issued by Government or local authority or other marketable securities of a like nature, insurance business, hire-purchase, leasing. However, it does not include institutions whose principal business is of agricultural activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property.

  • 50-50 Principal Business Criteria: When a Company’s Financial Assets constitute more than 50% of the total assets and income from Financial Assets constitute more than 50% of the gross income, the Company is required to be registered as NBFC. The Companies that fall under this category are also termed as Deemed NBFC and are required to comply with the NBFC regulations of the RBI.

Exempt NBFC’s that are not required to obtain NBFC license under section 45-IA of the RBI Act, 1934

For avoiding duality of regulation, the Reserve Bank of India has granted specific exemptions to the Companies from its regulatory requirements that do financial business, in case they are regulated by other regulators. Some of the examples are:

  • Alternative Investment Funds (earlier Venture Capital Funds)
  • Merchant Banking Companies
  • Stock Broking Companies registered with SEBI
  • Insurance Company holding a valid Certificate of Registration issued by IRDA
  • Nidhi Companies regulated by the Ministry of Corporate Affairs
  • Chit Companies as defined in clause (b) of Section 2 of the Chit Funds Act, 1982
  • Housing Finance Companies regulated by National Housing Bank
  • Stock Exchanges or a Mutual Benefit Company

What are the different categories of NBFC?

  • Deposit Accepting NBFCs
  • Non-deposit accepting NBFCs. Non-deposit accepting NBFCs further been categorised into:
    - Systematically Important NBFC (NBFC having asset size of Rs. 500 Crore or more)
    - Non-systematically Important NBFC (NBFC having asset size less than Rs. 500 Crore)
    - Other non-deposit holding Companies (NBFC NDSI and NBFC ND)

What are the different types of NBFC?

Principal business activity of such NBFC is financing of physical assets supporting productive / economic activity. Its physical assets supporting such economic activity and income arising therefrom shall not fall below 60% of its total assets and total income respectively.

Principal business activity of such NBFC is acquisition of securities.

Principal Business activity of such NBFC is providing finance whether by making loans or advances but does not include Asset Finance Company.

Principal business activity of such NBFC is to deploy at least 75% of its total assets in infrastructure loans. It also needs to have a minimum Net Owned Funds of Rs. 300 Crore, a CRAR of 15% and needs to have a minimum credit rating of A or equivalent.

Such NBFC carries on the business of acquisition of shares and securities which satisfies the following conditions:

  • Its asset size shall be Rs. 500 crore or above and it shall accept public funds
  • 90% of its Total Assets shall be in the form of investment in equity shares, preference shares, debt or loans in group companies;
  • Its investments in the equity shares (including instruments compulsorily convertible into equity shares within a period not exceeding 10 years from the date of issue) in group companies constitutes not less than 60% of its Total Assets;
  • It does not trade in its investments in shares, debt or loans in group companies except through block sale for the purpose of dilution or disinvestment;
  •  It does not carry on any other financial activity referred to in Section 45I(c) and 45I(f) of the RBI act, 1934 except investment in bank deposits, money market instruments, government securities, loans to and investments in debt issuances of group companies or guarantees issued on behalf of group companies.

This kind of NBFC facilitates the flow of long term debt into infrastructure debts. IDF-NBFC raises resources through the issue of Rupee or Dollar denominated bonds of minimum 5 year maturity. IDF-NBFCs can only be sponsored by Infrastructure Finance Companies.

NBFC-MFI is a non-deposit taking NBFC having not less than 85% of its assets which satisfy the following criteria:

  • Aggregate amount of loan disbursed for income generation by MFI shall not be less than 50% of the total loans given by the MFIs.
  • loan disbursement shall be to a borrower having a rural household annual income less than Rs. 1 Lac or to a borrower having an urban and semi-urban household income less than Rs. 1.60 Lac;
  • loan amount shall not be above Rs. 50,000/- in the first cycle and Rs. 1 Lac in subsequent cycles;
  • Total indebtedness of the borrower shall not exceed Rs. 1 Lac;
  • Loan tenure not to be less than 24 months for loan amount of Rs. 15,000 & above with prepayment without penalty;
  • Loan to be extended without collateral;
  • Loan repayable terms are on weekly, fortnightly or monthly instalments at the choice of the borrower.

Principal business activity of such NBFC is factoring. Financial assets from the factoring business and income derived from the factoring business shall not be less than 50% of its total assets and gross income respectively.

Assets from Guarantee Business and gross income from its mortgage guarantee business shall not be less than 90% of its total assets and gross income respectively. Net Owned Fund of such NBFC must be Rs. 100 Crore.

NBFC-NOFHC through which Promoter / Promoter groups will be permitted to set up a new bank.

Ceiling limit on the interest rate on the financing activities by NBFC

Micro Finance Company NBFC

Other NBFC

  • Cost of Borrowing Fund + 12% margin or average base rate of 5 largest public sector banks multiplied by the factor 2.75, whichever is lower
  • Rate of interest charged by the NBFC is governed by the terms and conditions of the loan agreement entered into between the borrowers and the NBFCs.

Foreign Investment in NBFC

100% Foreign Investment is allowed in NBFC under the automatic route in any of the following activities

  • Merchant Banking
  • Underwriting
  • Portfolio Management Services
  • Investment Advisory Services
  • Financial Consultancy
  • Stock Broking
  • Asset Management
  • Venture Capital
  • Custodian Services
  • Factoring
  • Credit Rating Agencies
  • Leasing & Finance
  • Housing Finance
  • Forex Broking
  • Credit Card Business
  • Money Changing Business
  • Micro Credit
  • Rural Credit

Minimum capitalisation norms for foreign investments in NBFC's

Foreign investments in NBFC’s needs to comply with minimum capitalization norms as specified in the sector specific policy of the RBI:

  • US $0.5 million for foreign capital up to 51% to be brought upfront.
  • US $ 5 million for foreign capital more than 51% and up to 75% to be brought upfront.
  • US $ 50 million for foreign capital more than 75% out of which US$ 7.5 million to be brought upfront and the balance in 24 months.
  • NBFCs (i) having foreign investment more than 75% and up to 100%, and (ii) with a minimum capitalisation of US$ 50 million, can set up step down subsidiaries for specific NBFC activities, without any restriction on the number of operating subsidiaries and without bringing in additional capital. The minimum capitalisation condition shall not apply to downstream subsidiaries.
  • Joint Venture operating NBFCs that have 75% or less than 75% foreign investment can also set up subsidiaries for undertaking other NBFC activities, subject to the subsidiaries also complying with the applicable minimum capitalisation norm mentioned in (i), (ii) and (iii) above and (vi) below.
  • Non- Fund based activities: Investment Advisory Services, Financial Consultancy, Forex Broking, Money Changing Business, Credit Rating Agencies are classified as permitted non-fund based activities. US$ 0.5 million to be brought upfront for all permitted non-fund based NBFCs irrespective of the level of foreign investment. It would not be permissible for such a company to set up any subsidiary for any other activity, nor it can participate in any equity of an NBFC holding/operating company.
Foreign investments in NBFCs are subject to compliance with the guidelines of RBI and its very critical to seek specific advisory in regard to structuring of foreign investment in NBFC.

NBFC Registration Process

  • Setting up of a Company with a minimum NOF requirement of Rs. 200 Lakhs (Equity Share Capital);
  • Submission of in-detail application to the RBI online;
  • Submission of original signed application to the Regional Office of the RBI;
  • Certificate of Registration is granted.

Documents that shall form part of the application to the RBI for NBFC License

  • A Certificate of Incorporation of a Company having Net Owned Funds of Rs. 200 Lacs needs to be submitted (NOF shall mainly comprises Equity Share Capital and not Preference Share Capital). Minimum NOF differs for NBFC-MFIs, NBFC Factors and CICs, Infrastructure Finance Companies, Mortgage Guarantee Companies;
  • Submission of Identification particulars and statement on prudential norms;
  • Unique Business Plan;
  • Details of Directors and Management – At least 1/3rd of the Directors must have minimum 10 years of experience in finance and must be full time Directors;
  • Certificate of Compliances;
  • Board Resolutions confirming adherence to the Fair Practices Code as per RBI Guidelines and non-carrying out of any NBFC activity and non-carrying out of acceptance of any public deposit;
  • Detailed Share Capital, Memorandum and Articles of Association of the Company;
  • Source of the Start up Capital of the Company;
  • Reporting of any non-compliance in the past by the Directors of the Company;
  • Submission of CIBIL ratings of Directors and shareholders;

FDI Compliances to be taken care, in case of any Foreign investments.

The above list of documents required are general and not exhaustive.

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Compliances required after obtaining Certificate of Registration from the RBI

  • Obtaining Certificate of Commencement of Business from the Registrar of Companies;
  • Statutory Audit
  • Tax Audit
  • Income Tax Returns Filing
  • GST Returns Filing
  • ROC Compliances on annual basis
  • Regular Corporate Secretarial Compliances
  • Regular RBI Compliances depending upon the category of NBFC
  • All other Compliances / Returns required by a Competent Authority
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