Regulatory Framework of Non- Banking Financial Companies in India

NBFCs are the companies which are engaged in the business of providing finance through loans and/or investments in other companies. As per the provisions of Section 45I of the RBI Act, a company registered under the Companies Act, 1956 or any other corresponding legislation for the time being in force, which is engaged in the business of acquisition of
Mr. Pankaj Singla
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shares/ bonds/ debentures/ securities or other marketable securities like leasing, hire-purchase, insurance business, chit business, loans and advances is considered as an NBFC. Similarly, a company engaged in the business of receiving deposits under a scheme or arrangement of lump sum or instalments (by way of contributions or any other manner) is also included within the ambit of the NBFCs.
However, NBFCs do not include any institution whose principal business is that of the following:
    i. agriculture activity;
    ii. industrial activity;
    iii. purchase or sale of any goods (other than securities); or 
    iv. providing any services and sale/purchase/construction of immovable property.
NBFCs lend and make investments and therefore their business activities are similar to that of banks; however there are a few differences as given below:
    i. NBFC cannot accept demand deposits;
    ii. NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on themselves; and
    iii. deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks.

Definition of NBFC under Reserve Bank of India Act, 1934

Section 45I (f) of the RBI Act, 1934 (“RBI Act”) defines an NBFC as: 
    i. a financial institution* which is a company; 
    ii. a non-banking institution which is a company and which has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner, or lending in any manner; 
    iii. such other non-banking institution or class of such institutions, as the Bank may, with the previous approval of the Central Government and by notification in the Official Gazette, specify;
* Section 45I (a) of the RBI Act defines the business of a Non-Banking Financial Institution (‘NBFI’) to mean carrying on the business of a financial institution and includes the business of an NBFC. Section 45I(c) of the RBI Act defines a financial institution as any non-banking institution which carries on any of the following business activities: 
    (i) the financing of any activity other than its own;
    (ii) the acquisition of shares, stock, bonds, debentures or securities issued by a Government or local authority or other marketable securities of a like nature;
    (iii) delivering of any goods to a hirer under a hire-purchase agreement;
    (iv) the carrying on of any class of insurance business; 
    (v) managing, conducting of chits or kuries, or any business, which is similar thereto; 
    (vi) collecting monies by way of subscriptions or by sale of units or other instruments or otherwise and awarding prizes or gifts, or disbursing monies in any other way, to persons from whom monies are collected or to any other person.

What is the relevance of the term ‘‘principal business’’ in the above mentioned section for the purpose of identification of a company as an NBFC?

The term ‘principal business’ is pertinent in view of Section 45I of the RBI Act as an NBFC requires compulsory registration with RBI to commence or carry on the financial business and since, the term 'principal business' has not been defined anywhere in law, the RBI decided the description of principal business’ vide an amendment to NBFC regulations regarding Certificate of Registration (‘CoR’) issued under Section 45-IA of the RBI Acton Oct 19, 2006, in view of which, a company will be treated as an NBFC if its financial assets are more than 50 per cent of its total assets (less ntangible assets, if any) and income from financial assets is more than 50 per cent of the gross income. Both these tests are required to be satisfied as the determinant factor for principal business of a company.

Types of NBFCs

NBFCs may be categorized depending upon the nature and purpose of finance provided by them. Eight main categories of NBFCs have been discussed herein below:

    i. Asset Finance Company(AFC): An AFC is a company which is carrying the principal business of financing of physical assets such as automobiles, tractors, lathe machines, generator sets, earth moving and material handling equipments, moving on own power and general purpose industrial machines. 
      ii. Investment Company (IC): IC means a company which carries on the principal business of acquisition of securities.
      iii. Loan Company (LC): LC means a company which carries on the principal business of providing finance by making loans or advances but does not include an AFC.
      iv. Infrastructure Finance Company (IFC): IFC is an NBFC which utilizes at least 75 per cent of its total assets in infrastructure loans, has a minimum Net Owned Funds of Rs. 300 crore, has a minimum credit rating of ‘A‘ or equivalent and a CRAR of 15%.
      v. Systemically Important Core Investment Company (CIC-ND-SI): CIC-ND-SI is an NBFC carrying on the business of acquisition of shares and securities which satisfies the following conditions:-
      • It holds not less than 90% of its Total Assets 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 except investment in bank deposits, money market instruments, government ecurities, loans to and investments in debt issuances of group companies or guarantees issued on behalf of group companies;
      • Its asset size is Rs 100 crore or above, and
      • It accepts public funds.
    vi. Infrastructure Debt Fund (IDF-NBFCs): IDF-NBFC is a company which facilitates the flow of long term debt into infrastructure projects. IDF-NBFCs raise resources through issue of Rupee or Dollar denominated bonds of minimum 5 year maturity. Only IFCs can sponsor IDF-NBFCs.
    vii. Non-Banking Financial Company - Micro Finance Institution (NBFC-MFIs): NBFC-MFI is a non-deposit taking NBFC engaged in the business of providing micro finance and which satisfies the prescribed conditions.
    viii. Non-Banking Financial Company – Factors (NBFC-Factors): NBFC-Factor is a non-deposit taking NBFC engaged in the principal business of factoring. The financial assets in the factoring business should constitute at least 75 percent of its total assets and its income derived from factoring business should not be less than 75 percent of its gross income.
    For regulatory purposes, NBFCs have been classified into the 3 broad categories, (a) those accepting public deposits; (b) those not accepting public deposits but engaged in financial business; and (c) core investment companies (which are exempted from the requirement of obtaining registration from the RBI, except CIC-ND-SI).

    Registration with RBI

    In terms of Section 45-IA of the RBI Act, no NBFC can commence or carry on business of a non-banking financial institution without obtaining a certificate of registration from the RBI and without having Net Owned Funds of Rs. 25 lakhs (Rupees two crore since April 1999). Section 45-IA of the RBI Act defines Net Owned Fund as the aggregate of the paid-up equity capital and free reserves as disclosed in the latest balance-sheet of the company after deducting there from: 
      i. accumulated balance of loss; 
      ii. deferred revenue expenditure; 
      iii. other intangible assets;
      iv. investments of such company in shares of its subsidiaries, companies in the same group, all other non-banking financial companies; and
      v. the book value of debentures, bonds, outstanding loans and advances (including hire-purchase and lease finance) made to, and deposits with subsidiaries of such company and companies in the same group to the extent such amount exceeds ten per cent of Owned Funds i.e. aggregate of the paid-up equity capital and free reserves as disclosed in the latest balance-sheet of the company after deducting accumulated losses, deferred revenue expenditure and other intangible assets. 
    RBI vide its press release ‘Temporary suspension of issuing Certificate of Registration (COR for conducting business of NBFI’ dated 1st April, 2014, announced its decision to keep in abeyance the issue of certificate of registration to the companies proposing to conduct business of NBFI in terms of Section 45IA of the RBI Act for a period of one year, except for CIC-ND-SIs, IFCs, IDF-NBFCs and NBFC-MFIs.

    Exemption from Registration

    Certain categories of NBFCs are exempted from the requirement of obtaining registration from the RBI like Venture Capital Fund/Merchant Banking companies/Stock broking companies registered with SEBI, Insurance Company holding a valid Certificate of Registration issued by IRDA, Nidhi companies as notified under the Companies Act, 1956 or any corresponding legislation for the time being in force, 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 Exchange or a Mutual Benefit company.

    FDI in NBFCs

    In terms of the extant Foreign Direct Investment Policy of 2014, issued by the Department of Industrial Policy and Promotion, Government of India (“FDI Policy), FDI in prescribed categories of NBFCs is allowed under the automatic route (which excludes ICs, in which FDI may be brought only after obtaining prior approval of GOI; power delegated to Foreign Investment Promotion Board). However, FDI in the prescribed categories under the automatic route will be subject to minimum capitalization norms and guidelines of the relevant regulator(s), if any applicable.

    RBI approval for restructuring of NBFCs

    On 17th September, 2009 RBI vide circular ‘RBI/2009-10/162, DNBS (PD) CC.No. 160 /03.10.001/2009-10’ had decided that any takeover / acquisition of shares of a deposit taking NBFC or merger/amalgamation of a deposit taking NBFC with another entity or any merger/amalgamation of an entity with a deposit taking NBFC that would give the acquirer / another entity control of the deposit taking NBFC, would require prior permission of RBI.
    Recently, on May 26th, 2014, RBI vide circular ‘RBI/2013-14/606, DNBS (PD) CC.No.376/03.10.001/2013-14’, mandated NBFCs (whether deposit accepting or non-deposit accepting) to obtain prior written permission of RBI for:
      i. any takeover of an NBFC, any merger/amalgamation of an NBFC with another entity; or
      ii. any merger/amalgamation of an entity with an NBFC that would give such another entity control of the NBFC; or
      iii. any merger/amalgamation of an NBFC with another entity or any merger/amalgamation of an entity with an NBFC which would result in acquisition/transfer of shareholding in excess of 10 percent of the paid up capital of the NBFCs.
    In terms of the said circular, the companies (NBFCs) shall obtain RBI approval before approaching the court or tribunal under Section 391-394 of the Companies Act, 1956 or Section 230-233 of Companies Act, 2013 for seeking an order for mergers or amalgamations.
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