Legal aspects relating to registration of nbfc in india

Legal aspects relating to
registration of NBFCs in India
Presentation by –
Miss Neha Jain, B.A.LLB

What is NBFC
• NBFC is a company registered under the Companies Act , 2013 and engaged
in the business of loans and advances, acquisition of
shares/stocks/bonds/debentures/securities issued by Government, leasing,
hire-purchase, insurance business, chit business etc. but does not include
any institution whose -
• Principal business is that of agriculture activity,
• industrial activity,
• purchase or sale of any goods (other than securities) or
• providing any services and sale/purchase/construction of immovable
property.
For any legal assistance, please connect with me at – simplex.lawsolutions@gmail.com

Types of NBFC
On the basis of
type of liability
Deposit
taking(NBFC-D)
Non-Deposit
taking (NBFC-
ND)

Types of NBFC - ND
Non-deposit taking NBFCs
(NBFC-ND)
Type I - NBFC-ND not accepting
public funds1/ not intending to
accept public funds in the
future and not having customer
interface2/ not intending to have
customer interface in the future
Type II - NBFC-ND accepting
public funds/ intending to accept
public funds in the
future and/or having customer
interface/intending to have
customer interface in the future

What do we mean by “Public Funds” ?
“Public funds" shall include funds raised either directly or indirectly through
public deposits, commercial paper, debentures, inter-corporate deposits and
bank finance but excludes funds raised by issue of instruments compulsorily
convertible into equity shares within a period not exceeding 10 years from the
date of issue as defined in Regulatory Framework for Core Investment
Companies

What is “Customer Interface”?
“Customer interface” means interaction between the NBFC and its customers
while carrying on its NBFI business as defined in Non-Systemically Important
Non-Banking financial (Non-Deposit Accepting or Holding) Companies
Prudential Norms (Reserve Bank) Directions, 2015

Registration Requirements
The Law - NBFCs are given registration under Section 45 IA of RBI Act, 1934.The
basic requirements for registration are as follows –
1. Obtaining a Certificate of Registration (CoR) from RBI.
2. Registered Company under Section 3 of the companies Act, 2013.
3. Minimum net owned fund of ₹ 200 lakh.
4. Qualify the 50-50 test - Financial activity should be its principal business i.e when
a company’s financial assets constitute more than 50 per cent of the total assets
and income from financial assets constitute more than 50 per cent of the gross
income.

Net Owned Fund defined
• Net owned fund means–
• (a) the aggregate of the paid-up equity capital and free reserves as disclosed in the latest
balance-sheet of the company after deducting therefrom–
(i) accumulated balance of loss;
(ii) deferred revenue expenditure; and
(iii) other intangible assets;
and (b) further reduced by the amounts representing–
(1) investments of such company in shares of– (i) its subsidiaries; (ii) companies in the same
group; (iii) all other non-banking financial companies; and
(2) the book value of debentures, bonds, outstanding loans and advances (including hire-
purchase and lease finance) made to, and deposits with,– (i) subsidiaries of such company; and
(ii) companies in the same group, to the extent such amount exceeds ten per cent of (a) above.

Process for registration
• Online process.
• Portal - https://cosmos.rbi.org.in
• Registration of the Company on the portal – after the Company is registered, a
downloadable Application form in excel format is available.
• On submission of the filled in form, a Company Application Reference Number is
generated.
• Thereafter, the company has to submit the hard copy of the application form
(indicating the online Company Application Reference Number, along with the
supporting documents, to the concerned Regional Office.

Considerations of RBI while granting CoR
• Position to pay its present or future depositors in full as and when their claims accrue
• Affairs of NBFC not e conducted in a manner detrimental to the interest of its present or
future depositors;
• General character of the management or the proposed management of the NBFC shall not
be prejudicial to the public interest or the interest of its depositors;
• Adequate capital structure and earning prospects;
• Public interest shall be served by the grant of CoR to the NBFC;
• Grant shall not be prejudicial to the operation and consolidation of the financial sector
consistent with monetary stability, economic growth etc.
• Any other condition, fulfilment of which in the opinion of the Bank, shall be necessary to
ensure that there shall be no prejudice to the public interest or in the interest of the
depositors.

Deposit taking NBFCs
For becoming a deposit taking NBFC, the company has to obtain minimum
investment grade or other specified credit rating for fixed deposits from any
one of the approved credit rating agencies at least once a year.

What if RBI rejects your application for
registration ?
• Right to Appeal within a period of 30 days from the date on which such
order of rejection is communicated 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.

Sale/Purchase of NBFC – Regulations by RBI

Process for acquisition/transfer of control of
NBFC
• Any sale/purchase of NBFC is governed by RBI’s Non-Banking Financial
Companies (Approval ofAcquisition or transfer of control ) Directions, 2015.
• An application to RBI has to be made in the event there is any variation in
the shareholding of an NBFC, resulting in 26% acquisition/ transfer of the
paid-up equity capital, including progressive increases over time.

What does the application for prior approval
contain?
• Application format – Annex
• Proposed directors/shareholders information;
• Sources of funds required for acquiring shares in the NBFC by the proposed shareholders;
• A declaration by all the proposed directors/shareholders stating that they are not
associating with any entity accepting deposits;
• A declaration by all the proposed directors/shareholders stating their non-association with
any entity which has been denied a Certificate of Registration by the RBI;
• A statement of non-criminal background as well as non-conviction under section 138 of the
Negotiable Instruments Act by all the proposed directors/shareholders;
• Bankers’ Report with regard to proposed directors/ shareholders.

Public notice
A public notice shall be given by both the parties post RBI approval in one
leading national and one leading local newspaper at least 30 days prior to
effecting such sale or transfer.

Share Purchase Agreement
On RBI’s approval and fulfilment of all the above mentioned steps, the parties
enter into a Share purchase agreement/MoU executing the sale/purchase of
the NBFC.The entire process may take anywhere between 4-6 months.

Thankyou

Legal aspects relating to registration of nbfc in india

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