NBFC license in India
How to get NBFC license in India– A Non-Banking Financial Company (NBFC) offers various financial services such as loans and advances facilitation, stock acquisition, hire-purchase, insurance, etc. Despite being akin to traditional banks in many aspects, NBFCs cannot accept demand deposits and issue cheques drawn on themselves. Yet their contribution towards the nation’s financial growth is remarkable. Just like other financial institutions, NBFC attracts tons of compliance and regulations formulated by the Reserve Bank of India (RBI). Let’s delve into the legalities and other key aspects concerning the establishment of NBFC in India.
When is NBFC License with RBI Required?
The Reserve Bank of India is the sole authority that oversees the establishment and functional aspects of NBFCs in India. The principal business of financial activity is when:
- If the total assets of the company comprise more than 50% of financial assets
- If the gross income of the company comprises more than 50% of the income arising from financial assets.
Companies that meet both these conditions should secure the NBFC license. In the realm of NBFC, these conditions are referred to as the “50-50” test.
NBFCs are involved with agri-based operations, industrial undertakings, transactions of goods, and sale or construction of immovable property with little to moderate engagement in financial endeavors shall not require NBFC registration.
Financial Companies not Requiring NBFC License
The following entities are not required to secure an NBFC license:
- Insurance Companies – governed by the Insurance Regulatory and Development Authority of India (IRDA);
- Companies that run Collective Investment Schemes – governed by the Securities and Exchange Board of India;
- Housing Finance Companies – governed by the National Housing Bank;
- Stock Broking – governed by the Securities and Exchange Board of India;
- Mutual Funds – governed by the Securities and Exchange Board of India;
- Venture Capital Companies – governed by the Securities and Exchange Board of India;
- Merchant Banking Companies – governed by the Securities and Exchange Board of India;
- Nidhi Companies – governed by the Ministry of Corporate Affairs (MCA);
- Chit Fund Companies – governed by the respective State Governments.
Requirement for Obtaining an NBFC License in India
You need to comply with the following requirements when applying for the NBFC license in India:
- A Company Registered in India (Private Limited Company or Limited Company)
- The Net Owned Fund of the company should be at least Rs.200 lakhs as per the last audited balance sheet.
Net Owned Fund = paid-up equity capital + free reserves + balance in share premium account + capital reserves (including the surplus arising from the sale, assets’ proceeds) – (reserves created by assets’ revaluation + book value of intangible assets- accumulated loss + investment in shares and debentures of subsidiaries surpassing 10% of the owned fund)
Types of NBFC License in India
NBFC exists in various forms and depending on the selected form, the application process shall differ. Types of NBFCs in India include:
- Asset Finance Company(AFC): An Asset Finance Company offers financial services relating to automobiles and machinery, primarily serving industrial settings.
- Investment Company: An investment company’s primary business revolves around the acquisition of securities (shares/stocks/bonds / other financial securities).
- Loan Company: The primary business of a loan company leans toward facilitating making loans or advances while bearing no resemblance to an Asset finance company.
- Infrastructure Finance Company: It is a non-banking finance company that uses 75% of the overall assets in infrastructure loans with a NOF equivalent to 300 crore while maintaining a mandatory credit rating of A. If the credit rating is not achieved then these companies must maintain Capital to Risk Assets Ratio of 15%.
- Systemically Important Core Investment Company: Systemically Important Core Investment Company sits on an asset size of over Rs. 100 crores. They can accept deposits and acquired shares and securities as a part of their principal business.
- Infrastructure Debt Fund: Infrastructure Debt Fund is a company that fuels infrastructure projects with long-term debt via issuance bonds having maturity of 5 years.
- Non-Banking Financial Company: Technically known as non-deposit-taking NBFC, these entities’s primary business revolves around facilitating microfinance services to eligible credit-seekers.
- NBFC Factor: NBFC factor, as the name suggests, refers to a non-deposit-taking NBFC whose primary business is to facilitate factoring services.
Applying for NBFC License
Applying for an NBFC license involves filing the online and offline application with the Reserve Bank. Doing so also requires submitting the following documentation:
- Details about management
- Certified copies of Certificate of Incorporation and Certificate of Commencement of Business for public limited companies, if applicable.
- Updated Memorandum and Articles of Association of the company, highlighting clauses related to financial activities.
- PAN/CIN copy issued to the company.
- Individual profiles of directors, duly completed and signed.
- Certification from respective NBFCs where directors have acquired experience.
- CIBIL data of company directors.
- Financial statements of any unincorporated bodies in the group where directors hold directorship, for the last 2 years.
- Board resolution approving application submission and authorizing signatory.
- Board resolution confirming no past or current acceptance of public deposits without RBI approval.
- Board resolution affirming cessation or non-engagement in NBFC activities without RBI registration.
- Certified board resolution for “Fair Practices Code” formulation.
- Auditor’s certificate regarding acceptance or non-acceptance of Public Deposits.
- Auditor’s certificate affirming absence of NBFC activities.
- Auditor’s certificate confirming net owned fund as of the application date.
- Authorized Share Capital details and latest shareholding pattern, including percentages.
- Copy of Fixed Deposit receipt & banker’s certificate of no lien supporting Net Owned Funds.
- Bank account details, loan/credit facilities availed, and branch/bank address.
- Last three years audited balance sheet, Profit & Loss account, directors & auditors report.
- Business plan for the next three years, outlining thrust of business, market segment, projected balance sheets, cash flow statement, asset/income pattern statement without public deposits.
- Documentation evidencing startup capital source.
- Self-attested Bank Statement/IT returns, etc.
Conclusion
Being an NBFC requires adherence to strict guidelines and functional norms devised by RBI. Any non-conformity can lead to hefty penalties and even revocation of license. Let Adviso be your licensing partner if you wish to navigate the complicated realm of RBI norms with ease, resulting in hassle-free NBFC establishment.
Read Our Article: Company Registration in Hong Kong
