Despite the liquidity crisis, the Indian NBFC sector grew at a respectable pace to INR 30.9 lakh crore in 2018-19 from INR 26.2 lakh crore in 2017-18. In order to stem asset-liability imbalance, the RBI has been strictly enforcing registration requirements for newly registered NBFCs. In an unprecedented crackdown, the RBI cancelled 1,701 NBFC licenses for not meeting statutory minimum capital requirements in 2019.
Plans are also afoot to amend the RBI Act, 1934 to allow the apex bank to override the Board of Directors of NBFCs, in order to protect the rights of investors, in case of a default. These measures may include restructuring by way of mergers or splitting distressed non-bank lenders into smaller entities.
All That You Need To Know About NBFCs
As of 31st March 2019, there were 9,659 NBFCs registered with the RBI, 88 of which were deposit accepting and 263 non-deposit accepting. In this article, we review the NBFC registration process to help aspiring companies put their best foot forward when applying for a license.
NBFC Pre-Registration Requirements
Applicants must meet prescribed minimum requirements in order to be granted an NBFC license as follows:
- Registration under the Indian Companies Act, 2013.
To obtain an NBFC license, a company should be registered with the Ministry of Corporate Affairs, Government of India, as per the provisions of the Companies Act 2013.
- Have Net Owned Funds (NOF) of at least INR. 2 crore.
This is the minimum amount of capital required for a company to register as an NBFC. The RBI defines Net Owned Funds as ‘paid-up equity capital, free reserves, balance in share premium account and capital reserves representing surplus arising out of sale proceeds of assets but not reserves created by revaluation of assets’
In other words, NOF is the total of paid-up equity and reserves less any outstanding liabilities as per the most recent balance sheet. The NOF for an international financial institution is INR 5 crore
- Clear Credit History
In order to be eligible for an NBFC license, the company must have excellent credit standing. A bank certificate to this effect must be provided.
- Professional Exposure
The senior management team of the company should have direct experience in the financial services sector.
Process of Registration
The company can file an online application on the RBIs dedicated COSMOS portal. On submission, an automated Application Reference Number (ARN) is generated which can be used by the applicants to submit the following documents to the RBI’s regional office in the prescribed format:
- Copies of Memorandum of Association (MoA), Articles of Association (AoA) and Certificate of Incorporation (CoI) issued by the Registrar of Companies
- Copies of audited Profit and Loss Statement and Balance Sheet for the last 3 years, along with Director’s Report and Chartered Accountant’s Report
- Copy of Company PAN/CIN
- Copy of the latest educational qualifications possessed by the Directors of the company
- Copy of fixed deposit receipt and bank certificate to prove that the company has reserved NOF
- Information regarding distribution of authorised share capital among the company’s promoters and shareholders.
- Auditors Certificate to confirm that the company does not hold any fixed deposit
- Board resolutions stating that the company has put a Fair Practices Code in place according to RBI guidelines.
- FEMA (Foreign Exchange Management Act) compliance report, if the company has investors based overseas.
- Board resolution approving the setting up of NBFC operations
- Copy of Income Tax, PAN and credit score related details of the Directors of the company
Experts say that incorrect or incomplete documentation is one of the major reasons why applications from aspiring NBFCs are rejected. Therefore, it is critical that the documentation submitted is complete and original in every respect.
Processing and Approval
The RBI reviews the submitted documents and approves the application within 90-120 days if all requirements are satisfied.
If additional documents are required, the RBI will notify the applicant. If no response is received within 30 days, the application is rejected.
Registration is not mandatory for all NBFCs. The following companies are exempted:
- Core Investment Companies – ( with assets less than INR 100 crore or privately funded)
- Merchant Banking Companies
- Housing Finance Companies
- Venture Capital firms
- Insurance companies
- Chit Fund Companies
- Nidhi Companies
What Are The NBFC Registration Fees?
As part of the registration process, a company is required to pay a fee of approximately INR 3,50,000. This is over and above the NOF investment, which forms the seed capital for the venture once registration is complete. For registration of NBFC a minimum capital of INR 2 crores is needed, the applicant needs to register a company along with the prescribed capital and requisite government fee.
If the company is yet to be incorporated, an additional application fee is also payable to the Ministry of Corporate Affairs. The fee includes incorporation charges, SPICEe or Simplified Proforma for Incorporating a Company registration charges which includes among other things RUN (Reserve Unique Name application), DIN (Director Identification Number) for each of the company’s directors, DSC (Digital Signature Certificate) for each director and the Memorandum and Articles of Association.
Acquiring Stake in an NBFC
It is a safer bet to invest in an established NBFC than starting a new one from scratch. If an investor wants to buy a controlling stake in an NBFC, he must seek approval from the RBI before proceeding. According to the rules, a formal application must be made to the regional RBI office in writing. In addition, the buyer must also give a public notice in national and regional newspapers at least 30 days prior to the impending transfer of ownership.
Getting a license is the first step toward starting an NBFC. The registration process is rigorous and entails thorough scrutiny by the RBI. To guarantee success, a company aspiring to start an NBFC must follow the apex bank’s guidelines closely and furnish any additional information as may be required by it. Non-compliance with any requirement – particularly NOF – can lead to immediate disqualification.
Finezza is a lending management software that helps NBFCs to what they do, just efficiently. If there is anything else, you would like to know about NBFCs, their functions, or their facilities, write to us in the comment section below.