As we have discussed in our previous article, the NBFCs are basically companies which are financing any activity other than their own. These companies require registration with RBI before carrying out such business. Here, we are dealing with the process of registration along with some practical approaches for obtaining such registration.
Why to register as an NBFC?
Section 45IA of the Reserve Bank of India Act, 1934 mandates that no company other than a registered NBFC can carry out the businesses such as financing other’s activities, lending, investment in securities, letting out the goods on hire, insurance business or the like. Such businesses will include all durations of the investments whether long term, medium term, or short term.
As stated earlier, for existing companies, the 50:50 test is required to be satisfied before this registration becomes mandatory. Hence, some loans to group entities will not require a company to obtain registration as an NBFC.
What is registration?
Section 45IA allows the Companies to obtain registrations as Non-banking Finance Companies.
There are broadly two ways of obtaining such registrations: by incorporating a new company and by obtaining the registration for an existing company.
The requirements are the same for both the types but for an existing company, the level of documentation will naturally be on a higher side.
The minimum requirements
There are some minimum requirements which a Company should fulfill before making the application for registration as an NBFC. Such requirements are either expressly contained in the Reserve Bank of India Act, 1934 or have emerged from practices followed by RBI. The requirements also depend on the class of the NBFC. The most common class, as discussed previously, is NBFC-ICC. Some of the key aspects are as follows:
Net owned funds of INR 2 Crores: The Company shall have a minimum net owned funds of INR 2 crores as per the last audited balance sheet. Net owned funds mean the sum of the paid-up equity capital and the free reserves as reduced by accumulated losses, intangible assets, and investments in subsidiaries in excess of 10%.
Experience of the Directors: At least one of the Directors shall have the experience of working in NBFCs/ Banks. The Directors shall also possess relevant educational qualification.
Business plans: The Company shall prepare a professionally vetted business plan which shall contain the detailed description of the business model, market surveys, objects, advantages or USPs, as well as realistic financial projections for the next 3 years. The accuracy and relevance is required to be properly checked.
Policies: Before making the application, a Company needs to fulfil the conditions with reference to IT infrastructure, security related aspects, and other obligations as per the type of the business. This also requires drafting and adoption of various policies.
Other details: The application requires detailed information about the Company, its promoters, directors and a certificate from the Statutory Auditors of the Company. There are further documents which are required to be attached to the application like incorporation certificate, Board resolution, fixed deposit receipts and no lien certificate, audited financial statements of the Company (if any), educational qualifications as well as certificate of experience of Directors, if any.
How to make the application?
The application is required to be filled in the Excel sheet and uploaded at the designated web portal. A physical copy of the application, after adding the application number generated on the portal is required to be submitted by Registered post A. D. or by hand to the concerned regional office of the RBI. There are no filing fees which are charged by the RBI for this application.
After submitting the application, the Company is required to monitor the furnished email for the communications received from the RBI. It should be noted that RBI has very wide discretion as far as the grant of registration is concerned. Hence, they may ask for any additional information or documents or may impose any conditions or restrictions.
Practical approach
The conditions on which RBI is required to be satisfied are very stringent and open ended. They relate to capital structure, earning prospects, general character of the management, demonstration of serving the public interest, and effect on the overall financial sector.
To pass these hurdles, the following approach has proved fruitful in our cases:
- Strong due diligence of the Company, its promoters, and management. It includes not only the Companies Act, 2013 but also other legislations as well as business structures.
- Building correct experience profiles of the management by inducting experienced persons.
- Accurate paperwork related to the application along with the requisite internal approvals.
- Framing actionable policies and plans for the Company.
- Maintaining clear and accurate communication with the RBI within prescribed timelines.
- Quick decision making processes to allow for accurate changes while protecting the interests of the Client.
After following the above steps under professional guidance, the decision on registration can reasonably be expected within a period of 6 to 9 months. A shorter timeline is possible if RBI is satisfied with a strong first application.
- Team Efficax