What you must know about non-banking financial company

What is an NBFC?
A Non-Banking Financial Company (NBFC), as the name suggests is a Company (registered under the Companies Law) which is engaged in financial services. It is involved in the business of

a.       Loans and advances,

b.      Acquisition of bonds/ debentures/ securities/ shares/ stocks which may be issued by Government or any other local authority or any other marketable securities of similar nature

c.       Hire-purchase,

d.      Leasing,

e.       Chit business,

f.        Insurance business,

However, it shall not include anybody which conducts the primary business of following nature:

                                 i.            Agriculture activity,

                               ii.            Industrial activity,

                             iii.            Sale or purchase of any goods (other than securities),

                             iv.            Providing any services relating to immovable property,

                               v.            Sale/ purchase/ construction of immovable property.

Also, any institution not being a bank, in form of a company having the principal business of receiving deposits under any scheme and/or arrangement either in a lump sum or in installments by way of contributions also comes within the definition of a Non-Banking Financial Company.

How are NBFCs different from traditional Banks?
NBFCs being financial institutions have functions and features similar to that of traditional Banks. However, there are some differences between the both which distinguish the two types of entities:

·         NBFCs do not accept any demand deposits;

·         NBFCs cannot issue cheques drawn on itself;

·         NBFCs do not form part of the payment and settlement system;

·         NBFC does not provide deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation to its depositors

What is the procedure of NBFC Registration?
The Reserve Bank of India, 1934 mandates that NBFC registration before any company is allowed to commence the functions of an NBFC. Thus the primary requirement of commencing the functions of an NBFC is Certificate of Registration and net-owned funds of Rs. 2 Cr. For Registration of NBFC, the applicant company has to apply online on the RBI official website and submit a physical copy of the application. The requisite documents as elaborated on the official portal must be attached to the physical copy of the application form. The status of the application for NBFC registration can be obtained using the acknowledgement number provided to the applicant.

What are the documents essential to obtain NBFC license?
The applicant company for obtaining the NBFC license has to apply duly on the RBI site for NBFC registration. An indicative list of basic documents and information to be furnished along with the application form is:

1.      Certified copies of Certificate of Incorporation and extracts of the MOA, describing the primary objective.

2.      Board Resolution stating that:

ii.                   The company at present is not carrying any operations/ functions of NBFC and will not commence any obtaining Certificate of registration from the RBI.

iii.                 The company has not accepted public funds in the past, does not hold any on the given date and shall not hold the same in the future without the approval of Reserve Bank of India.

iv.                 The company does not have a customer interface on the given date and shall not have any in the future without the prior approval of RBI.

v.                   The company has a ‘Fair practices Code’ as per the guidelines set by RBI.

3.      Copy of Fixed Deposit receipts obtained from the bank.

4.      A banker’s report in respect of major interest of the applicant company, its group/ holding company/ subsidiary/ associate, related parties, and directors, in the other companies.

For the companies already in existence: an audited balance sheet, profit & loss account, and directors & auditor’s report, for the entire period the company is in existence, or for last 3 years.

What is Takeover of NBFC?
The term takeover of NBFC means purchase of an NBFC by another company. It is regulated by the regulations of RBI. There are two registered companies involved in the process:

·         Target company, which shall be acquired.

·         Acquirer Company, which will acquire the other.

NBFC Takeover may take two forms:

Ø  Friendly Takeover, which is with the mutual understanding of both the entities. It can be for the benefit of both.

Ø  Hostile Takeover, as the name suggests, is where one company has an influence over the other and uses the higher standing to its own benefit. The target company may be unwilling to the transaction.

What are the advantages of NBFC Takeover?

1.     NBFC takeover is a less expensive process as against the fresh NBFC registration and obtaining NBFC license.

2.     NBFC Takeover is an encouraged way to expand services in the country.

3.     It helps to diminish the competition that the acquirer company faces.

4.     The Takeover of NBFC may help in increasing the profitability and sales/ revenue of Target Company.

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What is NBFC Registration and its License

NBFC means Non-Banking Financial Company which is registered under the Companies Act, 2013. It mainly includes the business activity like loans and advances, acquisition of shares/stocks/bonds/securities which are issued by government or local authority. An NBFC can carry on the business only after obtaining a NBFC license from RBI. There are mainly two types of NBFC i.e. Deposit taking NBFC and Non-deposit NBFC.

What Are The Types Of NBFC?

Asset Finance Company

The main business of these companies is to finance the assets such as machines, automobiles, generators, material equipment’s, industrial machines etc.

Investment Company (IC)

The main business of these companies is to deal in securities.

Loan Companies (LC)

The main business of such companies is to make loans and advances

Infrastructure Finance Company (IFC)

A company havingminimum net owned funds of at least Rs. 300 Crore and has deployed 75% of its total assets in Infrastructure loans is called IFC provided it has credit rating of A or above and has a CRAR of 15%.

Systemically Important Core Investment Company (CIC-ND-SI)

It is an NBFC which is carrying on the business of acquisition of shares and securities which satisfies the prescribed conditions.

Infrastructure Debt Fund (IDF-NBFC)

IDF-NBFC is a company registered as NBFC to facilitate the flow of long term debt into infrastructure projects. IDF-NBFC raise resources through issue of Rupee or Dollar denominated bonds of minimum 5 year maturity. Only Infrastructure Finance Companies (IFC) can sponsor IDF-NBFCs.

Non-Banking Financial Company – Micro Finance Institution (NBFC-MFI)

NBFC-MFI is a non-deposit taking NBFC which has at least 85% of its assets in the nature of qualifying assets which satisfy the prescribed conditions.

Prerequisites for NBFC Registration

Ø  It must be a company registered under Companies Act 2013

Ø  It must have a minimum equity net owned fund of Rs. 2 Crore

Ø  The CIBIL record must be clear

Ø  At least one Director must be from NDFC background or senior banker as full-time director in the company.

REGISTRATION PROCESS

Ø  First the company must be registered under the companies act 2013

Ø  The main object in the MOA must be financial business

Ø  After the company is incorporated an online application is to be filed in RBI website

Ø  Submit the hard copies of the documents to RBI

Ø  Certified MOA and AOA of companies

Ø  Profile of Directors along with their educational qualifications and work profile

Ø  Respective Board Resolution related to authorize signatory, has not accepted any public deposit in the past or without the prior approval of RBI.

Ø  The Company should give a Board Resolution stating that it will not carry any NBFC unless it get NBFC registration with RBI

Ø  Last three years audited financial statements for companies which are in existence

Ø  Business plan of the company for the next three years

Ø  Details of bank statement and bank account details.

RESTRICTIONS & REGULATIONS

Ø  Institution whose principal business is of agriculture

Ø  Business engaged in industrial activity

Ø  Business engaged in purchase or sale of any goods or services

Ø  Business engaged in sale/purchase of immoveable property

Ø  It cannot receive deposits repayable on demand

Ø  Cannot issue cheques drawn on itself

Ø  Public deposits can be taken for a minimum period of 12 months and maximum for a period of 60 months

Ø  The interest rates on deposits cannot be higher than the ceiling rate as prescribed by RBI

Ø  The deposits are not insured and their repayment is not guaranteed by RBI.

ADVANATGES OF NBFC

Ø  Provide loans and credit facilities with more ease than banks

Ø  Less compliances than bank

Ø  The process of loan in NBFC is more faster as compared to banks

Ø  Competitive Interest rates

Ø  Availability of loans for those with poor credit history

WHY NBFC???

NBFC’s provide all types of financial services similar to banks with two major differences – they do not hold a banking license and they cannot accept monetary deposit from individual customers.

NBFC’s are recognized as complementary to the banking sector as a result of the implementation of innovative marketing strategies, the introduction of tailor-made products, customer-oriented services, attractive rates of return on deposits and simplified procedures, etc.The NBFCs has introduced various innovative products such as IPO financing, three-wheeler financing, vehicles financing, small personal loans, finance for tires & fuel, asset management, mutual fund distribution and insurance advisory, etc.

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Brief guide to NBFC- Meaning, Types and Registration

What is NBFC?

Non- Banking Financial Institutions as the names suggest are different from banks on many levels. But they do provide a variety of banking as well as non-banking services.

 Section 45-IF of the RBI Act 1934 defines NBFC. Any company whose primary business consists of following:

-         receiving deposits and advances

-        acquisition of stocks or shares

-        leasing, hire-purchase,

-        insurance business, chit business

-        lending money

Regulated by RBI

NBFCs are registered and regulated by Reserve Bank of India. Various rules and regulations are laid down for the same purpose. Chapter III B of the RBI Act 1934 regulate the activities conducted by every NBFC.

What different Kinds of NBFC can be incorporated?

NBFCs can be categorized depending upon their:

·       Liability or

·       Activity

Depending upon Liability, NBFC can either be

-        Deposit taking (NBFCs-D) or

-        Non-deposit taking (NBFCs-ND). Micro Finance and NBFC Factor are prime examples of non-deposit taking NBFC.

Similarly, based on activity NBFC license can be applied in different categories like

-        Loan Company,

-        Asset Finance Company,

-        Investment Company etc.

NBFC Registration

Section 45-IA of the RBI Act 1934 defines norms for NBFC registration. For registration there are two basic requirements:

1. The applicant must be a company duly registered under Companies Act, 2013
2. The applicant company is required to have minimum Net Owned Fund of Rs.2 Crore. If the applicant is a freshly registered company, then it must have initial capital in the form of fixed deposit of the same amount.

Net Owned funds must be calculated as per the provisions of RBI based on the previous year’s audited balance sheet.

Document Requirement

Following documents are required to be attached with the application for registration of NBFC:

• Certified copies of Certificate Of Incorporation, PAN, AOA and MOA of the applicant company.
• Information of all directors in Annex III, duly signed by them separately;
• Information about sources of funds;
• A declaration given by directors or shareholders stating that they are not associated with any unincorporated entity accepting deposits;
• CIBIL data of the director/shareholders of the company.
• Audited financial statements of last three years
• Business plan for the next 3 years, etc.

Procedure

For registration an online application is required to be filed on the RBI’s official website rbi.org.in.

Simultaneously, hard copies of two complete sets of application are also required to be submitted in the regional RBI office. Please cross check that all the annexure are submitted with the application.

Regional office after scrutiny, forward the application to the central office. If the central RBI office is satisfied after due scrutiny of the application, it will issue Certificate of Registration.

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Detail Analysis about What is NBFC Takeover

In India NBFC takeover is regulated by Reserve bank of India as is their registration.  In present scenario, there has been a major evolution happening and new business models are developing and growing day by day. These structural changes happening on large scale have also affected the NBFCs. RBI has introduced many changes to ensure ease of doing business for NBFCs.

Procedure of NBFC Takeover

RBI has segregated different NBFCs on the basis of their size and operation level in following two categories:

1.     Non-systematically NBFC/ Smaller NBFC

2.     Systematically NBFC/ Larger NBFC

RBI regulations relating to Non-systematically important are quite liberal to help them grow. However, on the other hand systemically important, larger NBFCs are required to follow various rules to make sure that they are operating on par with the global standards.

NBFC takeover provisions do not cover minor changes in the management or control in their purview. But to incorporate any significant change, prior RBI approval is mandated.

When is Prior Approval required?

We just discussed that NBFCs are mandated for prior approval. Let us list out the circumstances where this prior approval becomes mandatory, failing which every change is considered null and void.

1. Any Takeover of NBFC or acquisition of control, which may or may not results in a change in management.
2. Any change in the shareholding of an NBFC, resulting in 26% acquisition or transfer of the paid-up equity capital.
3. If there is change in more than 30% of the directors of the NBFC which results in change in the management.

Exceptions from prior approval Requirement

There are some exceptions to the above stated mandatory prior approval. They are:

1. If the reason behind change in shareholding beyond 26% is buyback of shares/ reduction in capital by the prior approval of a competent court.
2. If the change in the management by 30 % is:

·       inclusive of Independent Directors or

·       due to rotation of the directors in the Board.

Prescriber procedure of NBFC Takeover

1.     Before initiating any takeover proceedings the acquirer should go through the documents of the Target Company. After due satisfaction a Memorandum of Understanding should be signed between the parties.

2.     If the prior approval is required, then application for the same is to be submitted along with the following documents:

-        Proposed directors/shareholders list with information

-        Sources of funds for takeover

-        A declaration by all the proposed directors/shareholders stating their non-association 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

3.     After due scrutiny if RBI is satisfied, it will issue a letter of approval.

4.     A public notice is required to be issued in two newspapers for 30 days indicating such changes and inviting any objections if any.

After expiry of the above mention 30 days Share Purchase Agreement is to be signed, change in management is to be incorporated and remaining payments are to be done.