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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