A Non- Banking Financial Company makes loans and advances and buys bonds/debentures/shares/stocks/securities issued by the government or local authority. It also handles other marketable securities such as leasing, hire-purchase, insurance, and chit business. It excludes any entity whose primary business is industrial activity, agricultural activity, the acquisition or sale of any products, the provision of any services, or the construction/sale/purchase of immovable property as defined by the Companies Act.

When NBFC Company Registration is required with RBI?

The Reserve Bank of India controls & monitors Non-Banking Financial Companies whose primary activity is lending or acquiring shares, stocks, bonds, and other securities, financial leasing, hire purchase, or receiving deposits. When a company's financial assets exceed 50% of total assets and revenue from financial assets exceeds 50% of gross income, it is engaged in the primary business of financial activity. A firm that meets both of these conditions must obtain an NBFC license. 

This NBFC licensing test is sometimes referred to as the 50-50 test.

Companies that engage in agriculture activities, industrial operations, the purchase & sale of goods, the provision of services, or the purchase, sale, or building of immovable property as their primary business and engage in some financial activity in a limited capacity will not be required to do the NBFC Company registration.

Financial Companies not requiring an NBFC Registration

The following entities engaged in the primary business of financial activities do not require an NBFC license:

• The National Housing Bank regulates housing finance companies.
• The Insurance Regulatory & Development Authority of India controls insurance companies.
• The Securities & Exchange Board of India regulates stock brokerage.
• The Securities & Exchange Board of India regulates merchant banking companies.
• The Securities & Exchange Board of India regulates venture capital firms.
• Companies that conduct Collective Investment Schemes - The Securities & Exchange Board of India regulates them.
• The Securities & Exchange Board of India regulates mutual funds.
• The Ministry of Corporate Affairs regulates Nidhi Companies.
• The governments of the individual states govern Chit Fund Companies.

Difference Between NBFCs and Banks

• Unlike a bank, an NBFC cannot accept demand deposits.
• Deposit Insurance & Credit Guarantee Corporation deposit insurance is accessible to bank depositors but not to NBFC depositors.
• Banks are part of the payment and settlement system and may issue cheques drawn on themselves, but NBFCs cannot.

However, certain types of NBFCs that are supervised by other authorities are free from the necessity of registration with the RBI, such as

• Chit corporations as specified in Section 2(b) of the Chit Funds Act of 1982
• Housing Finance Companies are governed by a National Housing Bank, a Stock Exchange, or a Mutual Benefit Corporation.
• SEBI-registered Venture Capital Funds/Merchant Banking Companies/Stockbroking Companies
• Insurance company with a valid IRDA Certificate of Registration,
• Nidhi firms registered under Section 620A of the Companies Act, 1956 or constituted under Section 406 of the Companies Act, 1956

Types of NBFC Licenses

The kind & category of NBFC license must first be chosen before applying for one. NBFC Companies are classified as follows:

Asset Finance Company (AFC) 

An Asset Finance Company is a financial firm that primarily finances physical assets such as tractors, automobiles,  generator sets,  lathe machines, earthmoving & material handling equipment, self-propelled vehicles, and general purpose industrial machinery.

An investment firm 

It is any corporation that is a financial organisation whose primary activity is the acquisition of securities (shares/stocks/bonds/other financial securities).

Loan Corporation 

A Loan Company is any company that is a financial institution that provides funding, whether via loans or advances or otherwise, for any activity other than its own but does not consist of an Asset Finance Company.

Infrastructure Financing Firm 

An Infrastructure Finance Company is a non-banking finance company that invests at least 75% of the total assets in infrastructure loans, has at least Net Owned Funds of Rs. 300 crore, and has a Capital to Risk Assets Ratio of 15%.

Systemically Important Core Investment Company 

A Systemically Important Core Investment Company is an NBFC with assets in excess of Rs.100 crores that accepts deposits and is engaged in the business of acquiring shares and securities that meet specified criteria.

Infrastructure Loans Fund 

An NBFC-registered firm that facilitates the flow of long-term debt into infrastructure investments. 

Infrastructure Debt Funds raise funds by issuing bonds denominated in rupees or dollars with a minimum term of five years.

Non-Banking Financial Company  

Micro-Finance Institution (Most Popular): A microfinance institution is a non-deposit-taking NBFC.

NBFC Factor 

An NBFC Factor is a non-deposit-taking NBFC that primarily engages in factoring.

Process for NBFC Registration

Submit the NBFC License application online or offline with the required documentation to the Reserve Bank of India's Regional Office

1. Form RUN is used for name approval, which should include the term financial to show that it is the primary activity.

2. At the time of registration under the Companies Act, the company's MOA must declare the major business as extending credit, making investments in various forms of shares & stocks, leasing, hire-purchase, insurance business, chit business, & taking deposits under any plan or arrangement.

3. According to the RBI, the entity's net owned funds cannot be less than Rs. 2 crores, and the NBFC's authorised share capital must be at least Rs. 2 crores. 

The following papers must be provided in order to get an NBFC license:

• Details about the management
• In the case of public limited companies, certified copies of the Certificate of Incorporation and the Certificate of Commencement of Business.
• Certified copy of the company's most recent Memorandum & Articles of Association. 
• Details of financial business terms in the MoU.
• The firm has received a copy of its PAN/CIN.
• Each director must fill up and sign their own director profile.
• Certificate from the NBFC/s where the Directors received NBFC experience.
• Data from CIBIL for the company's directors
• Financial records for the previous two years of Unincorporated Bodies in the group in which the directors may have a directorship with/without a meaningful stake.
• Board Resolution is expressly authorising signatory and approving the filing of the application and its contents
• Board Resolution stating that the company has not taken any public funds in the past (specify time)/does not hold any public deposits as of the date and will not accept any in the future without prior written clearance from the Reserve Bank of India.
• Board resolution saying that the firm is not carrying on any NBFC activity/has ceased NBFC activity & will not carry on/begin NBFC activity until it receives registration from the RBI.
• Certified copy of the Board Resolution establishing "Fair Practices Code."
• Statutory Auditors Certificate stating that the organisation does not engage in NBFC activity.
• Statutory Auditors Certificate attesting to the net owned fund as of the application date.
• Authorised Share Capital & the company's most recent ownership structure, including percentages
• Copy of Fixed Deposit receipt and banker's certificate of no lien reflecting amounts in support of Net Owned Funds
• Details about bank balances/accounts/complete postal address of the branch/bank, loan/credit facilities, and so on are available.
• Past 3 years' audited balance sheet, profit & loss account, directors' and auditors' reports, or for any shorter time available  
• Business plan for the next 3 years detailing the company's (a) business drive, (b) market sector, and (c) anticipated balance sheets, cash flow statement, and asset/income pattern statement, without any element of public deposits.
• Documentary proof supporting the source of the company's beginning cash.
• Bank statements/IT returns, for example, must be self-attested.

Registration Process with RBI

1. The firm that wants to incorporate an NBFC must register online and submit a physical copy of the application along with a few papers to the Reserve Bank of India's Regional Office.

(1) The applicant firm can use the RBI's protected website for online application at https://cosmos.rbi.org.in. (Because the applicant firm will not need to log in to the COSMOS application at this point, user ids are not necessary.)

(2) On the login screen of the COSMOS Application, the applicant firm may select "CLICK" for Company Registration. Where a window displaying the Excel application form for download would be presented. The applicant firm can then obtain a relevant application form (NBFC or SC/RC) from the aforesaid website, fill it out, and upload it.

(3) The applicant firm must ensure that the accurate name of the Regional Office is entered in the form.

• "C-8" of the Excel application form's "Annex-Identification Particulars." The firm would subsequently be assigned a Company Application Reference Number (CARN) for the online CoR application.

(4) Following that, the applicant business must send a paper copy of the application form (with the online Company Application Reference Number) and supporting documentation to the relevant Regional Office.

(5) The applicant firm can then verify the progress of the application by entering the acknowledgement number into the above-mentioned secure address.

Documents need to be presented for Registering with RBI

1. Copies of the Certificate of Incorporation that have been certified.

2. Only the major aim provision in the MOA pertaining to the financial business was certified.

3. Board resolution  

• The company is not operating on any NBFC activity/has ceased NBFC activity and will not carry on/commence the same before obtaining RBI registration; 
• the corporation has not accepted any public funds in the past (specify time)/does not hold any public deposit as of the date and will not accept the same in the future without the prior approval of the Reserve Bank of India;
• the UIBs in the group in which the director has a significant stake or has not taken any public deposit in the past / does not hold any public deposit as of the date & will not accept the same in the future
• According to RBI guidelines, the business has developed a "Fair Practices Code."

4. In support of the NOF, a copy of the Fixed Deposit receipt and a bankers certificate of no lien specifying the sums

5. For organisations that are already in operation, the Audited Balance Sheet & Profit & Loss Account, as well as the Directors & Auditors Report, shall be presented for the full period the company has been in existence, or for the previous 3 years, whichever is less.

6. Copy of the highest professional and educational qualification certificate for each director

7. Copy of each director's experience certificate in the Financial Services Sector (including the Banking Sector).

8. Banker's report on the application form, its group/subsidiary/associate/holding company/related parties, and directors of the applicant company with significant interests in other companies. The banker's report should detail these entities' interactions with these bankers, whether as a depositing or borrowing entity.

Conclusion

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Our aim is to provide all people and industries with one-click access to all of their legal and professional needs. We have worked with a significant number of Fintech firms in India, assisting them in developing a loan company and receiving authorization from SEBI, IRDA, and the RBI.