Presents The Power of 30!

A web series of 30 episodes covering different areas of corporate, securities and financial laws for the corporate professionals
across the country.
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 NON-BANKING FINANCIAL COMPANIES:
AN OVERVIEW

1st September, 2018

Abhirup Ghosh
Vinod Kothari & Company
Kolkata New Delhi Mumbai

1006-1009 Krishna Building A/11, Hauz Khas, 403-406,

224 AJC Bose Road New Delhi 110016 175 , Shreyas Chambers,
Kolkata – 700017 Phone:011-41315340/ D.N. Road, Fort,
Phone:033-22811276/ 22813742/7715 65515340 Mumbai – 400 001
E: corplaw@vinodkothari.com E: delhi@vinodkothari.com Phone: 022 22614021/ 62370959
E: bombay@vinodkothari.com
www.vinodkothari.com
Email: info@vinodkothari.com / vinod@vinodkothari.com
MEANING OF NON-BANKING FINANCIAL
COMPANY

Non-Banking Financial Company

Must be a financial institution, Has to be a company registered under
Must not be a banking company
therefore, must be in the business Companies Act, 2013 or any other
of conducting financial activities erstwhile laws

A foreign body corporate in not a

The definition of financial company
activities may be taken from the
section 45I(c) of the RBI Act,
An LLP is not a company
1934

Financial activities must be Question of considering unincorporated

conducted as principal business entities does not arise
activities of the company
 LEGAL DEFINITION OF NBFCS & MEANING OF
FINANCIAL ACTIVITIES
Definition of NBFC
Section 45I(f) of RBI Act, 1934
- Financial institution which is a company;
- NBI which is a company and whose
principal business is accepting of
deposits
- such other class of companies, as the
RBI may notify
Definition of financial
institution
Section 45I(c) of RBI Act, 1934
A NBI which carries on the following
activities
1. Financing
2. Acquisition of shares, stocks or securities
3. Hire purchase
4. Insurance – excluded by notification
5. Management of chits, kuries, etc
6. Money circulation schemes
Activities which are not
financial activities
Section 45I(c) excludes the following
activities from the purview of financial
activities:
- Agricultural activities
- Industrial activities
- Purchase or sale of goods, or provision
of services
- Purchase, construction or sale of
immovable properties, provided that
the income from such activities do not
arise from financing of purchase or
sale of construction of immovable
properties
PRINCIPAL BUSINESS TEST
Quantitative factors Qualitative factors

Press Release 1998-99/1269 dated April 8, 1999

nature of the business of an

Financial
entity,
assets> 50%
of its total
assets

Principal its principal thrust areas,

business
test

Income from schematic and consistent

financial
assets> 50% distribution of assets,
of the gross resources and activities.
income
SOME FAQS & CASE STUDIES ON PRINCIPALITY
TEST 1/2
A Ltd. is a company engaged in trading activities, it also has made investments in shares of other
companies amounting to more than 50% of its total assets. However, trading income constitutes majority
of its total income. Whether the Company is an NBFC?
• Principal business criteria shall be deemed to have been made when both the asset and the income
criteria are met. Therefore, the Company is not an NBFC.

In continuation to the above case, during one financial year, the Company fails to generate substantial
amount of trading income and the income from the investments made in shares represent the majority of
the gross income. Whether the Company now becomes an NBFC?
• In this case, the Company fulfils both the asset and income criteria, therefore, it satisfies the principal
test.
• However, it has to be determined whether the Company intends to carry on the business of NBFC. If
the intention of the company is to stick to its existing line of business, then mere fulfilment of the
principal business test in one financial year will not change the nature of the entity.
• However, if in subsequent years similar trend follows and then it will be evident that the actual
nature of the Company is that of an NBFC.
SOME FAQS & CASE STUDIES ON PRINCIPALITY
TEST 2/2

What if the Company takes NBFC registration, in the second year it fails to the satisfy the principal
business test and again in the third year it attains the criteria? Does that mean the Company will obtain
CoR in the first year, surrender in the second and again obtain in the third year?

• No. There can be temporary fluctuations in the business, that cannot change the nature of the
business. If the intention of the Company is to carry on the business of NBFC, it can continue to hold
COR in the second year as well.
 DIFFERENCE BETWEEN BANKS AND NBFCS (1/2)
Particulars
Definition
Scope of business
Licensing requirements
Major limitations on business
Major privileges
Banks
Banking is acceptance of deposits
withdrawable by cheque or demand;
NBFCs cannot accept demand deposits
Limited by sec 6 (1) of the BR Act.
Licensing requirements are quite stringent.
Transfer of shareholding also controlled
by RBI.
No non-banking activities can be carried.
Can exercise powers of recovery under
SARFAESI and DRT law.
NBFCs
NBFCs are companies carrying financial
business.
No bar on NBFCs carrying activities other
than financial activities.
It is quite easy to form an NBFC. Acquisition
of NBFCs is procedurally regulated and
are subject to approval.
Cannot provide checking facilities.
None, except 196 NBFC, specified by
Central Government, have powers under
SARFAESI or DRT law.
 DIFFERENCE BETWEEN BANKS AND NBFCS (2/2)
Particulars Banks
Part of payment and settlement Banks are a part of the payment and
system settlement system.
Deposits Can accept both demand deposits as
well as term deposits
Foreign investment Upto 74% allowed to private sector
banks.
Regulations BR Act and RBI Act lay down stringent
controls over banks.
SLR/CRR requirements Banks are covered by SLR/ CRR
requirements.
Priority sector lending requirements Certain minimum exposure to priority
sector required.
NBFCs
NBFCs are not a part of the payment
and settlement system.
Only some NBFCs are allowed to
accept term deposits
Upto 100% allowed
Controls over NBFCs are relatively
lesser stringent.
NBFC-Ds have to maintain a certain
ratio of deposits in specified
securities; no such requirement for non
deposit taking companies.
Priority sector norms are not
applicable to NBFCs.
 STATISTICS
Over 93% of the registered NBFCs are either
Investment Companies or Loan Companies
NUMBER OF NBFCS IN INDIA
12400
12225
12200
12029
12000
11842
11800
11682

11600 11522
11402
11400

11200

11000

10800 AFC CIC-SI IDF IFC Factor ARC MFI LC + IC

FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 Q1 FY 2018

Data source: RBI

REGISTRATION REQUIREMENTS
INDIA WORKS ON A MULTI-REGULATOR MODEL
Reserve Bank of
NBFCs
India RBI Regulations do not apply

Ministry of
Nidhi Companies Stock Exchanges
Corporate Affairs

State Registrar of Brokers/ sub-

Chit Funds brokers
Chit Funds

National Housing Housing Finance

Mutual funds
Bank Companies

Insurance
IRDA Merchant Bankers
Companies

SEBI AIFs
REGISTRATION OF NBFCS
 In order to carry on the business of NBFC, a company has to register itself with the Reserve Bank of India
under section 45-IA of the Reserve Bank of India Act, 1934
 Conditions as per section 45-IA
 The applicant should be registered as a company under Companies Act
 The minimum net-owned funds of the applicant should be Rs. 200 lakhs
 Meaning of net owned funds
 Owned funds – exposure in group companies, to the extent the exceed 10% of owned funds
 Meaning of owned funds
 Aggregate of paid up equity capital and free reserves as reduced by accumulated balance of
losses, deferred revenue expenditure and other intangible assets
 If any person carries on the business of NBFC without obtaining registration, the same will attract penal
provisions of section 58B of the RBI Act and shall be punishable with imprisonment which shall not be less
than 1 year but may extend upto 5 years and with fine which shall not be less than Rs. 1 lakh but may
extend upto Rs. 5 lakhs
NBFCS WHICH ARE NOT REQUIRED TO OBTAIN
REGISTRATION WITH THE RBI
 Housing Finance Companies,
 Merchant Banking Companies,
 Stock Exchanges,
 Companies engaged in the business of stock-broking/sub-broking,
 Venture Capital Fund Companies,
 Nidhi Companies,
 Insurance companies,
 Chit Fund Companies
 Core Investment Companies having asset size of less than Rs. 100 crores or not holding public funds
TYPES OF NBFCS
 TYPES OF NBFCS 1/2

Deposit taking
Based on the NBFCs Total assets of all
Systemically Those with asset
ability to NBFCs in a group must
important NBFC size of Rs. 500 be aggregated to
accept deposits Non-deposit crores or above determine the limits
taking NBFC

Non- Those with asset

Systemically size of less than
important NBFC Rs. 500 crores
 TYPES OF NBFCS 2/2
Investment Loan Company
Company
Asset Finance
Investment Core Investment
Company
activities Company
Non-Operative Micro Finance
Financial Holding Institution
Based on the
nature of activities Company Infrastructure
Finance Company
Infrastructure Debt
Fund
Lending or similar
activities Mortgage
Factors
Guarantee
Company
Peer-to-Peer
Other activities Lending Platform
Account
Aggregator
INVESTMENT COMPANIES
 Company which is a financial institution carrying on as its
principal business of making investments in shares or securities of
other companies
 In this case –
 At least 50% of the total assets should be investments in shares/ securities
of other companies; and
 At least 50% of the gross income should come from such investments
 CORE INVESTMENT COMPANIES
• Not less than 90% of its Total Assets in the form of investment in
Systemically Important equity shares, preference shares, debt or loans in group companies
Core Investment • Its investment in equity or equity like instruments of group
Companies companies must not exceed 60% of the total assets
• It does not trade in investments, except through block sale for the
purpose of dilution
Core Investment
• It does not carry on any financial activity other than the above. The
Companies remaining 10% can be used for self use assets
• Its asset size is Rs. 100 crores or above
• It accepts public funds

• Non-systematically Important CIC does not have to register itself with

Non Systemically RBI.
Important Core • They do not have to comply with any of the CIC directions, in view of
Investment Companies the applicability of the operative provisions of the Directions to CIC-SI
only.
GROUP COMPANIES
Companies in the Group” means an arrangement involving two or more entities
related to each other through any of the following relationships, viz.
 Subsidiary – parent (defined in terms of AS 21),
 Joint venture (defined in terms of AS 27),
 Associate (defined in terms of AS 23),
 Promoter-promotee [as provided in the SEBI (Acquisition of Shares and Takeover)
Regulations, 1997] for listed companies,
 A related party (defined in terms of AS 18)
 Common brand name, and
 Investment in equity shares of 20% and above).
 CLASSIFICATION OF INVESTMENT COMPANIES
DEPENDING ON THE EXTENT OF INVESTMENTS MADE IN
GROUP COMPANIES

Scale of investments in group companies

10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Not an NBFC Investment Company CIC

**Assuming investments in group companies is the only financial activity a company carries out
NON-OPERATIVE FINANCIAL HOLDING
COMPANIES
 Financial institution through which promoter / promoter groups will be
permitted to set up a new bank;
 It’s a wholly-owned Non-Operative Financial Holding Company (NOFHC)
which will hold the bank as well as all other financial services companies
regulated by RBI or other financial sector regulators, to the extent
permissible under the applicable regulatory prescriptions.
LOAN COMPANIES
 Company which is a financial institution carrying on as its principal business
the providing of finance whether by making loans or advances or otherwise
for any activity other than its own. That means -
 At least 50% of its total assets must be loan assets; and
 At least 50% of the gross income should come from such loan assets

 Does not include an Asset Finance Company.

ASSET FINANCE COMPANIES
 Company which is a financial institution carrying on as its principal business the
financing of physical assets supporting productive/economic activity;
 Principality test for AFCs –

Principal Income from

Asset finance
business asset finance
=> 60% of
criteria for => 60% of
Total Assets
AFCs Gross income
 DIFFERENTIATING ASSET FINANCE AND LOAN
Whether loan or
Product Features
asset finance

Loan for car to be used Though the loan is used for financing an asset, however, the asset
Loan
for personal use does not support an economic/ productive activity

Loan for car to be used The loan is used for financing an asset, which supports an economic/
Asset Finance
for commercial use productive activity

The loan is used for financing an asset, which supports an economic/

Tractor loan Asset Finance
productive activity

The end use of the loan is not restricted. It may or may not be used
Loan against property Loan
for financing asset.
Working capital loan The loan will be used to meet the working capital needs of the
secured by assets of the borrower. It is not being used for financing any asset that could Loan
borrower support productive/ economic activity
 MICRO FINANCE COMPANIES
NBFC-MFI is a non-deposit taking NBFC having not less than 85% of its assets in the nature of qualifying assets which
satisfy the following criteria:

Borrower’s profile: rural

household annual income not
exceeding ₹ 1,00,000 or
urban and semi-urban
household income not
exceeding ₹ 1,60,000;
Ticket size of loan not more Tenure of the loan not to be
Total indebtedness of the less than 24 months for loan
than ₹ 50,000 in the first
borrower does not exceed ₹ amount in excess of ₹ 15,000
cycle and ₹ 1,00,000 in 1,00,000; with prepayment without
subsequent cycles; penalty;

Aggregate amount of loans, Loan is repayable on weekly,

Loans extended must be given for income generation, is fortnightly or monthly
without collateral not less than 50 per cent of instalments at the choice of
the total loans given by the the borrower;
MFIs;

The minimum net owned funds of the company must be Rs. 5 crores
INFRASTRUCTURE FINANCE COMPANIES

Deploys at least 75 per cent of its total assets in infrastructure loans

Has minimum Net Owned Funds of ₹ 300 crore

Has a minimum credit rating of ‘A ‘or equivalent

CRAR of 15%
 MEANING OF INFRASTRUCTURE
Transport
Roads and bridges; Ports; Inland
Waterways; Airport; Railway Track,
tunnels, viaducts, bridges; Urban
Public Transport
Water & Sanitation
Solid Waste Management; Water
supply pipelines; Water treatment
plants; Sewage collection, treatment
and disposal system; Irrigation; Storm
Water Drainage System; Slurry
Pipelines
Energy
Electricity Generation; Electricity
Transmission; Electricity Distribution; Oil
pipelines; Oil/ Gas/ Liquefied Natural
Gas (LNG) storage facility; Gas
pipelines
Communication
Telecommunication (Fixed network);
Telecommunication towers;
Telecommunication & Telecom Services
Social and Commercial
Infrastructure
Education Institutions; Hospitals; Three-
star or higher category classified hotels
located outside cities with population of
more than 1 million; Common
infrastructure for industrial parks, SEZ,
tourism facilities and agriculture
markets; Fertilizer; Post harvest storage
infrastructure for agriculture and
horticultural produce including cold
storage; Terminal markets; Soil-testing
laboratories; Cold Chain; Hotels with
project cost of more than Rs.200 crores
each in any place in India and of any
star rating; Convention Centres with
project cost of more than Rs.300 crore
each.
INFRASTRUCTURE DEBT FUND COMPANIES
Company registered as NBFC to facilitate the flow of long term debt into infrastructure projects;

Raise resources through issue of Rupee or Dollar denominated bonds with minimum maturity of 5 years;

Only Infrastructure Finance Companies (IFC) can sponsor IDF-NBFCs.

The intention of this type of NBFC is to raised funds from domestic/ offshore institutional investors and refinance
existing debt of infrastructure companies, thereby creating fresh headroom for banks to lend to fresh infrastructure
projects
NBFC-FACTORS
Meaning of factoring: [Factoring Regulation Act,
NBFC-Factor must be registered under Companies Act, 1956 2011]

2(j) “factoring business” means the business of acquisition

of receivables of assignor by accepting assignment of such
receivables or financing, whether by way of making loans
Carries on factoring activities
or advances or otherwise against the security interest over
any receivables but does not include—

(i) credit facilities provided by a bank in its ordinary course

Net owned funds of at least Rs. 5 Crs.
of business against security of receivables;

(ii) any activity as commission agent or otherwise for sale

of agricultural produce or goods of any kind whatsoever or
It must be registered with RBI
any activity relating to the production, storage, supply,
distribution, acquisition or control of such produce or goods
or provision of any services.
As per RBI FAQs, only NBFC Factors can carry out factoring
activities In addition to RBI Directions, Factoring
Regulation Act, 2011 also applies on
Factoring Companies
 MORTGAGE GUARANTEE COMPANIES
MGC are financial institutions for which:

at least 90% of the business turnover is

mortgage guarantee business
net owned fund is
₹ 100 crore.

at least 90% of the gross income is from

mortgage guarantee business
ACCOUNT AGGREGATOR
Financial information means information relating to -
An NBFC registered with the RBI which Deposits with Structured Commercial
Bank deposits Investment
carries out the following activities, for a NBFCs Product (SIP) Paper (CP)

fee or otherwise.
Certificates of Government
Deposit (CD) Securities Equity Shares Bonds
Retrieve or (Tradable)
collect financial
instrument
Mutual Fund Exchange Traded Indian
Debentures Units Funds Depository
Receipts
Account
aggregation
CIS (Collective Alternate Balances under
Consolidate, contract the National
Financing Investment Investment Funds Insurance Policies
organise and Pension System
arrangement Schemes) units (AIF) units (NPS)
present financial
information
Units of Units of Real Any other item,
Infrastructure Estate Investment prescribed by
Investment Trusts Trusts the RBI from time
to time
ACCOUNT AGGREGATOR – CONTD..
 Needs to be registered with the RBI as an NBFC
 Needs minimum NOF of Rs. 2 crores
 Cannot carry out any activities other than account aggregation
 Leverage of the company at any time after the registration of the NBFC should not
exceed 7 times
PEER TO PEER LENDING PLATFORM
 It is an electronic platform which connects lenders and borrower
 The lenders can be incorporated as well as unincorporated
entities
 Same for borrowers
 Has to be registered with the RBI as an NBFC
Collaboration
 If the platform only acts as a DSA of one or more financial
institutions, it will not require registration
 Minimum net owned funds of Rs. 5 crores
 Long list of restrictions on these entities, including
 Taking exposure on the borrowers themselves
 Facilitating secured loans on their platform
Arranges for
finance  Not cross sell financial products, except for loan specific
insurance products
 Not facilitate international flow of funds
ABOUT US Vinod Kothari & Co.,
 Based in Kolkata, Mumbai, Delhi

We are a team of consultants,

advisors & qualified
professionals having over 30
years of practice.

Our Organization’s Credo:

Focus on capabilities; opportunities shall follow