Non Banking Finance Companies

The Companies Act 1956 provided for a number of different types of companies, including a one-of-a-kind provision for Non–Banking Financial Corporations (NBFC). The same was thereon carried forward by the Companies Act, 2013. An NBFC has therefore been recognized by law and engaged in providing a wide range of financial services over several decades. Since it holds a significant position in the world of finance, it is essential to explore the various facets related to an NBFC and, specifically, NBFC India versions.

Meaning of an NBFC:

Non–Banking Financial Corporations (NBFC) are companies engaged in providing a wide range of financial services such as loans, advances, and acquisitions of marketable securities, including stocks, debts, equities, and the like. It is engaged in the process of receiving various forms of deposits under numerous different types of heads, as aforementioned. 

What is not NBFC?

The Companies Act specifically excludes certain types of companies from the category of NBFCs. They are the businesses that have any of the following activities as their principal activity:

  • Businesses that are engaged in agricultural activities.
  • Businesses that have industrial activities as their purpose
  • Any business engaged in transactions of sale and purchases other than securities
  • Any business engaged in providing services or transacted related to developing, buying, or selling immovable property. 

Types of NBFC:

There are mainly 8 kinds of NBFCs, as listed below:

  • Asset Finance Company
  • Loan Company
  • Investment Company
  • Core Investment Company
  • Micro Finance Company
  • Infrastructure Finance Company
  • Housing Finance Company 
  • Mortgage Guarantee Company 

Procedure for NBFC Incorporation:

If a company does not fall among the excluded businesses as listed above, they need to meet the following eligibility requirements to become an NBFC:

  • The company needs to be registered as a Private Limited or a Public Limited Company.
  • The company needs to have a concrete five-year business plan.
  • 1/3 of the total number of directors in the company need to have experience in the field of finance.
  • There are certain FEMA guidelines and capital compliances mandated in the case of NBFC; the company needs to have met all such mandates.
  • The company should have clean and trustworthy credit scores measured through CIBIL scores.

Process of Registration:

The process of registering an NBFC India requires several essential compliances.

Mandatory Documents to be procured during the process are:

  • Certificate of Incorporation
  • Memorandum of Association
  • Articles of Association
  • CIBIL score and records 
  • Proof of 1/3 of directors having experience in the field of finance
  • Address proof of the company
  • Board Resolution authorizing the application for NBFC
  • Pledge by the Board through a resolution to uphold the integrity of public deposits
  • Bank account showing a minimum capital of 2 crores
  • 5-year action plan in detail
  • Specifics related to company management and decision-making. 

The company representative needs to undertake the following steps:

  • Visit the official website of the Reserve Bank of India (RBI) and proceed to the application for NBFC.
  • Insert the required details of the company as demanded in the application form.
  • Submit all the relevant documents as aforementioned. 
  • Once the application is duly submitted, the company shall be assigned a Company Application Reference Number (CARN). 
  • The applicant shall be required to procure and submit all the documents to the RBI office of their region. 
  • The RBI then scrutinizes all the submitted documents and accordingly grants the status of an NBFC to it.

Fee Payable:

The fee payable while incorporating an NBFC is relative and calculated in proportion to the company's authorized capital. Additionally, there are certain ancillary expenses such as the fee for a Simplified Proforma for Incorporating a Company Electronically (SPICe +) form, fees for Memorandum and Articles of Association of the Company, fees for generating the digital signatures of the company directors, as well as a processing fee payable to the Registrar of Companies during the application process.
Some popular NBFC examples include Power Finance Corporation Limited, Shriram Transport Finance Company Limited, Bajaj Finance Limited, Muthoot Finance Ltd, and HDB Finance Services. However, these NBFC examples represent only the cream layer, but several promising up and coming NBFC India companies are.

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