OVERVIEW OF LAW RELATING TO NBFCs
NBFC is a company registered under Companies Act and is engaged in business of loans and advances, acquisition of shares/ stocks/bonds/debentures/securities issued by Government or other securities of like marketable nature, leasing, hire-purchase, insurance business, chit business.
As per section 45-I(f) of RBI Act, NBFC means (i) financial institution which is a company (ii) a non-banking institution which is a company and which has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner, or lending in any manner (iii) such other non-banking institutions or class of such institutions, as the Bank may, with the previous approval of the Central Government and by notification in the Official Gazette, specify.
NBFC means only the non-banking institutions which is a loan company or an investment company or an asset finance company or a mutual benefit financial company or a factor registered with RBI under section 3 of Factoring Regulation Act - Clause 3( xiv) of NBFC Acceptance of Public Deposits (Reserve Bank) Directions, 2016 issued on 25-8-2016.
Deposit insurance facility is not available to deposits with NBFC.
Many NBFC obtain Certificate of Registration (CoR) as NBFC and put their funds in fixed deposits with commercial banks, without carrying out NBFC activities. The fixed deposits is not financial
assets. There are only near money and can be used only for temporary parking of funds or till commencement of business. If such NBFC do not commence NBFC business is six months, their CoR will stand withdrawn automatically - RBI circular No. DNBS (PD) CC NO. 259/03.02.59/2011-12 dated 15-3-2012.
The NBFCs and nidhis are not ‘mutual funds’. - PIB Press release dated 14.2.2000.
NBFCs land and make investments and hence their activities are akin to that of banks. However following are major differences—
(
i)NBFC cannot accept demand deposits.
(ii)NBFC do not form part of the payment and settlement system and cannot issue cheques drawn on itself.
(iii)deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is available to Banks but not available to depositors of NBFCs.
Chapter IIIB of RBI Act [Sections 45H to 45QB to RBI Act] give powers to RBI to control and supervise NBFCs. As per section 45Q of RBI Act, these provisions are override provisions of any other law.
In case of Non-banking Financial Companies (NBFC) like hire purchase companies, leasing companies, housing finance companies, loan companies, investment companies etc., RBI restrictions and guidelines have to be followed.
Nidhi Company and chit fund company is also ‘NBFC’ but they are regulated by different authorities.
If a company is engaged in industrial activities or agricultural operations as its principal business, it is not an ‘NBFC’.
NBFCs have to be registered with RBI. List of NBFCs registered is available on www.rbi.org.in. RBI has clarified that deposits with NBFC are not guaranteed by RBI. These are unsecured.
OVERVIEW OF LAW RELATING TO NBFCs
RBI is sole regulatory authority for NBFC, State Money Lenders Act does not apply to NBFC - State Money Lenders Act does not apply to NBFC, as they are solely and entirely regulated by RBI. Section 45Q of RBI Act confers overriding effect upon Chapter III-B of RBI Act, 1934 – Nedumpilli Finance Co. Ltd. v. State of Kerala (2022) 7 SCC 394 = 138 taxmann.com 191 = 138 taxmann.com 191 (SC).
Housing Finance Companies regulated by RBI - Housing Finance Companies (HFC) were earlier regulated by National Housing Bank. However, HFCs are now regulated by RBI as per sections 29A to 52A of National Housing Bank Act, 1987 amended vide Finance (No. 2) Act, 2019 w.e.f. 9-8-2019.
As per Notification No.DOR.047/CGM (MM)-2019 dated 19-112019, all provisions of Chapter IIIB of RBI Act will apply to NBFCs which are Housing Finance Companies (HFC), except section 45-IA of RBI Act.
Provisions of sections 45-IA, 45-IB and 45-IC of RBI Act shall not apply to NBFC which is a housing finance company - RBI Notification No. DOR.049/CGM (MM)-2020 dated 18-11-2020.
A company must have minimum net owned funds of Rs. 20 crores to commence housing finance as principal business or carry on business of housing finance as its principal business. Existing companies must have at least Rs. 15 crores net owned funds before 1-4-2022 and Rs. 20 crores before 1-1-2023 RBI Notification No. DOR.048/ED(SS)-2020 dated 18-11-2020.
Various master directions issued by RBI summarise policy in respect of registration, prudential regulations (of income recognition, asset classification, provisioning), norms for acceptance of public deposits, capital adequacy, restrictions on investments) Asset Liability Management (ALM), returns to be submitted to RBI etc.
RBI has started issuing Master Directions on all regulatory matters beginning January 2016. The Master Directions consolidate instructions on rules and regulations framed by the Reserve Bank under various Acts including banking issues and foreign exchange transactions. These are updated from time to time. RBI has issued I-23
OVERVIEW
following Master directions. These can be seen on RBI website www.rbi.org.in.
Fit and Proper Criteria for Sponsors - Asset Reconstruction Companies (Reserve Bank) Directions, 2018
Non-Banking Financial Company - Peer to Peer Lending Platform (Reserve Bank) Directions, 2017
Information Technology Framework for the NBFC Sector Mortgage Guarantee Companies (Reserve Bank) Directions, 2016
Non-Banking Financial Company Returns (Reserve Bank)
Directions, 2016
Non-Banking Financial Companies Auditor’s Report (Reserve Bank) Directions, 2016
Monitoring of Frauds in NBFCs (Reserve Bank) Directions, 2016
Non-Banking Financial Company - Account Aggregator (Reserve Bank) Directions, 2016
Non-Banking Financial Company - Non-Systemically Important Non-Deposit taking Company (Reserve Bank) Directions, 2016
Non-Banking Financial Company - Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016
Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 2016
Core Investment Companies (Reserve Bank) Directions, 2016
Exemptions from the provisions of RBI Act, 1934
Miscellaneous Non-Banking Companies (Reserve Bank)
Directions, 2016
Standalone Primary Dealers (Reserve Bank) Directions, 2016
Residuary Non-Banking Companies (Reserve Bank) Directions, 2016.
Directions issued by RBI have statutory force and can be termed as law in force - Central Bank of India v. Ravindra (2001) 107 Comp
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OVERVIEW OF LAW RELATING TO NBFCs
Cas 416 (SC) - quoted with approval in Sudhir Shantilal Mehta v. CBI (2009) 96 SCL 403 (SC).
Companies engaged in manufacture, mining, trading etc. are NonBanking Non-Financial Companies. Such companies are governed by provisions under Companies Act. They do not have to submit any return to RBI in respect of public deposits accepted by them.
NBFC are broadly classified by RBI as systemically important NBFC and Non-systemically important NBFC.
NBFC-D is an NBFC accepting public deposits.
NBFC-ND is an NBFC not accepting public deposits. These fall under following categories - NBFC-MEI, NBFC-FACTOR, NBFCIDF.
NBFC accepting deposits are termed as NBFC-D. Instructions are contained in RBI Master Direction No. DNBR.PD.008/03.10.119/ 2016-17 dated 1-9-2016.
IFC is non-deposit taking NBFC with net owned funds over Rs. 300 crores. Minimum of 75% of its total assets should be deployed in infrastructure loan. It should have minimum credit rating A.- para 3(xvi) of RBI Master Direction No. DNBR.PD.008/03.10.119/201617 dated 1-9-2016.
NBFC - Factor means a NBFC having financial assets in the factoring business at least to the extent of 75% of its total assets and the income from the factoring business should be not less than 50% of its gross income and factoring business should constitute at least 50% of its total assets.- para 3(xviii) of RBI Master Direction No. DNBR.PD.008/03.10.119/2016-17 dated 1-9-2016.
Factor (Reserve Bank) Directions, 2012 have been issued by RBI. Such companies should have registration under section 3 of the Factoring Regulation Act, 2011.
OVERVIEW OF LAW RELATING TO NBFCs
This Act i.e. Factoring Regulation Act (except sections 19, 20, 21 and 32) have been brought into force w.e.f. 1-2-2012 vide Notification No. SO 1399(E) dated 1-2-2012.
Miscellaneous Non-Banking Companies (MNBC) are mainly financial institutions, which collect money and utilize it for investments or giving loans to members. The foreman organises collection and distribution. He collects his commission and balance surplus is distributed among members.
These are similar to chit funds or kurki or bhishi. [Technically, bhishi (by whatever named called) collected by ladies in kitty parties is same type of transaction, but it is not MNBC as their group is not registered as a company].
They can accept deposits only from shareholders.
The instructions are contained in RBI Master Direction No. DNBR.PD.005.10.119/2016-17 dated 25-8-2016.
However, chit funds are out of purview of RBI control.
RBI has made distinction between systemically important NBFC and non-systemically important NBFC.
Non-deposit taking NBFC with asset size of Rs. 500 crore or more as per last audited balance sheet are defined as systematically important NBFC (NBFC-ND-SI).
RBI Master Direction No. DNBR.PD.008/03.10.119/2016-17 dated 1-9-2016 contains detailed instructions in respect of systemically important NBFC.
RBI Master Direction No. DNBR.PD.007/03.10.119/2016-17 dated 1-9-2016 contains detailed instructions in respect of non-systemically important NBFC.
Miscellaneous instructions to NBFC-ND-SI have been given in RBI Master Circular No. DNBR(PD) CC NO. 055/03.10.119/2015-16 dated 1-7-2015.
I-27 OVERVIEW OF LAW RELATING TO NBFCs
A non-banking institution which is a company and has its principal business of receiving deposits under any scheme or lending in any manner is a Residuary Non-Banking Company [RNBC].
The instructions are contained in RNBC (Reserve Bank) Directions, 2016 issued on 25-8-2016.
Principal business of RNBC is receiving deposits under any scheme or arrangement, and which are not Investment, Asset Financing or Loan NBFC. Prudential regulations apply to them also. However, there is no ceiling on deposits raised by them.
RNBC has to ensure that amounts deposited and investments made are not less than the aggregate amount of liabilities of depositors. The interest cannot be less than 5% if amount is deposited on monthly basis and 3.5% if amount is deposited under daily basis. Deposit can be for minimum 12 months and maximum 84 months.
Core Investment Companies (CIC) are those which have assets predominantly as investments in shares for holding stake in group companies. The holding is not for trading and the CICs do not carry any other financial activity and do not accept any deposits.
These are NBFCs but need a separate treatment. Hence, Core Investment Companies (Reserve Bank) Directions, 2016 have been made operational w.e.f. 25-8-2016.
These apply to every NBFC carrying on the business of acquisition of shares and securities and which satisfies the specified conditions.
Core Investment Company (CIC) means an NBFC carrying on the business of acquisition of shares and securities and which satisfies the following conditions - (i) It holds not less than 90% of its net assets in form of investment in equity shares, preference shares, bonds, debentures, debts or loans in group companies (ii) Its investment in group companies is not less than 60% of its net assets (iii) It does not trade in investments in shares, bonds, debentures, debt or loans in group companies except through block sale for dilution or disinvestment (iv) It does not carry on any other
financial activity - clause 2(1) of Core Investment Companies (Reserve Bank) Directions, 2016 issued on 25-8-2016.
Section 45-IA of RBI Act shall not apply to non systematically important CICs (Core Investment Company).
Section 45-IA(1)(b) of RBI Act shall not apply to Systemically Important Core Investment Company, if it meets with capital requirements and leverage ratio as specified in CIC Directions.
CICs having asset size of Rs. 100 crore an above would be treated as systemically important CIC (CIC-ND-SI) - clause 3(xxiv) of Core Investment Companies (Reserve Bank) Directions, 2016 issued on 25-8-2016.
The Core Investment Companies can make overseas investments as per Core Investment Companies Overseas Investment (Reserve Bank) Directions, 2012.
CIC Companies with asset size exceeding Rs. 100 crores will have to obtain registration from RBI (CoR - Certificate of Registration). They should maintain minimum capital ratio and Leverage ratio. However, they will be exempt from requirements of prudential regulations.
CIC with an asset size of less than Rs. 100 crores are exempt from registration. For this, all CICs belonging to a group will; be aggregated.
Banks and housing finance companies lend housing loans against mortgages. Banks and housing finance companies will have greater comfort if mortgage can be guaranteed through a three way contract among borrower, lender and guarantor - Speech of Finance Minister while presenting 2007-08 Union Budget.
Provision for mortgage guarantee company is made with this idea. A mortgage guarantee company will be treated as NBFC.
Provisions of sections 45-IA, 45-IB and 45-IC of RBI Act will not apply to the mortgage guarantee companies.
RBI has issued instructions on registration and operations of Mortgage Guarantee Company vide Mortgage Guarantee Companies (Reserve Bank) Directions, 2016 issued on 10-11-2016.
These directions also contain directions regarding prudential regulation, investment policy and income recognitions, which were earlier given as separate directions.
The provisions are contained in NBFC Acceptance of Public Deposits (Reserve Bank) Directions, 2016 issued on 25-8-2016. Deposits with NBFC are unsecured and not guaranteed by RBI.
‘Net Owned Fund’ means net owned funds as defined under section 45-IA of RBI Act including the paid up preference shares which are compulsorily convertible into equity - clause 2(xiii) of NBFC Acceptance of Public Deposits (Reserve Bank) Directions, 2016 issued on 25-8-2016.
Net Owned Funds for various categories of NBFC should be Rs. ten crores - RBI Notification No. DOR.CRE.060.CGM/2022 dated 17-3-2022 [Earlier RBI Notification No. DNBR.907/CGM (CDS) – 2015 dated 27-3-2015 specified limit as Rs. two crores].
The existing NBFCs are required to achieve this NOF by 31-32027 in stages.
The interest offered cannot exceed 12.5%. It can be compounded on three monthly basis - clause 14 of NBFC Acceptance of Public Deposits (Reserve Bank) Directions, 2016 issued on 25-8-2016.
Public deposit should be for minimum 12 months and maximum 60 months. NBFC cannot accept deposits repayable on demand.clause 11 of NBFC Acceptance of Public Deposits (Reserve Bank) Directions, 2016 issued on 25-8-2016.
Brokerage of maximum 2% can be paid plus 0.5% reimbursement of marketing expenses of broker - clause 16 of NBFC Acceptance of Public Deposits (Reserve Bank) Directions, 2016 issued on 25-82016. I-29 OVERVIEW OF LAW RELATING TO NBFCs
These can be accepted as specified in clause 15 of NBFC Acceptance of Public Deposits (Reserve Bank) Directions, 2016 issued on 25-8-2016.
Nomination facility is available - clause 32 of NBFC Acceptance of Public Deposits (Reserve Bank) Directions, 2016 issued on 25-82016.
NBFC has to issue advertisement/statement in lieu of advertisement. Receipt of deposit must be given and Register of deposits should be maintained.
Advertisement on TV should indicate that viewer should refer to advertisements in newspapers, that it has valid registration and that RBI does not accept responsibility or guarantee about repayment.
NBFC are advised to follow customer identification procedure and follow ‘Know Your Customer’ (KYC) Directions, 2016.
Provisions in RBI Act authorising RBI to impose ban/restrictions on acceptance of public deposits has been held valid. - Bhavesh D
Parish v. UOI 2000 AIR SCW 1965 = 26 SCL 454 (SC) * RBI v. Peerless General Finance & Ins AIR 1987 SC 1023 = 61 Comp Cas 663 (SC).
If an NBFC becomes industrial company, it can retain the excess deposits and repay them on due dates on the terms on which the deposits were accepted when the company was NBFC - Nagarjuna Finance Ltd. In re (1999) 21 SCL 172 (CLB). OVERVIEW OF LAW RELATING TO