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NBFC Registration for Protection of Interest of Depositors

A non-banking institution which is a company and has principal business of receiving deposits under any scheme or arrangement in one lump sum or in instalments by way of contributions or in any other manner, is also a non-banking financial company.

The Reserve Bank of India (RBI), in order to regulate the financial system of the country to its advantage and in public interest, amended the Non-Banking Financial Companies (NBFCs) Prudential Norms (Reserve Bank) Directions, 1998, in exercise of the powers conferred by section 45JA of the Reserve Bank of India Act, 1934. A key development which was brought by this amendment was the insertion ‘paragraph 9C’ to the Directions which deals with submission of a certificate from Statutory Auditor to the Bank. Now, Every NBFC has to submit a Certificate from its Statutory Auditor that it is engaged in the business of non-banking financial institution requiring it to hold a Certificate of Registration under Section 45-IA of the RBI Act. A certificate from the Statutory Auditor in this regard with reference to the position of the company as at end of the financial year can be submitted to the Regional Office of the Department of Non-Banking Supervision under whose jurisdiction the NBFC is registered, latest by June 30, every year.

The RBI has distinguished a Non-Banking Financial Company as a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares/ stocks/ bonds/ debentures/ securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property. A non-banking institution which is a company and has principal business of receiving deposits under any scheme or arrangement in one lump sum or in instalments by way of contributions or in any other manner, is also a non-banking financial company (Residuary non-banking company).  

Principal Business:

Non-Banking  Financial  Company Factor  (NBFC-Factor)  means  a  non-banking  financial  company  as  defined  in  clause  (f)  of  section  45-I  of  the  RBI Act, 1934  which has its principal business as defined in paragraph 42 of these directions and has been granted a certificate of registration under sub-section (1) of section 3 of the Factoring Regulation Act, 2011.

An NBFC-Factor shall ensure that its financial assets in the factoring business constitute at least 50 per cent of its total assets and its income derived from factoring business is not less than 50 per cent of its gross income.

The NBFC-Factors shall conduct the business of factoring in accordance with the Factoring Regulation Act, 2011 and the rules and regulations framed under it from time to time.

How is NBFC Registration beneficial?

As per Section 45-IA of the RBI Act, 1934, no company can commence or carry on the business of a non-banking financial institution without obtaining a certificate of registration and without having a Net Owned Funds of Rs. 200 lakhs.

With a recent amendment to the NBFC regulations, It was observed that there were NBFCs which were no longer engaged in the business of NBFI but still continue to hold the Certificate of Registration (CoR) even though they are not required/eligible to hold the CoR granted by RBI. In order to ensure that only NBFCs which are actually engaged in the business of NBFI hold CoR, it has was decided that all NBFCs should submit a certificate from their Statutory Auditors every year to the effect that they continue to undertake the business of NBFI requiring holding of CoR under Section 45-IA of the RBI Act, 1934. The first such certificate should relate to the financial year ending March 31, 2006.

The certificate from the Statutory Auditors in this regard can be submitted to the Regional Office of the Department of Non-Banking Supervision under whose jurisdiction the NBFC is registered, latest by June 30, every year with reference to the position of the company as on March 31 of that year.

Post NBFC Registration Benefits:

If companies that are required to be registered with the Reserve Bank as NBFCs, are found to be conducting non-banking financial activity, such as, lending, investment or deposit acceptance as their principal business, without seeking registration, the Reserve Bank can impose penalty or fine on them or can even prosecute them in a court of law. A Registered NBFC helps in gaining the confidence of borrowers, gives the security of capital invested in the business.

If members of public come across any entity which does non-banking financial activity but does not figure in the list of authorized NBFC on RBI website, they should inform the nearest Regional Office of the Reserve Bank, for appropriate action to be taken for contravention of the provisions of the RBI Act, 1934.

Guidelines in the interest of the depositors at the times of investment:

Some  of  the  important  regulations  relating  to  acceptance  of  deposits  by  NBFCs  are  as  under:
  • The NBFCs are allowed to accept/renew public deposits for a minimum period of 12 months and maximum period of 60 months. They cannot accept deposits repayable on demand.
  • NBFCs cannot offer interest rates higher than the ceiling rate prescribed by RBI from time to time. The present ceiling is 12.5 per cent per annum. The interest may be paid or compounded at rests not shorter than monthly rests.
  • NBFCs cannot offer gifts/incentives or any other additional benefit to the depositors.
  • NBFCs (except certain AFCs) should have minimum investment grade credit rating.
  • The deposits with NBFCs are not insured.
  • The repayment of deposits by NBFCs is not guaranteed by RBI.
  • There are certain mandatory disclosures about the company in the Application Form issued by the company soliciting deposits.

Role of Company Law Board in protecting the interest of depositors:

Where  a  non-banking  financial  company  fails  to  repay  any  deposit  or  part  thereof  in  accordance with the terms and conditions of such deposit, the Company Law Board (CLB) either on  its  own  motion  or  on  an  application  from  the  depositor  directs,  by  order,  the  non-banking financial company to make repayment of such deposit or part thereof forthwith or within such time and subject to such conditions as may be specified in the order. A depositor can approach CLB by mailing an application in prescribed form to the appropriate bench of the Company Law Board according to its territorial jurisdiction with the prescribed fee.

What does RBI do to protect the interest of NBFC depositors?

RBI has issued detailed regulations on deposit acceptance, including the quantum of deposits that can be collected, mandatory credit rating, mandatory maintenance of liquid assets for repayment to depositors, manner of maintenance of its deposit books, prudential regulations including maintenance of adequate capital, limitations on exposures, and inspection of the NBFCs, besides others, to ensure that the NBFCs function on sound lines. If the Bank observes through its inspection or audit of any NBFC or through complaints or through market intelligence, that a certain NBFC is not complying with RBI directions, it may prohibit the NBFC from accepting further deposits and prohibit it from selling its assets. In addition, if the depositor has complained to the Company Law Board (CLB) which has ordered repayment and the NBFC has not complied with the CLB order, RBI can initiate prosecution of the NBFC, including criminal action and winding up of the company.

More importantly, RBI initiates prompt action, including imposing penalties and taking legal action against companies which are found to be violating RBI's instructions/norms on basis of Market Intelligence reports, complaints, exception reports from statutory auditors of the companies, information received through SLCC meetings, etc. The Reserve Bank immediately shares such information with all the financial sector regulators and enforcement agencies in the State Level Coordination Committee Meetings.

As a premier public policy institution, as part of its public policy measure, the Reserve Bank of India has been in the forefront in taking several initiatives to create awareness among the general public on the need to be careful while investing their hard earned money. The initiatives include issue of cautionary notices in print media and distribution of informative and educative brochures/pamphlets and close interaction with the public during awareness/outreach programs, Town hall events, participation in State Government sponsored trade fairs and exhibitions. At times, it even requests newspapers with large circulation (English and vernacular) to desist from accepting advertisements from unincorporated entities seeking deposits

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