CMA(Dr.

)RAJKUMAR ADUKIA’S LAWS APPLICABLE TO NON BANKING

FINANCIAL COMPANIES IN INDIA

CMA(Dr.) RAJKUMAR ADUKIA

Author of 300 plus books,
WINNER OF NATIONAL BOOK HONOUR AWARD 2018
B.Com. (Hons.), FCMA, LLB, FCA, FCS, MBA,
Dip IFRS (UK), DLL&LW, DIPR, Dip in Criminology, PhD
Mobile: 9820061049
Email-Id:cmadrrajkumaradukia@gmail.com
INTRODUCTION

“The need to borrow” was the twin sister of the need to have money. Since money was used as
means of exchange, whenever there was insufficiency of own money people turned to their
family and friends. As the complexity of the needs of human beings changed and the trade
became more complex the need to borrow has also changed. From simple loan from family and
friends this borrowing was institutionalized and started being termed as loan. But the basic
principle remained same. Whenever there was shortage of money for any economic activity
(either consumption for personal use or for creation of business)it had to be borrowed.
As the need for money increased, soon the limitation on the resources that could be borrowed
from one person was felt. So now people started pooling their resources and started lending to
the members who were a part of this group. What constituted as small group of few family and
friends began to expand into their localities so that more money was available in case one needed
it. Slowly the number of members increased and so did the complexity of repayment.
This brought in the need to control the receiving of money (is deposits) and lending of
money(loans)and their repayment. This entire cycle can be translated as the birth story of Non-
banking Financial Institutions. The people whose monetary needs could not be met by
Traditional banks took the form of NBFI.
The NBFIs in India can be traced back to 1930,s where a small trader made loans to the locals in
south India to meet their personal needs. He would often charge for the loan given and expect the
loan to be returned after the agreed period. Slowly the lending model started gaining popularity
and became parallel to banks. With its stricter norms the lower strata of people began to shy
away from banks. They turned to local institutions to meet their credit requirements. These
institutions formed themselves into companies and got registered themselves under companies
Act 1956(Now Companies Act, 2013).These companies were governed by Companies Act until
January 1997 after which they were governed by RBI.
After independence RBI continued to deal with the challenges that were thrown by young and
independent India who had to be directed in the direction of being economic independent from
the British Raj .During this period the central Bank of our country underwent several changes. In
1960’s the NBFIs began to invite fixed deposit from investors and work out leasing deal for big
industrial firms. Initially, they operated on a limited scale and could not make a significant
impact on the financial system.

But due to their unique and complex nature of operations and also financial companies acting as
financial intermediaries, there was a need for separate regulatory mechanism to regulate the
business of these financial institutions which were now being called as NBFCs.
Accordingly Chapter III B was included in the Reserve Bank of India Act, 1934, assigning
authorities to the Bank to regulate deposit taking companies. The RBI has since initiated
measures to bring the NBFC sector within the realm of its regulation.
• The RBI accepted and implemented the key recommendations of James S. Raj Study
Group formed in 1975 that financial companies be allowed to gearing often times. As per the
salient features of the Directions, the hire purchase and leasing companies could accept deposits
to the extent of their net owned funds. The Directions also required the Companies to maintain
liquid assets in the form of unencumbered approved government securities.
• Between 1980’s and 1990’s, NBFCs gained good ground and started to attract a huge
number of investors owing to their customer friendly reputation. Since the days of Liberalization,
Privatization and Globalization (LPG, started in 1991), there has been a mushrooming growth of
NBFCs; the number of NBFCs grew from a mere 7000 in 1981 to around 30000 in 1992. This is
when the RBI felt that it was becoming increasingly onerous for it to regulate the industry. In
1992, the RBI formed a Committee headed by A. C. Shah, former Chairman of the Bank of
Baroda, to suggest measures for the effective regulation of the industry. The Shah Committee
gave its recommendations, which ranged from compulsory registration to prudential norms.
• January 1997 witnessed drastic changes in the RBI Act, 1934, especially the Chapters III-
B, III-C, and V of the Act with the fundamental objective of putting in place a complete
regulatory and supervisory structure, aimed at protecting the interests of depositors as well as
ensuring the robust functioning of NBFCs.
• In the period following the amendment of the Act in 1997, the NBFCs have evolved
substantially in terms of operations, variety of market products and instruments, technological
sophistication etc.
• In the last 20 years, the NBFCs have gained much significance by adding depth to the
overall financial sector. In light of the growing significance of NBFCs as a key player in
broadening the financial base of India, it generates paramount academic and research interests to
delve deep into its onset, growth and performance.

With the extensive use of technology and the need to innovate in financial products, Peer to Peer
(P2P) lending platforms and Alternative Credit lending are also taking shape in India. These
platforms care to the credit needs of first time borrower who have no credit history, making them
unapproachable to banks. Alternative lenders take Alternate Credit score while assessing the
credibility of the borrower. The Alternate credit score uses data points like travel size,
ecommerce shopping, payment of telecom and internet bills and other spending to understand the
consumer behavior and consistency in terms of repayment. Alternate credit lender employees
deep learning and Artificial intelligence to analyze the digital footprint left by the use of mobile,
social media to find a recurring patterns that will indicate an individual’s willingness and ability
to pay.
According to a recent Price Waterhouse Coopers report, more than 225 alternative lending
companies have been founded in India in 2017. The investors are also so bullish about the
alternative lending industry in India that it is the second most funded and one of the fastest
growing segments in the Indian Fintech space.RBI has already brought P2P lending under its per
view by making their registration compulsory and has issued directions to regulate this new form
of lending.

ORIGIN AND GROWTH OF NBFC IN INDIA AND THE SYSTEM OF SHADOW

BANKING

Traditional Banking System has been predominant in conducting business of the lending and
collecting deposits from public at large. However, these institutions do not possess infinite
capital, and are therefore there is a limit to the amount of loans they can disburse to the
consumers. Moreover, they are generally large and geographically spread over; they fail to
recognize local factors that affect the lending and deposit needs of local people. Besides
traditional banks involves lot of formalities specially before disbursing loans. These limitations
of traditional banks are where the shadow banking system came into play. The term ‘shadow
bank’ was coined by economist Paul McCulley in a 2007 speech at the annual financial
symposium hosted by the Kansas City Federal Reserve Bank in Jackson Hole, Wyoming.
Shadow banking is a broad term that can mean different things. It is often thought to comprise
private credit intermediation occurring outside the formal banking system. It is a response to the
unmet needs and preferences of willing borrower and lenders. By giving issuers new outlets for
raising capital when bank lending is unavailable, and providing lenders more avenues for
portfolio diversification—shadow banking might yield greater efficiencies and risk sharing
capacity.

Shadow Banking is found in all economies across the world, be it in developed countries or
developing countries, or countries with mature financial markets or those without. Though it is
universal, shadow banking takes on different forms in different economies. In advanced
economies, shadow banking institutions perform the function of risk transformation through
securitization. In less developed economies, where the financial markets are still at a nascent
stage, the shadow banking institutions play a supplementary role to traditional banking activities.
The only commonality is that in both scenarios, these institutions operate outside the regular
banking system, meaning that they function in an environment of lesser transparency and
regulation than those institutions performing the same functions in the mainstream banking
arena.Shadow banking encompasses all the Non-Banking Financial Intermediaries including
institutions, ranging from leasing, factoring, and venture capital companies to various types of
contractual savings and institutional investors (pension funds, insurance companies, and mutual
funds). In India the term shadow banking includes Non-Banking Financial Companies, Peer to
peer lending and Alternative Credit Lending.

The growth of NBFC regulations in India

The non-banking financial companies (NBFCs) flourished in India in the decade of the 1980s
against the backdrop of a highly regulated banking sector. NBFCs have been engines of growth
and are integral part of the Indian financial system. They have substantially enhanced
competition and diversification in the financial sector, spreading risks particularly at times of
financial distress and have been accepted as of banking system at competitive prices. The
Banking sector has always been highly regulated, whereas non banking sector was completely
unregulated till introduction of chapter III B (by Act 55 of 1963) w.e.f. 1st February, 1964.
Therefore, simplified sanction procedures, flexibility and timeliness in meeting the credit needs
and low cost operations resulted in the NBFCs getting an edge over banks in providing funding.
NBFCs have been pioneering at retail asset backed lending, lending against securities,
microfinance etc. However, in many cases mismanagement/ lack of efficient management
resulted in problems arising out of adverse portfolio selection, un-prudent operations, inability to
manage risk both on asset and liability side. In many cases due to non availability of adequate
credit from the banking sector NBFCs had to rely excessively on unsecured public deposits for
their existence / survival by paying higher rate of interest. To service such high cost deposits,
some NBFCs were forced to deploy their funds which carried high return coupled with high risk.
This ultimately resulted in higher risks for their depositors, which in some cases had culminated
in the crisis of confidence and credibility.

Under this scenario, it was felt necessary to initiate immediate action for the protection of
depositors’ interest. RBI issued the Non Banking Companies (Reserve Bank) Directions, 1977,
guidelines on prudential norms and various other Directions and clarifications, from time to time
for governing the activities of NBFCs. Central Government, during 1974, introduced 58A in the
Companies Act, 1956 which empowered Central Government to regulate acceptance and renewal
of deposits and to frame rules in consultation with Reserve Bank of India (RBI) prescribing (a)
the limit up to, (b) the manner and (c) the conditions subject to which deposits may be invited or
accepted / renewed by companies. The Central Government in consultation with RBI framed
Companies (Acceptance of Deposits) Rules, 1975.

In keeping with the spirit of financial sector liberalization, efforts were made to integrate NBFCs
into the mainstream of overall financial sector. The first phase of this process was initiated on the
basis of the recommendations of the Shah Committee. Measures relating to registration and
prudential norms based on Shah Committee’s recommendation could not, however, be given
statutory backing because the RBI Act 1934 did not confer the RBI with necessary powers in this
regard. An ordinance was therefore promulgated by the Government in January 1997 effecting
comprehensive changes in the provision of the RBI Act, 1934 which was later replaced by the
Reserve Bank of India (Amendment) Act, 1997. The Act conferred wide ranging powers on the
RBI for registration, regulation/supervision, issue of guidelines and even winding-up of these
companies. Under the amendment, compulsory registration, a minimum net owned fund (NOF)
of Rs. 25 lakh, maintenance of certain percentage of liquid assets, creation of reserve fund, etc.
were prescribed for the NBFCs. In May, 1997, as certain malpractices pertaining to NBFCs came
to light, the RBI took prompt corrective steps and the financial sector was also resilient enough
to withstand this shock. The percentage of liquid assets to be maintained by NBFCs were revised
upward uniformly for all NBFCs to 12.5% and 15% of their ‘public deposits’ with effect from
1.4.1998 and 1.4.1999 respectively.

Growth of Shadow Banking Sector Globally

As per FSB, Global Shadow Banking Monitoring Report 2016., there has been a steady
expansion in the size of the global shadow banking sector in recent years from US$ 31 trillion in
2010 to US$ 34 trillion in 2015, which were around 14 per cent of total domestic financial assets
in 2015. The size of India’s shadow banking sector stood at US$ 436 billion, accounting for 1.3
per cent of the total global shadow banking assets in 2015. Global shadow banking assets were
primarily concentrated in the advanced economies which accounted for almost three-fourth of
the global shadow banking assets. Even though the regulatory environment has become more
stringent for such entities ever since the global financial crises of 2008- 2009, less risky shadow
banking activities such as those undertaken by investment funds have expanded rapidly in recent
years. The chart below depicts Shadow banking as a per cent of total financial assets in 2015 for
some of the major economies of the world.
Source: RBI Report on Non-Banking Finance Companies in India’s Financial Landscape

Spurt in Shadow Banking Sector in India

Though, India’s share in shadow banking sector globally is only 1.3% as depicted in chart above,
India has stood out among both developed economies and emerging market and developing
economies in terms of high growth, after China and Russia which reported growth rates
exceeding 10 per cent in shadow banking assets between 2011 and 2015. Factor that has
contributed to growth most perhaps is the low interest rate in banking sector and rising demand
for credit from developers, local governments and small and medium enterprises.
At end-March 2017, there were 11,522 NBFCs registered with the Reserve Bank, of which 178
were NBFCs-D and 220 were NBFCs-ND-SI. The number of NBFCs has been declining over
time with cancellations of registrations exceeding new registrations on account of voluntary
surrender or cancellation of CoR due to noncompliance of revised criteria of net owned fund.
Despite this there has been a double-digit growth in credit extended by NBFCs from 2014- 15 as
can be evidenced from chart below that depicts Consolidated Balance Sheet of NBFCs at end of
March each year, prepared based on the consolidated balance sheet of NBFCs-D and NBFCs-
ND-SI.
Source: RBI

ACTIVITIES UNDERTAKEN BY ENTITIES IN INDIA

Chapter 1: Entities in India: Types and their Regulators

Broadly entities in India can take varied forms like sole-proprietor ship, partnership firms,
Hindu-undivided family (HUF), co-operative society, limited liability partnership (LLP), private
limited company, listed public limited company, unlisted public limited companies etc.

In India activities of unincorporated entities like individuals, HUF and partnership firms are
subjected to minimal regulations whereas incorporated entities like LLP and companies
including both public and private are regulated by Ministry of Corporate Affairs (MCA). Listed
entities have further stringent regulatory regime as their activities are also under the supervision
of Security and Exchange Board of India (SEBI). Co-operative Societies are administered under
respective state laws and are regulated by State governments.

Activities undertaken by entities in India

Entities may further be classified as those engaged in financing activities and those engaged in
other activities (non-financing) like agriculture, manufacturing, construction, trading (other than
in financial securities), etc. Following functions may be regarded as related to financing:

(i) the financing, whether by way of making loans or advances or otherwise, of any
activity other than its own:
(ii) the acquisition of shares, stock, bonds, debentures or securities issued by a
Government or local authority or other marketable securities of a like nature:
(iii) letting or delivering of any goods to a hirer under a hire-purchase agreement as
defined in clause (c) of section 2 of the Hire-Purchase Act, 1972 (this act was never
enforced and has been later repealed);
(iv) the carrying on of any class of insurance business;
(v) managing, conducting or supervising, as foreman, agent or in any other capacity, of
chits or kuries as defined in any law which is for the time being in force in any State,
or any business, which is similar thereto;
(vi) collecting, for any purpose or under any scheme or arrangement by whatever name
called, monies in lumpsum or otherwise, by way of subscriptions or by sale of units,
or other instruments or in any other manner and awarding prizes or gifts, whether in
cash or kind, or disbursing monies in any other way, to persons from whom monies
are collected or to any other person,

Entities that are engaged in financing activities can be broadly two types i.e. banking and non-
banking. Where bank is a government authorized financial intermediary that aims at providing
banking services to the general public, a non- banking financial institutions (NBFI) is a company
that provides banking services to people without holding a bank license. Banks works under
direct supervision of Reserve Bank of India. Most Non-Banking Financial Institutions are also
regulated by RBI. Though there are certain exemptions to this. The Reserve Bank regulates and
supervises three categories of NBFIs, viz. All-India financial institutions (AIFIs), primary
dealers (PDs) and NBFCs as depicted in chart below:
NBFCs registered under other Regulators

There are certain class of NBFCs primarily regulated by other regulators are exempted from the
requirement of registration under Section 45-IA of the RBI Act, 1934. The regulator and kind of
NBFIs they deal with are as follows:

1. Securities and Exchange Board of India

• Venture Capital Fund regulated by SEBI (Venture Capital Funds) Regulations,1996
• Merchant Banking regulated by SEBI (Merchant Banking) Regulations, 1992
• Stock Brokers and Stock Exchanges regulated under
the Securities and Exchange Board of India. (Stock Brokers and Sub-brokers)
Regulations, 1992 and Securities Contracts (Regulations) (Stock Exchanges and
Clearing Corporations) Regulations, 2012.
2. Ministry of Corporate Affairs
• Nidhi Companies: Section 406 of Companies Act, 2013 and Companies (Nidhi
Companies) Rules, 2014.
3. National Housing Bank
• Housing Finance Companies registered under The National Housing Bank Act, 1987
4. Insurance Regulatory and Development Authority of India: Insurance Companies are
registered under Insurance Act, 1938
5. State Government: Chit Fund Companies, Money Lenders, C-operative societies acting as
financial intermediaries, MFIs formed as Trusts or Society.

Besides there are certain types of non-banking financial institutions like All-India financial
institutions (AIFIs), Primary Dealers, Asset Reconstruction Companies, which are though
completely regulated by RBI but are not registered under section 45-IA of the RBI Act, 1934.

Money Lending in India

The Constitution of India has conferred the power to legislate on matters relating to money
lending and moneylenders to the States under Entry 30 of list II of Seventh Schedule. Most of
them have enacted the laws. These legislations contain provisions aimed at protecting the
borrowers from malpractices of the moneylenders. Some States have enacted separate
legislations governing the business of pawn-broking, while others have incorporated separate
provisions for pawnbrokers within the money lending legislation itself.

The salient features of these laws are:

• Requirement of registration/license for carrying on the business of money lending within

a State/a portion of the State;
• Duties of the moneylenders with respect to maintaining and providing statement of
accounts to the debtors;
• Penalties for carrying on business without license and for intimidating the debtors or
interfering with their day-to-day activities, including the cognizability of such offences;
• Maximum rates of interest that can be charged;
• Matters that the Courts are required/empowered to decide in suits filed by moneylenders;
• Applicability to companies engaged in the money lending business. However, some
States in exercise of their general exemption powers, have granted exemptions to
companies from the applicability of the legislations.
• Exemption to loans from a trader to another trader, loans by banks, co-operative societies,
financial institutions, etc.
Any form of entity can enter into business of money lending but it is essential to get
licensed/registered under the respective state legislation. The Apex courts has in Kaloji
Talusappa Gangavathi vs. Khyanagouda and Ors (AIR1970SC1420), observed that in order to
curb malpractices of the money lender and protect unwary debtors, it is necessary for the
Legislature to impose such stringent restrictions by requiring such person to obtain a license,
maintain and furnish accounts and carry out other obligations. Time and again the courts have
dismissed recovery suit filed by unregistered money lenders holding money lending contract and
transaction void in absence of money lending license.

Acceptance of Public Deposit

Chapter IIIC of the RBI Act, 1934 deals with the prohibition of acceptance of public deposit by
certain unincorporated entities. As per Section 45S of the RBI Act, 1934 any individuals, firms
or unincorporated association of individuals cannot accept any deposit if involved in financial
activities as referred to in Section 45I(c). Even in case where the individual/firm/unincorporated
association of individuals are not engaged in financial activities, they cannot be in principal
business of receiving deposits. Restriction is also imposed on issuing any advertisement to solicit
any public deposit.
However, the above restriction does not apply to an individual accepting by way of loan from
any of his relatives or to the receipt of money by a firm by way of loan from the relative or
relatives of any of the partners. For these a person shall be deemed to be a relative of another if,
and only if, –
(i) they are members of a Hindu undivided family; or
(ii) they are husband and wife; or
(iii) the one is related to the other in any of the following manner
• Father, Mother (including step-mother),
• Son (including stepson), Son’s wife, Daughter (including step-daughter),
• Father’s father, Father’s mother, Mother’s mother, Mother’s father,
• Son’s son, Son’s son’s wife, Son’s daughter, Son’s daughter’s husband,
• Daughter’s husband, Daughter’s son, Daughter’s son’s wife, Daughter’s daughter,
Daughter’s daughter’s husband,
 • Brother (including stepbrother), Brother’s wife, Sister (including stepsister), Sister’s
husband.
Acceptance of Deposits by Companies other than NBFCs, HFCs and certain specified
companies

As per Section 73 to 76 of the Companies Act, 2013 read with Companies (Acceptance of
Deposit) Rules, 2014, also governs the law relating to acceptance of deposit by Companies other
than NBFCs, NHBs, etc.

The Company may "accept" deposit from its members on such terms and conditions including
security and interest as may be agreed upon between the company and its members provided it
fulfils following requirement:

• Issue a circular giving all the relevant details like for e.g. Financial Position, Credit
rating, total depositor.
• Filing the copy of the circular with registrar within 30 days before date of issue of
circular.
• Deposit 20% of the amount of deposits maturing during the following financial year
• Certify that the company has not committed any default in repayment of deposit accepted
before or after the commencement of act and such deposit where default has occurred, the
company made good the default and period of five years has lapsed.
• Providing security including creation of charge on property.

However, the above conditions are not applicable to a Private Companies if

• Accepts monies from members not exceeding 100% of aggregate of Paid-up share
capital, free reserves and Securities Premium Account, or
• Is a ‘start-up’, for five years from date of its incorporation; OR
• Which fulfils the following:

a. which is not an associate or a subsidiary company of any other company;

 b. if the borrowings of such a company from banks or financial institutions or any body
corporate is less than twice of its paid-up share capital or fifty crore rupees,
whichever is lower; and
c. such a company has not defaulted in the repayment of such borrowings subsisting at
the time of accepting deposits under this section

A private company may also borrow from its directors, provided such loans are provided from
his owned fund and not from borrowed money. Company cannot accept loan from relatives of
the director as per Companies Act, 2013. But as per ‘The Companies (Acceptance of Deposit)
second amendment Rules, 2015’ dated 15th September, 2015 G.S.R. 695(E) Private Limited
Company can accept loan from the relative of the Director, if relative furnish to the company at
the time of giving the money, a declaration in writing to the effect that the amount is not being
given out of funds acquired by him by borrowing or accepting loans or deposits from others.

Besides, International Financial Services Centre (IFSC) public companies are also allowed to
accept deposits from its members not exceeding 100% of the aggregate of paid-up share capital,
free reserves and securities premium account.

Acceptance of Deposit from Public by Certain Public Companies

Under Section 76 of the Companies Act, 2013, a public company, having net worth of Rupees
100 crores or more or turnover of rupees 500 crores or more may accept deposits from persons
other than its members on fulfilling certain conditions like:

• Prior consent of the company in General meeting by special resolution;

• Filing a copy of Resolution before registrar before making invitation;
• such company need to obtain rating from recognized credit rating agency at the time of
inviting the deposit and the rating shall be obtained every year during the tenure of
deposit"
• Such company shall create a charge on its assets within 30 days from acceptance to the
extent of amount of deposit accepted"
REGULATORY FRAMEWORK AND SUPERVISION OF NBFCs

Two departments of RBI namely Department of Non-Banking Regulation (DNBR) and

Department of Non-Banking Supervision (DNBS) work simultaneously to regulate and supervise
NBFCs in India. Department of Non-Banking Regulation (DNBR) works towards promoting and
fostering a robust and sound non-banking financial sector by laying down appropriate regulations
including prudential regulations and business conduct regulations for Non-Banking Financial
Companies whereas the Department of Non-Banking Supervision (DNBS) is entrusted with the
responsibility of supervision of Non-Banking Financial Companies (NBFCs) under the
regulatory - provisions contained under Chapter III B and C and Chapter V of the Reserve Bank
of India Act, 1934.

The function of DNBR is to

a. To frame policies for regulation and supervision of NBFCs (including (MGCs) and SC/RCs,
b. Issuance and cancellation, if required, of Certificate of Registration (CoR) to NBFCs
(including (MGCs) and SC/RCs),
c. Consultation and co-ordination with other departments of the Reserve Bank, other finance
sector regulators, industry and various other stakeholders including Centre and State
Governments in policy and other related matters,
d. Administration of the provisions of the Reserve Bank of India Act, 1934 relating to NBFCs,
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002,
e. Advising State Governments, as and when required, on rules to be notified under Chit Funds
Act, 1982, the Prize Chit and Money Circulation Schemes (Banning) Act, 1978 and on issues
related to the functions discharged by DNBR.

On the other hand, DNBS’s main focus is on a) depositor protection, b) consumer protection and
c) financial stability. The supervisory framework of the Reserve Bank provides for surveillance
of the sector through off-site monitoring and on-site inspection. Main functions of DNBS
involves:
 a. To ensure compliance with the provisions of the Reserve Bank of India Act, 1934 relating to
NBFCs, Securitisation and Reconstruction of Financial Assets and Enforcement of Security
Interest Act, 2002 and Factoring Regulation Act, 2011.
b. To supervise regulated entities through on-site inspections and off-site monitoring.
c. To ensure adherence by NBFCs to the policies laid down by the Department of Non-Banking
Regulation (DNBR) with the help of the respective Regional Offices (ROs).
d. To act as a secretariat to the State Level Coordination Committee (SLCC) and to ensure
better inter regulatory co-ordination through the SLCC mechanism to curb unauthorised non-
banking financial activities.
e. To conduct public awareness programmes, depositors' education and to conduct workshops /
seminars for trade and industry organisations.

The Reserve Bank has also been empowered under the RBI Act, 1934 to take punitive action
which includes cancellation of Certificate of Registration, issue of prohibitory orders from
accepting deposits, filing criminal cases or winding up petitions under provisions of Companies
Act in extreme cases.

Mission

• Maintaining the continued viability of NBFCs by ensuring that they function on healthy lines
• Developing an appropriate prudential framework for the NBFC Sector
• Affording indirect protection to their depositors by comprehensive regulation of deposit taking
NBFCs
• Curbing un-authorized and fraudulent deposit acceptance by NBFCs
• Containment of systemic risk by comprehensive regulation of systemically important non-
deposit taking NBFCs
• Ensuring protection to consumers of NBFC services by laying down of Fair Practices Code

Vision

• To have a strong, robust and vibrant NBFC sector, complementing the banking sector
 Developmental activities of the Department

• Co-ordination with State Governments to pass State Legislations to curb unauthorized and
fraudulent activities
• Conducting public awareness programmers, depositors' education, conducting workshops /
seminars for trade and industry organizations
• Promoting Self-Regulatory Organization (SRO) for NBFC-MFI
• Conducting training programmers for personnel of NBFCs, State Governments, State Police and
auditors of NBFCs
• Interacting with co-regulators viz., SEBI, IRDA, and Government of India and State
Governments for greater coordination on related issues.

The current focus of the Department is to

• Identify and review regulatory framework to bridge gaps and align regulations with other
financial intermediaries, wherever appropriate;
• Identify and monitor areas of systemic risks and unregulated shadow banking activities from the
financial stability perspective;
• Supervise the regulated entities through Off-Site Reporting, On-Site Inspections and Market
Intelligence;
• Coordinate with other financial sector regulators and enforcement agencies to check
unauthorized financial activities;
• Conduct public awareness campaigns on Non-Banking Financial Companies and unauthorized
acceptance of deposits through press advertisements, participation in fairs / workshops/seminars;
• Streamline the sector to ensure that only serious players occupy the NBFC space
• Enhance disclosure and transparency in the sector

The services provided along with the prescribed time – limits by the Department and the
timelines for approvals are as under:

Sr. No Description of Regulatory Approval Time required

Department of Non-Banking Regulation
Non-Banking Finance Companies(NBFCs)
2. Issue of Certificate of Registration 45 days
(other than Securitization and Reconstruction Companies)
3. NOC to sponsor Infrastructure Debt Fund by NBFC 30 days
4. Change of control/ownership/management of an NBFC 30 days
5. Conversion of existing NBFCs to other categories such as 30 days
Core Investment Companies-Non Deposit taking-
Systemically Important (CIC-ND-SI) , NBFC-Micro
Finance Institutions (NBFC-MFIs), NBFC-Infrastructure
Finance Companies (IFCs) and NBFC-Factors
6 Change in shareholding pattern 45 days
7 Declaration of dividend– (In case there are special reasons 45 days
or difficulties for any PD in strictly adhering to the
guidelines relating to Dividend, it may approach RBI in
advance for an appropriate ad hoc dispensation in this
regard)

Sr. No Description of Regulatory Approval Time required

Department of Non-Banking Supervision

Non-Banking Finance Companies(NBFCs)
1. Change of name 30 days
2. Shifting of company’s Registered Office and request for 30 days
issue of fresh Certificate of Registration
3 Issue of NOC for setting up of subsidiary/ Wholly Owned 30 days
Subsidiary overseas
4 Approval for exemption from the exposure norms in cases 30 days
where public funds are not accepted
5 Permission to invest in insurance companies 30 days
 6 Permission to convert NBFC from Category A (Accepting 30 days
Deposits) to Category B (Non-Deposit Accepting)
7 Opening of branches (> 1000 in number) by NBFCs 30 days
primarily into lending against gold jewellery
8. Opening of branches by NBFCs-Deposit taking 30 days
9. Issue of co-branded credit cards and pre-paid payment 30 days
instruments
10. Distribution of mutual fund products 30 days

Regional Offices

The DNBS has 16 Regional Offices all over India having jurisdiction over the NBFCs registered
with the Registrar of Companies of their respective states. The Central Office of DNBS is
situated in Mumbai. Any communication to the Central Office can be addressed to

Reserve Bank of India

Department of Non-Banking Supervision
Central Office
World Trade Centre, Centre 1, 2nd Floor
Cuffe Parade, Colaba
Mumbai- 400005

• Phone : 022- 2215 3350

• Fax 022- 2216 2768

Application Tracking System

An Application Tracking System (ATS) has been developed for members of the public to submit
any individual application to RBI and keep track of the status of its disposal thereafter.
Applicant/ complainant can access the ATS, which is hosted on the public website of the Reserve
Bank of India (RBI), www.rbi.org.in under the link ‘Application Tracking System’. Further, the
COSMOS Application also provides a tracking mechanism for the purpose of tracking the
Application for Certificate of Registration.
Complaint Redressal

The Department attaches utmost importance to complaints/grievances of customer of NBFCs.

Citizens may lodge their complaints/grievances, including complaints pertaining to non-
repayment of deposits with the Department of Non-Banking Supervision, in the nearest Regional
Office of the Reserve Bank. Depositors can also approach Company Law Board (CLB), or the
State Police under the Protection of Interest of Depositor’s Act, if passed by the concerned State
Governments or file a complaint with the Consumer Forum or file a civil suit in a Court of law to
recover the deposits. The Company Law Board has been authorized under the RBI Act 1934 to
adjudicate the claims of depositors with specific powers to direct the defaulting companies to
make repayments

For quick redressal of grievances, the customers may forward their grievances to the respective
regulator. An illustrative list of activities and the concerned regulators is available in Annex I in
the FAQs available at www.rbi.org.in→ FAQs → NBFCs → All You Wanted to Know About
NBFCs.

Regulations Applicable to NBFCs

CHAPTER IIIB, III-C and V of Reserve Bank of India (RBI) Act 1934, RBI Directions and RBI
Circulars; Notifications and Guidelines issued from time to time regulate NBFCs

A. To all NBFCs

• Reserve Bank of India Act, 1934

• Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank)
Directions, 1998
• Miscellaneous Non-Banking Companies (Reserve Bank) Directions, 1977
• Non-Banking Financial Companies – Corporate Governance (Reserve Bank) Directions,
2015
• Miscellaneous Instructions to all Non-Banking Financial Companies
• Non-Banking Financial Companies Auditor’s Report (Reserve Bank) Directions, 2008
• Fair Practice Code
 • Know Your Customer' (KYC) Guidelines – Anti Money Laundering Standards (AML) -
'Prevention of Money Laundering Act, 2002 - Obligations of NBFCs in terms of Rules
notified thereunder
• Returns to be submitted by NBFCs
• Raising Money through Private Placement by NBFCs – Non-Convertible Debentures etc.
• Rounding off transactions to the Nearest Rupee by NBFCs
• Early Recognition of Financial Distress, Prompt Steps for Resolution and Fair Recovery
for Lenders: Framework for Revitalizing Distressed Assets in the Economy
• NBFC (Approval of Acquisition or Transfer of Control) Direction, 2015.
• NBFC (Opening of Branch/Subsidiary/Joint Venture/ Representative office or
Undertaking Investment Abroad by NBFCs) Direction, 2011.
• Information Technology Framework for the NBFC Sector
• Foreign Direct Investment in NBFC/ ARC

B. Regulation Applicable to Deposit taking NBFCs (NBFC-D)

• Non-Banking Financial (Deposit Accepting or Holding) Companies Prudential Norms

(Reserve Bank) Directions, 2007
• Frauds –Future approach towards monitoring of frauds in NBFCs

C. Regulations applicable to Non Deposit Systematically Important NBFCs (NBFC- ND-SI)

• Systemically Important Non-Banking Financial (Non-Deposit Accepting or Holding)

Companies Prudential Norms (Reserve Bank) Directions, 2015
• Frauds –Future approach towards monitoring of frauds in NBFCs
• Miscellaneous Instructions to NBFC- ND-SI

D. Regulations applicable to Non Deposit Non- Systematically Important NBFCs (NBFC-ND-

NSI)

• Non-Systemically Important Non-Banking Financial (Non-Deposit Accepting or

Holding) Companies Prudential Norms (Reserve Bank) Directions, 2015

E. Specific Regulations
 • Core Investment Companies (Reserve Bank) Directions, 2016
• NBFC- Account Aggregator (Reserve Bank) Direction, 2016
• NBFC-Peer to Peer Lending Platform(Reserve Bank) Direction, 2017
• Residuary Non-Banking Companies (Reserve Bank) Direction, 2016
• Mortgage Guarantee Companies (Reserve Bank) Direction, 2016
• Non-Banking Financial Company-Micro Finance Institutions’ (NBFC-MFIs) –
Directions, 2011

State Laws on protection of interests of depositors in financial establishments

Some State Laws -

a. Tamil Nadu Protection of Interest of Depositor's (Financial Establishments) Act 1997
b. Maharashtra Protection of Interests of Depositors (In Financial Establishments) Act 1999
c. The Delhi Protection of Interests of Depositors (In Financial Establishments) Act, 2001
d. Bihar Protection of Interests of Depositors (In Financial Establishments) Act 2002
e. Gujarat Protection of Interests of Depositors (In Financial Establishments) Act 2003
f. The Madhya Pradesh protection of Depositor’s Interest Act 2000

The Companies Act 2013

Some applicable sections include:

Section 3 : Definitions of “Company”; “existing company”; “private company”; and “public

company”
Section 4: Meaning of “holding company” and “subsidiary”
Section 4A: Public Financial Institutions
Section 43A: Private Company to become public company in certain cases
Section 58A: Deposits not to be invited without issuing an advertisement
Section 58AA: Small Depositors
Section 58AAA: Default in acceptance or refund of deposits to be cognizable
Section 209(1): Books of Accounts to be kept by company
Section 217(1) : Director’s Report
Section 227: Powers and Duties of Auditors
Section 252: Minimum Number of Directors
Section 292A: Audit Committee
Section 370(1B): Loans etc. to companies under the same management
Section 372 (11) : Purchase by company of shares etc. of other companies
Section 620A: Power to modify Act in its application to Nidhis etc.
Section 637A: Power of Central Government or Tribunal to accord approval etc. subject to
conditions and to prescribe fees on applications
Company’s Rules

i. Companies (Acceptance of Deposit) Rules, 1975

ii. Companies (Acceptance of Deposits Amendment) Rules, 1997
iii. Companies (Application for Extension of time or Exemption under sub-section (8) of
section 58A) Rules, 1979

Foreign Exchange Regulations

i. Foreign Exchange Management (Deposit) Regulations 2000

ii. Foreign Exchange Management (Transfer or issue of Security by a Person Resident
outside India) Regulations, 2000

REGULATION OF NBFC BY RESERVE BANK OF INDIA THROUGH THE RESERVE

BANK OF INDIA ACT 1934

Chapter IIIB of the RBI Act, 1934

Provisions Relating to Non-Banking Institutions Receiving DepositsandFinancial Institutions

The Chapter IIIB of the RBI Act, 1934 was inserted by the Banking Laws (Miscellaneous
Provisions) Act, 1963 (Act 55 of 1963, s.5), w.e.f. 1st February, 1964. It presently consists of 20
Sections (45H to 45QB, Section 45O &45P being deleted), which are as follows:

1. 45H. Chapter IIIB not to apply in certain cases.

2. 45I. Definitions.
3. 45-IA. Requirement of registration and net owned fund.
4. 45-IB. Maintenance of percentage of assets.
5. 45-IC. Reserve fund.
6. 45J. Bank to regulate or prohibit issue of prospectus or advertisement soliciting
deposits of money.
7. 45JA. Power of Bank to determine policy and issue directions.
8. 45K. Power of Bank to collect information from non-banking institutions as to
deposits and to give directions.
9. 45L. Power of Bank to call for information from financial institutions and to give
directions.
 10. 45M. Duty of non-banking institutions to furnish statements, etc., required by Bank.
11. 45MA. Powers and duties of auditors.
12. 45MB. Power of Bank to prohibit acceptance of deposit and alienation of assets.
13. 45MC. Power of Bank to file winding up petition.
14. 45N. Inspection.
15. 45NA. Deposits not to be solicited by unauthorised person.
16. 45NB. Disclosure of information.
17. 45NC. Power of Bank to exempt.
45O. [Penalties.]
45P. [Cognizance of offence.]
18. 45Q. Chapter IIIB to override other laws.
19. 45QA. Power of Company Law Board to offer repayment of deposit.
20. 45QB. Nomination by depositors

Section 45H deals with certain cases where Chapter IIIB does not apply. Accordingly, this
chapter does not apply to:

o the State Bank or

o a banking company
o corresponding new bank
o a subsidiary bank
o a Regional Rural Bank
o a co-operative bank
o a primary agricultural credit society
o a primary credit society

However, it will apply to Tamil Nadu Industrial Investment Corporation Limited.

Here it should be noted that the term "banking" means the accepting, for the purpose of lending
or investment, of deposits of money from the public, repayable on demand or otherwise, and
withdrawal by cheque, draft, order or otherwise. Further a "banking company" means any
company which transacts the business of banking in India.
A "corresponding new bank" means a corresponding new bank constituted under section 3 of the
Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 or under section 3 of
the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980.
Term Subsidiary Bank means Hyderabad Bank, the State Bank of Bikaner, the State Bank of
Mysore, the State Bank of Patiala, the State Bank of Travancore.

Important Terms under the Act

Section 45-I is the defining section. It contains 8 definitions. Some the important terms are
discussed below:

As per section 45-I (e), ‘‘non-banking institution’’ means a company, corporation or

cooperative society.
As per section 45-I (c), ‘‘financial institution’’ means any non-banking institution which
carries on as its business or part of its business any of the following activities, namely:–
(i) the financing, whether by way of making loans or advances or otherwise, of any
activity other than its own:
(ii) the acquisition of shares, stock, bonds, debentures or securities issued by a
Government or local authority or other marketable securities of a like nature:
(iii) letting or delivering of any goods to a hirer under a hire-purchase agreement as
defined in clause (c) of section 2 of the Hire-Purchase Act, 1972:
(iv) the carrying on of any class of insurance business;
(v) managing, conducting or supervising, as foreman, agent or in any other capacity, of
chits or kuries as defined in any law which is for the time being in force in any State,
or any business, which is similar thereto;
(vi) collecting, for any purpose or under any scheme or arrangement by whatever name
called, monies in lumpsum or otherwise, by way of subscriptions or by sale of units,
or other instruments or in any other manner and awarding prizes or gifts, whether in
cash or kind, or disbursing monies in any other way, to persons from whom monies
are collected or to any other person.
but does not include any institution, which carries on as its principal business
 • agricultural operations;
• industrial activity;
• the purchase or sale of any goods (other than securities) or the providing of any services;
• or the purchase, construction or sale of immovable property, so however, that no portion
of the income of the institution is derived from the financing of purchases, constructions
or sales of immovable property by other persons.

As per section 45-I (f) ‘‘non-banking financial company’’ [NBFC] means–

(i) a 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 institution 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.

As per section 45-I(a) ‘‘business of a non-banking financial institution’’ means carrying on of

the business of a financial institution referred to in clause (c) [i.e. financial institution] and
includes business of a non-banking financial company referred to in clause (f) [i.e. NBFC]

As per section 45-I(bb) term ‘‘deposit’’ includes and shall be deemed always to have included
any receipt of money by way of deposit or loan or in any other form, but does notinclude, –
(i) amounts raised by way of share capital;
(ii) amounts contributed as capital by partners of a firm;
(iii) amounts received from a scheduled bank or a co-operative bank or any other banking
company;
(iv) any amount received from,–
a. the development bank
b. State Financial Corporation,
c. any financial institution specified in or under section 6A of the Industrial
Development Bank of India Act, 1964 [This section 6A has been repealed],
 d. any other institution that may be specified by the Bank in this behalf. As per
notification no. DNBS.129/CGM(VSNM)-98, Dated 18/12/1998, a company, a
corporation and a registered co-operative society are specified institutions.
(v) amounts received in the ordinary course of business, by way of security deposit,
dealership deposit, earnest money, advance against orders for goods, properties or
services.
(vi) From registered money lender in State
(vii) As subscription to CHIT

Here (iv)(d) is important because as read with related notification it suggests that any amount
received from a company, a corporation and a registered co-operative society will not be
regarded as deposit.

Registration and net owned fund

Section 45-IA which was inserted by RBI (amendment) Act, 1997 with effect from 9th January,
1997 and contains requirement for registration with RBI (under Chapter IIIB) and fulfilling
minimum net owned fund(NOF) criteria for all NBFCs carrying the business of non banking
financial institution. .

Section restricts NBFC from carrying business of NBFI without getting Certificate of
Registration (CoR) from RBI. Further RBI can specify NOF of Rupees 25 Lakh to Rupees 2
Crores as minimum net owned fund.
“Net owned fund” =Paid-up Equity + Free Reserves - Accumulated Losses – Deferred Revenue
Exp - Intangible assets - Investment in shares of group company and other NBFCs - the book
value of debentures, bonds, outstanding loans and advances made to, and deposits with group
companies and subsidiaries
As per Notification number DNBR. 007/ CGM (CDS)- 2015 dated 27th March, 2015, has
specified Rupees 2 crores as net owned fund required for NBFC to commence or carry business
of non banking financial institution. Further, for existing NBFC having lesser NOF, notification
requires such entities to achieve the NOF of
• Rupees one hundred lakhs before 1st April, 2016; and
 • Rupees two hundred lakhs before 1st April, 2017.
Application for CoR has to be made in specified form by the company with specified
information and documents as discussed in details in chapter pertaining to registration.
Criteria for issue of CoR
As per the section 45-IA (4) a CoR can be issued if RBI is satisfied that:
o NBFC is in a position to pay its present or future depositors in full as and when their
claims accrue
o Affairs of NBFC are not being or are not likely to be conducted in a manner detrimental
to the interest of its present or future depositors
o Management not be prejudicial to the public interest or the interest of its depositors
o NBFC has adequate capital structure and earning prospects
o public interest shall be served
o shall not be prejudicial to the operation and consolidation of the financial sector
consistent with monetary stability, economic growth and considering such other relevant
factors
Cancellation of CoR
As per the section 45-IA (6) the RBI may cancel a CoR issued to an NBFC if such NBFC:
o ceases to carry on the business of NBFI in India
o has failed to comply with any condition of CoR
o fail to comply with any direction issued by the RBI
o fail to maintain accounts in accordance with the requirements of any law or
o fail to submit or offer for inspection its books of account and other relevant documents
o has been prohibited from accepting deposit by an order made by the Bank under the
provisions of this Chapter and such order has been in force for a period of not less than
three months
Appeal
A company aggrieved by the order of rejection/ cancellation of CoR may prefer an appeal, within
a period of thirty days to the Central Government. Decision of Central Government in this
respect would be final.

Maintenance of percentage of assets (liquid asset)

Section 45-IB requires NBFC must invest and continue to invest in India in unencumbered
approved securities 5% to 25% (as specified by RBI) of the deposits outstanding at the close of
business on the last working day of the second preceding quarter. The term “approved
securities” means securities of any State Government or of the Central Government and such
bonds, both the principal whereof and the interest whereon shall have been fully and
unconditionally guaranteed by any such Government. The term “unencumbered approved
securities” includes the approved securities lodged by the NBFC with another institution for an
advance or any other arrangement to the extent to which such securities have not been drawn
against or availed of or encumbered in any manner.
As per Notification Number DFC 121/ED(g)-98 Dated 31st January, 1998 as modified latest by
Notification No. DNBS (PD).205 / CGM (PK)-2009 dated February 13, 2009 , the NBFCs other
Residuary Non Banking Companies (RNBCs) are exempt from the requirement of maintaining
minimum percentage of asset in unencumbered approved securities, provided they invest and
continue to invest in India in unencumbered approved securities valued at price not exceeding
the current market price of such securities (On and from February 13, 2009) an amount which is
not less than 15% of the public deposit, at the close of business on any day. Such Non-Banking
Financial Companies shall be entitled to invest an amount equal to or in excess of ten percent of
public deposits, in unencumbered approved securities and the remaining in unencumbered term
deposits or bonds in/of any scheduled commercial bank, Small Industries Bank (SIDBI) or
National Bank for Agriculture and Rural Development (NABARD).
As per the Notification Number DFC 120/ED(g)-98, RNBCs are required to maintain 10% of the
deposits outstanding at the close of business on the last working day of the second preceding
quarter, in unencumbered approved securities.

Under section 45-IB (2) all NBFCs accepting/holding public deposits are required to submit
NBS-3 return on a quarterly basis, to prove compliance to the above requirements. As per section
45-IB (3), penalty for non-compliance, is, a penal interest at a rate of three percent per annum
above the bank rate on such shortfall. If shortfall continues, the rate of penal interest shall be five
per cent per annum above the bank rate. This penalty is to be paid within 14 days of notice from
RBI and if not paid principal civil court may issue directions in this respect. RBI may overlook
no-compliance if shortfall for sufficient explained reasons.

Transfer of Profits to Reserve fund.

As per section 45-IC NBFCs must transfer atleast 20% of net profit every year to reserve fund.
This fund should not be appropriated except for purpose specified by RBI. Any appropriation
must be reported to RBI within 21 days.
Appropriation to be reported to RBI within 21 days (extendable) of withdrawal.
Central Government on the recommendation of RBI, may exempt specific NBFC from this
requirement having regard to the adequacy of the paid-up capital and reserves in relation to
deposit held, if amount in the reserve fund together with the amount in the share premium
account is not less than the paid-up capital of the NBFC.

Issue of prospectus or advertisement soliciting deposits of money

As per section 45J, RBI may prohibit or issue conditions for Issue of prospectus or advertisement
soliciting deposits by any non banking institution.

Power of Bank to determine policy and issue directions

As per the section 45JA, the RBI may issue directions to all or any NBFC on
o income recognition,
o accounting standards,
o making of proper provision for bad and doubtful debts,
o capital adequacy based on risk weights for assets and credit conversion factors for off-
balance-sheet items and
o deployment of funds
RBI may also issue specific directions to a particular NBFC/ or class thereof/ or all NBFCs
regarding the following:
 o the purpose for which advances or other fund based or non-fund based accommodation
may not be made
o the maximum amount of advances or other financial accommodation or investment in
shares and other securities may be made by NBFC to any person or a company or to a
group of companies.

Power of Bank to collect information from non-banking institutions as to deposits and to give
directions

As per section 45K, RBI may at any time direct that every non-banking institution shall furnish
to the Bank, in such form, at such intervals and within such time, such statements, information or
particulars relating to or connected with deposits received , which may relate to all or any of the
following matters, namely, the amount of the deposits, the purposes and periods for which, and
the rates of interest and other terms and conditions on which, they are received. The RBI may
give direction regarding receipt of deposits, including the rates of interest payable on such
deposits, and the periods for which deposits may be received. If non banking institution fails to
comply with direction of the RBI, it may prohibit the acceptance of deposits by such non
banking institution. RBI may also direct every non-banking institution receiving public deposits,
to send its annual accounts at its own cost to depositor of and above certain value.
As per the section 45M, it shall be the duty of every non-banking institution to furnish the
statements, information or particulars called for, and to comply with any direction given to it.

Power of Bank to call for information from financial institutions and to give directions

Section 45L empowers RBI to issue direction or require financial institutions either generally or
any group of financial institutions or financial institution in particular, to furnish information
relating to:
o the paid-up capital,
o reserves or other liabilities,
o the investments whether in Government securities or otherwise,
o the persons to whom, and the purposes and periods for which, finance is provided and
 o the terms and conditions, including the rates of interest, on which it is provided.
RBI shall issue such direction due regard to the conditions in which, and the objects for which,
the institution has been established, its statutory responsibilities, if any, and the effect the
business of such financial institution is likely to have on trends in the money and capital markets.

Powers and duties of auditors

Section 45MA inserted by the RBI (Amendment) Act, 1974, requires Auditors of non banking
institution to ensure all statement, information or particulars required by RBI have been
provided.RBI may also issue directions to NBFCs and its auditors, on matters relating to
balance-sheet, profit and loss account, disclosure of liabilities in the books of account or any
matter relating thereto. Auditors report to RBI should be included in Auditors report under the
Companies Act, 2013. RBI’s master direction DNBS/ PPD.03/66.15.001/2016-17 dated
September 29, 2016, may be referred in this respect.
As per sub section (3) of 45MA inserted by RBI (amendment) Act of 1997, RBI may also order
special audit of NBFC. The remuneration of the auditors as may be fixed by the RBI to be paid
by NBFC.

Power of Bank to prohibit acceptance of deposit and alienation of assets

Section 45MB inserted by the RBI (Amendment) Act, 1997 (w.e.f. 9-1-1997), provides that any
NBFC may be debarred from accepting deposit for any violation. Such NBFC may also be
directed not to sell, transfer, create charge or mortgage or deal in any manner with its property
and assets without prior written permission of the Bank for such period not exceeding six months
from the date of the order
Power of Bank to file winding up petition
Section 45MC also inserted by the RBI (Amendment) Act, 1997, RBI can file for winding up of
NBFC if:
• NBFC is unable to pay its debt. A NBFC is deemed to be unable to pay its debt if it is
unable to pay any lawful demand within 5 working days of such demand and RBI has
certified that it is unable to pay its debt;
 • No deposit order has been passed for more than 3 months
• Has failed to raise NOF or get CoR
• Its continuation is detrimental to public interest
RBI must send a copy application for winding up to the Registrar of Companies.

Inspection

Under section 45N, RBI may order inspection by its officer of

• any non-banking institutionfor the purpose of verifying the correctness or completeness
of any statement, information or particulars furnished or to obtain information or
particulars which the non-banking institution has failed to furnish.
• Any non-banking institution being a financial institution if RBI deems fit.
Management/ officers of such non-banking institution must produce to the inspecting authority
all such books, accounts and other documents and furnish that authority with any statements and
information required within time specified. Further, inspecting authority may examine on oath
any director or member of any committee/ management committee / any officer.

Deposits not to be solicited by unauthorised person

As per section 45NA inserted by the RBI (Amendment) Act, 1974, only person authorised by
non banking institution can publish or cause to be published any prospectus or advertisement
soliciting deposit in compliance with prescribed provisions of law.

Disclosure of information

As per section 45NB inserted by the RBI (Amendment) Act, 1997 (w.e.f. 9-1-1997), information
of NBFC submitted to RBI or obtained through audit by RBI shall be confidential and not
disclosed. However, NBFC may disclose information with prior permission of RBI. RBI may
also disclose information in public interest without naming the NBFC or its depositors.
Disclosure can also be made by NBFC or RBI to another NBFC if it is customary to do so.
RBI may disclose information regarding an NBFC to any authority constituted under Law if
dims fit. However, RBI cannot be compelled by any Court or Tribunal to provide information
collected under Chapter IIIB.

Power of RBI to exempt

As per the section 45NC also inserted by the RBI (Amendment) Act, 1997 (w.e.f. 9-1-1997),
RBI can exempt non banking institution or NBFC or class thereof from any provisions under
chapter IIIB. RBI issues master direction from time to time in this behalf to exempt the
categories of NBFC as provided therein from certain provisions of the RBI Act, 1934. [See:
Master Direction DNBR.PD. 001/03.10.119/2016-17 Updated as on May 31, 2018]

Chapter IIIB to override other laws

As per section 45Q, chapter IIIB will have effect notwithstanding anything inconsistent
therewith contained in any other law for the time being in force or any instrument having effect
by virtue of any such law

Power of Company Law Board to offer repayment of deposit

As per section 45QA as inserted by the RBI (Amendment) Act, 1997 (w.e.f. 9-1-1997), if NBFC
fails to repay deposit as per terms, National Company Law Tribunal (earlier CLB) may give
appropriate directions in this respect after giving opportunity of being to all parties.

45QB. Nomination by depositors

Section 45QB as inserted by the RBI (Amendment) Act, 1997 (w.e.f. 9-1-1997, empowers a
Depositor with non banking financial institution with right to nominate someone who will be
entitled to receive claims in event of his debt in accordance with 45ZA of the Banking
Regulation Act, 1949.
 Chapter IIIC: Prohibition of Acceptance of Deposits by Unincorporated Bodies

This chapter was introduced by the Banking Laws (Amendment) Act, 1983 (w.e.f. from 15th
February 1984) vide Notification No.S.O.98 (E) dated 14-2-1984. It consists of three sections
viz. Section 45R, 45S and 45T.
Section 45R refers to definitions contained in Chapter IIIB and states that they would apply to
this chapter as well.
Section 45S which was modified bythe Reserve Bank of India (Amendment) Act, 1997
(effective from January 9, 1997), states that, unincorporated bodies such as, individuals, firms or
unincorporated associations of individuals are prohibited from accepting any deposit, if:

i. the business of such unincorporated bodies either wholly or partly includes any of the activities
of financing, or acquisition of securities, letting or delivering of goods under hire purchase
agreement, managing, conducting or supervising, as foreman of chits or kuries.
ii. the principal business of unincorporated bodies is that of receiving deposits or lending in any
manner. An individual or a partner of a firm carrying on such activities has, however, been
permitted to accept deposits from relatives (defined in section) and borrow money from certain
institutions as specified in the RBI Act, 1934.

Any person other than a body corporate, who holds any deposit as on April 1, 1997, which is not
in accordance with the provisions of the RBI Act, will be required to repay such deposits either
on the maturity of the deposits or within a period of three years from April 1, 1997, whichever is
earlier. If any person is unable to repay a part of the deposits for reasons beyond his control or
such repayment will cause extreme hardship to him he should make an application to the RBI for
extension of time for such repayment. The RBI may, if it is satisfied, by an order in writing,
extend such period by a period not exceeding one year subject to such conditions as may be
specified by it. Unincorporated bodies are prohibited from issuing any advertisement in any form
for soliciting deposit with effect from April 1, 1997.

Section 45T relates to power to issue search warrants. AnyCourt can issue search warrant in
same manner and effect as search warrant issued under the Code of Criminal Procedure, 1973 for
 violation of 45S on an application by officer of RBI or State government authorised in this
behalf.

MEANING OF NBFC AND VARIOUS TYPES OF NBFCs

The working and operations of NBFC are regulated by the Reserve Bank of India (RBI) within
the framework of the Chapter III-B: Provisions Relating to Non-Banking Institutions Receiving
Deposits and Financial Institutions of the Reserve Bank of India Act, 1934 and directions issued
by it. Though the Chapter III-B was inserted in the RBI Act, 1934 by the Banking Laws
(Miscellaneous Provisions) Act, 1963. (w.e.f. 1-2-1964), the term Non-Banking Financial
Company (NBFC) was not defined until the insertion of clause (f) in section 45-I by the RBI
(Amendment) Act, 1997 (w.e.f. 9/1/1997). Clause (f) of section 45-I of the RBI Act, 1934
defines ‘non-banking financial company’ as–

• a financial institution which is a company;

• 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;

• such other non-banking institution 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;

In other words, a Non-Banking Financial Company (NBFC) is a company registered under the
Companies Act, 2013 (or under the Companies Act, 1956) and also registered under Section 45-
IA of the Reserve Bank of India Act, 1934 and which provide banking services (without legally
being a bank as they do not possess Banking License) or other specified services. NBFCs are
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 installments by way of contributions or in any other manner, is also a non-
banking financial company (Residuary non-banking company).

Principal Business

It is relevant here to understand as to what constitutes the principal business in terms of NBFCs.
The term 'principal business' is not defined by the Reserve Bank of India Act, 1934. However,
the Reserve Bank vide Press Release 1998-99/1269 dated April 8, 1999, has defined it so as to
ensure that only companies predominantly engaged in financial activity get registered with it and
are regulated and supervised by it. Accordingly, financial activity is considered as principal
business when a company’s financial assets constitute more than 50 per cent of the total assets
(netted off by intangible assets) and income from financial assets constitute more than 50 per
cent of the gross income. A company which fulfils both these criteria (popularly called as 50-50
test) will be registered as NBFC by RBI. The conditions are cumulative, that is, both the tests are
required to be satisfied simultaneously as the determinant factor for principal business of a
company. Hence if there are companies engaged in agricultural operations, industrial activity,
purchase and sale of goods, providing services or purchase, sale or construction of immovable
property as their principal business and are doing some financial business in a small way, they
will not be regulated by the Reserve Bank. Interestingly, this test is popularly known as 50-50
test and is applied to determine whether or not a company is into financial business.

NBFC Vs. Conventional Banks

Though NBFCs perform similar functions to commercial banks, they are diverse from them in
many aspects. Some of the important points of distinction between the two are:

• An NBFC cannot accept demand deposits, and therefore, cannot write a checking facility
whereas banking is acceptance of deposits which ban be withdrawn by cheque or on
demand.
• It is not a part of payment and settlement system which is precisely the reason why it
cannot issue cheques to its customers.
 • Deposit insurance facility of DICGC is not available for NBFC depositors unlike in case
of banks.
• Scope of business for banks is limited by sec 6 (1) of the Banking Regulation Act, 1949.
NBFCs on the other hand are permitted to carry activities other than financial activities
though not as their primary function in all cases.
• Licensing requirement for banks is more stringent. Moreover, transfer of shareholdings is
highly regulated in case of banks. After recent amendments certain amount of restriction
has also been imposed on NBFCs where there is transfer of control, which now require
prior written permission of RBI.
• Certain minimum priority sector lending are required for Banks whereas there are no
such requirement for NBFCs.
• Banks are required to meet SLR/ CRR requirements, whereas NBFCs just have to
maintain a certain ratio of deposits in specified securities. Moreover, there is no such
requirement for non deposit accepting NBFCs.
• 100 per cent FDI in NBFCs is allowed under the automatic route in 18 specified
activities, subject to minimum capitalisation norms whereas only 74 per cent (incl.
investment by FIIs/ FPIs) FDI permitted in private sector - banking, 49 percent under
automatic route and beyond 49 per cent and up to 74 per cent under approval route.

Types of NBFCs

NBFCs can be classified in three ways based on the nature of its business, based on funding
sources (liabilities) and based on the size of its asset

Liability based Classification

• NBFCs having public deposits or NBFCs‐D

• NBFCs not having public deposits or NBFCs‐ND

Asset based classification

1. Asset Finance Company (AFC):An AFC is a company which is a financial institution
carrying on as its principal business the financing of physical assets supporting
productive/economic activity, such as automobiles, tractors, lathe machines, generator
sets, earth moving and material handling equipments, moving on own power and general
purpose industrial machines Financing of physical assets may be by way of loans, lease
or hire purchase transactions.. Principal business for this purpose is defined as aggregate
of financing real/physical assets supporting economic activity and income arising there
from is not less than 60% of its total assets and total income respectively.
2. Investment Company(IC):IC means any company which is a financial institution
carrying on as its principal business the acquisition of securities. Investment Companies
are further divided into following subcategories:
• Core Investment Companies:The Reserve Bank of India vide its Notification No.
DNBS(PD)CC.No.197/03.10.001/2010-11 dated August 12, 2010, a new class of NBFCs
by the name of ‘Core Investment Companies’ (CIC) was added Core Investment
Companies in terms of RBI’s Notification means: securities and which satisfies the
following conditions as on the date of the last audited balance sheet: -
a) it holds not less than 90% of its net assets in the form of investment in equity shares,
preference shares, bonds, debentures, debt or loans in group companies;
b) its investments in the equity shares (including instruments compulsorily convertible
into equity shares within a period not exceeding 10 years from the date of issue) in
group companies and units of Infrastructure Investment Trust only as
sponsorconstitutes not less than 60% of its net assets. Net assets, for the purpose of
this proviso, would mean total assets excluding:
o cash and bank balances
o investment in money market instruments and money market mutual funds
o advance payments of taxes; and
o deferred tax payment.
c) it does not trade in its investments in shares, bonds, debentures, debt or loans in group
companies except through block sale for the purpose of dilution or disinvestment;
d) it does not carry on any other financial activity referred to in Section 45I (c) and 45I
(f) of the Reserve Bank of India Act, 1934 except:
 o investment in bank deposits, money market instruments, including money market
mutual funds, government securities, and bonds or debentures issued by group
companies;
o granting of loans to group companies; and
o issuing guarantees on behalf of group companies.
• Other than Core Investment Companies: Investment companies other than core
composite companies.
3. Loan Company (LC):LC means any 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 but does not include an AFC

4. Infrastructure Finance Companies (IFC): IFC is a non-banking finance company

a. which deploys at least 75 per cent of its total assets in infrastructure loans,
b. has a minimum Net Owned Funds of Rs. 300 crore,
c. has a minimum credit rating of ‘A ‘or equivalent and
d. a CRAR of 15%.
5. Factor (NBFC Factor):NBFC-Factor is a non-deposit taking NBFC engaged in the
principal business of factoring. The financial assets in the factoring business should
constitute at least 50 percent of its total assets and its income derived from factoring
business should not be less than 50 percent of its gross income.
6. Mortgage Guarantee Companies (MGC) - MGC are financial institutions for which at
least 90% of the business turnover is mortgage guarantee business or at least 90% of the
gross income is from mortgage guarantee business and net owned fund is atleast Rs 100
crore.
7. Non-Operative Financial Holding Company (NOFHC): NOFCH is 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.
8. Micro Finance Institutions (NBFC-MFI): 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:
o loan disbursed by an NBFC-MFI to a borrower with a rural household annual
income not exceeding Rs.1,00,000 or urban and semi-urban household income not
exceeding Rs.1,60,000;
o loan amount does not exceed Rs. 50,000 in the first cycle and Rs. 1,00,000 in
subsequent cycles;
o total indebtedness of the borrower does not exceed Rs.1,00,000;
o tenure of the loan not to be less than 24 months for loan amount in excess of
Rs.15,000 with prepayment without penalty;
o loan to be extended without collateral;
o aggregate amount of loans, given for income generation, is not less than 50 per
cent of the total loans given by the MFIs;
o loan is repayable on weekly, fortnightly or monthly instalments at the choice of
the borrower

9. Infrastructure Debt Funds (IDF-NBFC): IDF-NBFC is a company registered as NBFC

to facilitate the flow of long-term debt into infrastructure projects. IDF-NBFC raise
resources through issue of Rupee or Dollar denominated bonds of minimum 5 year
maturity. Only Infrastructure Finance Companies (IFC) or Banks can sponsor IDF-
NBFCs.
10. Peer to Peer Lending Platform (NBFC-P2P): P2P NBFC is a company registered as
NBFC, as an intermediary providing the services of loan facilitation via online medium
or otherwise, to the participants who have entered into an arrangement with an NBFC-
P2P to lend on it or to avail of loan facilitation services provided by it. Such companies
cannot raise deposit or lend themselves. They provide platform or online marketplace to
the participants involved in Peer to Peer lending within the limit prescribed.
11. NBFC-Account Aggregator (NBFC-AA): NBFC-AAin a company registered as NBFC
which is into business of collecting and providing information about a customer’s
 financial assets in a consolidated, organized and retrievable manner to the customer or
others as specified by the customer.

Size Based Classification

NBFCs-ND may also be classified into (i) Systematic Investment and (ii) Non-Systematic
Investment NBFCs based on the size of its asset.
1. Systemically Important NBFCs-ND
An NBFC–ND with an asset size of Rs.500 crore and more as per the last audited balance
Sheet is considered as systemically important NBFCs–ND (NBFC-ND-SI). Asset size of all the
NBFCs in the group is to taken for the purpose of calculating asset size of the NBFC. No NBFC–
ND–SI is allowed to:
a) lend to any single borrower/group of borrowers exceeding 15 per cent / 25 per cent of its
owned fund;
b) invest in the shares of another company/ single group of companies exceeding 15 per cent
/25 per cent of its owned fund; and
c) lend and invest (loans/investments taken together) exceeding 25 per cent of its owned
fund to a single party and 40 per cent of its owned fund to a single group of parties.
2. Non-Systematically Important NBFCs-ND
A NBFC–ND whose asset size does not exceed Rs.500 crore as per the last audited balance sheet
may be considered as Non-systemically important NBFCs–ND (NBFCND- SI).
Classification Based on Sources of Funds & Customer Interface

RBI Introduced this new classification methodology from June 17, 2016 to simplify the process
of registration of new NBFCs smoother and hassle free. There would be two different types of
applications for non-deposit taking NBFCs (NBFC-ND) based on Sources of Funds & Customer
Interface as follows:

a. Type I - NBFC-ND not accepting public funds1/ not intending to accept public funds in the
future and not having customer interface2/ not intending to have customer interface in the future
b. Type II - NBFC-ND accepting public funds/ intending to accept public funds in the
future and/or having customer interface/intending to have customer interface in the future
The processing of cases for Type I - NBFC-ND applicants would be on fast track mode. As these
companies will not have access to public fund and will not have customer interface, they will be
subjected to less intensive scrutiny / due diligence. However, CoR issued to Type I - NBFC-ND
companies will be conditional. These companies will be prohibited from accessing public funds
and having customer interface. In case these companies intend to avail public fund or intend to
have customer interface in the future, they are required to take approval from Reserve Bank of
India, Department of Non-Banking Regulation.

REGISTRATION OF NBFCs UNDER RESERVE BANK OF INDIA ACT 1934

Under section 45-IA of the Reserve Bank of India Act, 1934 it is mandatory for a NBFC to get
itself registered with the RBI as an NBFC. This registration authorizes it to conduct its business
as an NBFC. A company desirous of commencing business of non-banking financial institution
as defined under Section 45-I(A) of the RBI Act, 1934 should comply with the following:

i. It should be a company registered under the Companies Act, 2013 (or erstwhile The
Companies Act, 1956)

ii. It should have a minimum Net Owned Fund (NOF) of Rs. 200 lakh (though some
specialized NBFCs have different NOF requirement as dealt in separate chapter).

However, to avoid dual regulation, certain categories of NBFCs which are regulated by other
regulators are exempted from the requirement of registration with RBI. These entities are:

• Venture Capital Fund registered under SEBI (Venture Capital Funds) Regulations, 1996
• Merchant Banking companies registered under SEBI (Merchant Bankers) Regulation,
1992
• Stock broking companies registered under (Stock-Brokers and Sub-Brokers) Regulations,
1992
• Insurance Company holding a valid Certificate of Registration issued by Insurance
Regulatory and Development Authority
 • Nidhi companies as notified under Section 620A of the Companies Act, 1956 or Section
406 of Companies Act, 2013
• Chit companies as defined in clause (b) of Section 2 of the Chit Funds Act, 1982,
• Housing Finance Companies as defined in section 2(d) of the National Housing Bank
Act,2007, and
• Stock Exchanges regulated by SEBI

Process of Registration

Since 1997 as a policy decision, RBI has stop registering any public deposit accepting
NBFC. RBI in its First Bi-monthly Monetary Policy Statement - 2016-17, stated that in order to
make the process of registration of new NBFCs smoother and hassle free, it would formulate a
simplified and rationalized process of registering new NBFCs with simpler forms and lesser
documents. To materialize this, on June 17, 2016, RBI announced a simplified process of
Registration of a NBFC-ND. Under the new requirements, NBFC other than Systemically
Important Core Investment CompanyCIC-ND-SI, would be classified as Type I-NBFC –ND and
Type –II-NBFC-ND based on Sources of Funds & Customer Interface. As per the new
requirements, Type I - NBFC-ND would mean those NBFC that will not accept public funds and
will not having customer interface; and Type II - NBFC-ND would mean those NBFC that will
either accept or intends to accept public funds and/or have customer interface.

Here the term “ Public funds" includes funds raised either directly or indirectly through public
deposits, commercial paper, debentures, inter-corporate deposits and bank finance but excludes
funds raised by issue of instruments compulsorily convertible into equity shares within a period
not exceeding 10 years from the date of issue.

The term “Customer interface” means interaction between the NBFC and its customers while
carrying on its NBFI business.

Registration of Type I NBFC-ND

The applications for registering Type I NBFCs, would be on Fast Track Mode. They will be
subjected to less intensive scrutiny / due diligence. However, CoR issued to Type I - NBFC-ND
companies will be conditional. These companies will be prohibited from accessing public funds
and having customer interface. In case these companies intend to avail public fund or intend to
have customer interface in the future, they are required to take approval from Reserve Bank of
India, Department of Non-Banking Regulation. The list of basic documents and information to
be supplied has been greatly reduced from about 45 to 6 for Type I entities. However, it must be
remembered that this list are indicative and not exhaustive. The Reserve Bank, may, if necessary,
call for any further documents to satisfy itself on the eligibility of the company seeking
registration as NBFC. In the event of the Reserve Bank calling for further documents in addition
to those mentioned in the checklist, the applicant company must respond within a stipulated time
of one month.

Moreover, henceforth the application for registration of new NBFCs is to be made to Central
Office, Department of Non-Banking Regulation and not to the Regional Offices as before.

An indicative list of basic documents/information to be furnished along with the application form
in case of Type I NBFC:

• Certified copies of Certificate of Incorporation.

• Certified copies of extract of only the main object clause in the MOA relating to the
financial business.
• Board resolution stating that:
o the company is not carrying on any NBFC activity/stopped NBFC activity and
will not carry on/commence the same before getting registration from RBI
o the UIBs in the group where the director holds substantial interest or otherwise
has not accepted any public deposit in the past /does not hold any public deposit
as on the date and will not accept the same in future
o the company has formulated “Fair Practices Code” as per RBI Guidelines
o the company has not accepted public funds in the past/does not hold any public
fund as on the date and will not accept the same in the future without the approval
of Reserve Bank of India
 o the company does not have any customer interface as on date and will not have
any customer interface in the future without the approval of Reserve Bank of
India
• Copy of Fixed Deposit receipt & bankers certificate of no lien indicating balances in
support of NOF.
• For companies already in existence, the Audited balance sheet and Statement of Profit &
Loss along with director’s & auditor’s report or for the entire period the company is in
existence, or for last three years , whichever is less, should be submitted.
• Banker’s report in respect of applicant company, its group/subsidiary/associate/holding
company/related parties, directors of the applicant company having substantial interest in
other companies The Banker’s report should be about the dealings of these entities with
these bankers as a depositing entity or a borrowing entity.

Registration of Type II NBFC-ND

The application form for registration of Type II NBFC- ND, is same as that for Type I, but with
different list of basic documents and information to be supplied. This list is also greatly reduced
from list of 45 documents to 8 documents. However, it must be remembered that this list
are indicative and not exhaustive. The Reserve Bank, may, if necessary, call for any further
documents to satisfy itself on the eligibility of the company seeking registration as NBFC. In the
event of the Reserve Bank calling for further documents in addition to those mentioned in the
checklist, the applicant company must respond within a stipulated time of one month. Moreover,
certain additional documents and information would be required in case new NBFC is desirous
of registering as NBFC- Micro Finance Institution, NBFC-Factors or NBFC- IDF.

Applications for new Type II- NBFCs shouldalso be made to Central Office, Department of
Non-Banking Regulation and not to the Regional Offices as before.

Following is the list of Documents required for registration of Type II NBFCs:

1. Certificate of Registration obtained from Registrar of Company.

2. Certified copies of an extract of the object clause of Memorandum of Association stating
financial business as its main object.
 3. Board Resolution stating that :

• The Company is not carrying on any activity as of Non-Banking Financial Company and
will not commence the same operation as similar to NBFCs before getting registration
from RBI.
• The Unincorporated Bodies (UIBs) in the group where the director holds substantial
interest or otherwise has not accepted any public deposit in the past and is not holding the
same and will not accept the same in future.
• The company formulates fair practices code as per the RBI Guidelines.
• the company has not accepted any public deposit, in the past (specify period)/does not
hold any public deposit as on the date and will not accept the same in future without the
prior approval of Reserve Bank of India

• Copy of Fixed Deposit receipt & bankers certificate of no lien indicating balances in
support of NOF.

6. For companies already in existence, the Audited balance sheet and Statement of Profit &
Loss along with director’s & auditor’s report or for the entire period the company is in
existence, or for last three years, whichever is less, should be submitted
7. Copy of the certificate of highest educational and professional qualification in respect of
all the directors
8. Copy of experience certificate, if any, in the Financial Services Sector (including
Banking Sector) in respect of all the directors
9. Banker’s report in respect of applicant company, its group/subsidiary/associate/holding
company/related parties, directors of the applicant company having substantial interest in
other companies The Banker’s report should be about the dealings of these entities with
these bankers as a depositing entity or a borrowing entity.

Additional Documents for registration of Micro Finance Institutions (NBFC-MFI):

i) Board resolution stating that:

 • the company will be a member of all the Credit Information Companies and will be a
member of at least one Self Regulatory Organization
• the company will adhere to the regulations regarding pricing of credit, Fair Practices in
lending and non-coercive method of recovery as per RBI Guidelines
• the company has fixed internal exposure limits to avoid any undesirable concentration in
specific geographical locations
• the company is not licensed under Section 8 of the Companies Act, 2013/ Section 25 of
the Companies Act, 1956.

ii) Roadmap for achieving 85% qualifying assets.

Additional Documents for registration of NBFC-FACTOR

i. Board Resolution enclosing roadmap that the company will have financial assets in the
factoring business constituting at least 50% of its total assets and its income derived from
factoring business will not less than 50% of its gross income (Specify the time frame)

Additional Documents for Registration of NBFC- Infrastructure Development Fund

i) No objection Certificate from RBI issued to NBFC-IFC for sponsoring the NBFC-IDF.
ii) Copy of Tripartite Agreement between the concessionaire, the Project Authority and
NBFC-IDF.
iii) Details of change in the management of the sponsor company during last financial year
till date, if any, and reasons thereof.
iv) Source of start-up capital of the company with documentary evidence. NBFC-IDF would
raise resources through issue of either Rupee or Dollar denominated Bonds of minimum
5-year maturity.

Application Process

The applicant company is required to apply online and submit a physical copy of the application
along with the necessary documents/information to Central Office, Department of Non-Banking
Regulation directly at the following address:
Chief General Manager
Department of Non-Banking Regulation
Reserve Bank of India
Centre I, World Trade Centre
Mumbai-400 005

The applicant company is required to apply online and submit a physical copy of the application
along with the necessary documents to the Regional Office of the Reserve Bank of India. The
application can be submitted online by accessing RBI’s secured
website https://cosmos.rbi.org.in. At this stage, the applicant company will not need to log on to
the COSMOS application and hence user ids are not required. The company can click on
“CLICK” for Company Registration on the login page of the COSMOS Application. A window
showing the Excel application form available for download would be displayed. The company
can then download suitable application form (i.e. NBFC or SC/RC) from the above website, key
in the data and upload the application form. The company may note to indicate the correct name
of the Regional Office in the field “C-8” of the “Annex-I identification Particulars” in the Excel
application form. The company would then get a Company Application Reference Number for
the CoR application filed on-line. Thereafter, the company has to submit the hard copy of the
application form (indicating the online Company Application Reference Number, along with the
supporting documents, to the concerned Regional Office. The company can then check the status
of the application from the above mentioned secure address, by keying in the acknowledgement
number.

Registration of Systemically Important Core Investment Company

Registration requirements under 45-IA does not applies to NBFC-CIC which are not a
Systemically Important Core Investment Company (CIC-ND-SI). CIC-ND-SI are CICs company
having total assets of not less than Rs.100 crore either individually or in aggregate along with
other CICs in the Group and which raises or holds public funds. Existing CICs which were
exempted from registration in the past and have an asset size of less than Rs 100 crore are
exempted from registration in terms of section 45NC of the RBI Act 1934. The application form
for CICs-ND-SI available on the Bank’s website can be downloaded and filled in and submitted
to the Regional Office of the DNBS in whose jurisdiction the Company is registered along with
necessary supporting documents mentioned in the application form. An extensive indicative list
of basic documents and information to be furnished along with the application has been provided
which lists 52 items and needs to be submitted in duplicate.

REGULATORY EXEMPTIONS TO CERTAIN NBFCs

Non Banking Financial Institutions Exempted from certain provisions of the RBI Act, 1934

Section 45 NC of the RBI Act, 1934 provides RBI power to exempt certain non banking
institution or NBFC or their class from application of Chapter IIIB or part thereof, for such
period and under such conditions as may be specified.

A. Total Exemption from provisions of Chapter III B of the RBI Act, 1934 –

(i) Housing Finance Institutions

A Housing Finance Company is a company registered under the Companies Act, 2013 (or 1956)
which as per the definition provided in section 2(d) of the National Housing Bank Act, 1987,
primarily transacts or has as one of its principal objects, the transacting of the business of
providing finance for housing, whether directly or indirectly. The RBI has exempted a NBFC
which is a housing finance institution from the provisions of Chapter III B of the RBI Act, 1934.
RBI regulates such companies through National Housing Board (NHB) and therefore these
companies are registered with NHB.

(ii) Prepaid Payment Instruments issued by Non-Banking Institutions

The provisions of Chapter III B of RBI Act, 1934, does not apply to a non-banking institution
which is authorized to operate a payment system and to issue prepaid payment instruments under
the Payment and Settlement Systems Act, 2007.This exemption shall be limited and restricted to
money received by such non-banking institution for issue of prepaid payment instruments.

-
B. Exemption from sections 45-IA, 45-IB, 45-IC, 45 MB and 45 MC of the RBI Act, 1934

Exemptions from these sections means such institutions will not be required to
• register or maintain Net Owned Fund under section 45-IA,
• maintain minimum percentage of assets in unencumbered approved securities under
section 45-IB
• transfer of specified percentage of profits to reserve funds under 45-IC
Besides in case of these institutions RBI has no power to prohibit acceptance of deposit and
alienation of assets under section 45 MB and to file winding up under section 45 MC.

(iii) Insurance Companies

Insurance Companies are NBFC doing the business of insurance, holding a valid certificate of
registration issued under section 3 of the Insurance Act, 1938 and not holding or accepting public
deposit are exempted from requirements of RBI as prescribed in above sections. They are also
exempted from the provisions of following directions:
• Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank)
Directions, 2016,
• Non-Banking Financial Company - Systemically Important Non-Deposit taking
Company and Deposit taking Company (Reserve Bank) Directions, 2016 and
• Non-Banking Financial Company – Non- Systemically Important Non-Deposit taking
Company (Reserve Bank) Directions, 2016.

However, RBI still has certain powers like powers to regulate issue of prospectus, issue
directions and call for information in case of such institutions.

(iv) Stock Exchanges

Stock Exchanges are also NBFCs. Stock exchanges recognised under section 4 of the Securities
Contracts (Regulation) Act, 1956 and not holding or accepting public deposit are exempt from
the requirement of Section 45-IA, 45-IB, 45-IC, 45 MB and 45 MC of the RBI Act, 1934. These
being regulated by SEBI have been given this exemption to avoid dual control.

(v) Stock brokers or sub-brokers

Stock brokers or sub-brokers which are NBFCs are exempted from requirements of Section 45-
IA, 45-IB, 45-IC, 45 MB & 45 MC of the RBI Act, 1934 provided they have a valid certificate of
registration obtained under section 12 of the Securities and Exchange Board of India Act, 1992
and they do not accept or hold public deposits. They are also exempted from the provisions of
following directions:
• Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank)
Directions, 2016,
• Non-Banking Financial Company - Systemically Important Non-Deposit taking
Company and Deposit taking Company (Reserve Bank) Directions, 2016 and
• Non-Banking Financial Company – Non- Systemically Important Non-Deposit taking
Company (Reserve Bank) Directions, 2016.

However, RBI still has certain powers like powers to regulate issue of prospectus, issue
directions and call for information in case of such institutions.

C. Exemption from sections 45-IA, 45-IB and 45-IC of the RBI Act, 1934

(vi) Merchant Banking company

“Merchant banker” means any corporate entity which is engaged in the business of issue
management either by making arrangements regarding selling, buying or subscribing to
securities or acting as manager, consultant, adviser or rendering corporate advisory service in
relation to such issue management. Such companies are registered with the Securities and
Exchange Board of India as a Merchant Banker under Section 12 of the Securities and Exchange
Board of India Act, 1992 and carries the business of merchant Banker in accordance with the
Securities and Exchange Board of India Merchant Banking (Rules) 1992 and Securities and
Exchange Board of India Merchant Banking (Regulations) 1992;

A merchant banking company has been exempted from the provisions of Section 45-IA
[Requirement of registration and net owned fund], Section 45-IB [Maintenance of liquid assets]
and 45-IC [Creation of Reserve Fund] of the RBI Act, 1934, Non-Banking Financial Companies
Acceptance of Public Deposits (Reserve Bank) Directions, 2016, Non-Banking Financial
Company - Systemically Important Non-Deposit taking Company and Deposit taking Company
(Reserve Bank) Directions, 2016 and Non-Banking Financial Company – Non- Systemically
Important Non-Deposit taking Company (Reserve Bank) Directions, 2016 on fulfillment of
following conditions:

a. It is registered with the SEBI as Merchant Banker and carries on the business in accordance
rules and regulations issued by it
b. It acquires securities only as a part of its merchant banking business;
c. It does not carry on any other financial activity like making loans, providing goods on hire,
etc, which makes them financial institution as defined in Section 45I(c) of the RBI Act, 1934;
and
d. It does not accept or hold public deposits.

(vii) Micro Finance Companies

Microfinance companies are the financial institutions that offer small-scale financial services in
both the forms – credit and savings, especially to the poor in rural, semi-urban and urban areas.
Sections 45-IA, 45-IB and 45-IC of the Reserve Bank of India Act, 1934 (2 of 1934) shall not
apply to any non-banking financial company which is

• engaged in micro financing activities, providing credit not exceeding Rs. 50,000 for a
business enterprise and Rs. 1,25,000 for meeting the cost of a dwelling unit to any poor
person for enabling him to raise his level of income and standard of living; and
• licensed under Section 25 of the Companies Act, 1956 (section 8 of the Companies Act,
2013); and
• not accepting public deposits
However, there can be an NBFC-MFI which do not met above conditions. Such NBFC-MFI
would not be provided above exemptions.

(viii) Asset Reconstruction Companies

Before enactment of the Enforcement of Security Interest and Recovery of Debts Laws and
Miscellaneous Provisions (Amendment) Act, 2016, w.e.f. 1-9-2016, two deferent kind of
companies, Securitization Company and Reconstruction Company were recognized under
Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act,
2002 (SARFESI Act). Securitization Company meant any company formed and registered under
the Companies Act, 2013 for the purpose of securitization. Under section 2(z) SARFESI Act
2002, the term securitization means acquisition of financial assets by any securitization company
or reconstruction company from any originator, whether by raising of funds by such
securitization company or reconstruction company from qualified institutional buyers by issue of
security receipts representing undivided interest in such financial assets or otherwise. Similarly,
reconstruction companies were companies formed and registered under the Companies Act, 2013
for the purpose of asset reconstruction and term ‘asset reconstruction’ is defined in section 2 (b)
of the SARFESI Act, 2002 as, acquisition by any asset reconstruction company of any right or
interest of any bank or financial institution in any financial assistance for the purpose of
realization of such financial assistance. Both Securitization and Reconstruction companies are
exempt from the provisions of provisions of Sections 45-IA, 45-IB and 45-IC of the RBI Act,
1934. It should be noted here that after the amendments made in 2016 only Asset Reconstruction
Companies are now registered under section 3 of the SARFESI Act, 2002 which are defined
under newly inserted section 2(ba) of the SARFESI Act, 2002 as, ‘a company registered with
RBI under section 3 for the purposes of carrying on the business of asset reconstruction or
securitization, or both’.

(ix) Nidhi Companies

Nidhi are a special class of companies under the section 406 of Chapter XXVI of Companies
Act, 2013 (section 620A of Companies Act, 1956). Sub – Section (1) of Section 406 of the
Companies Act 2013 define Nidhi as a company which has been incorporated with the object of
cultivating the habit of thrift and savings amongst its members, receiving deposits from, and
lending to, its members only, for their mutual benefit, and which complies with such rules as are
prescribed by the Central Government for regulation of such class of companies. The provisions
of Sections 45-IA, 45-IB and 45-IC of the RBI Act, 1934 does not apply to the Nidhi Companies.

(x) Chit Companies

Chit Companies are companies doing the business of chits. Chit is defined in clause (b) of
Section 2 of the Chit Funds Act, 1982 as a transaction whether called chit, chit fund, chitty, kuri
or by any other name by or under which a person enters into an agreement with a specified
number of persons that every one of them subscribes a certain sum of money (or a certain
quantity of grain instead) by way of periodical installments over a definite period and that each
such subscriber , in his turn, as determined by lot or by auction or by tender or in such other
manner as may be specified in the chit agreement, be entitled to the prize amount.

A transaction is not a chit, if in such transaction,—

a) some alone, but not all, of the subscribers get the prize amount without any liability to
pay future subscriptions; or
b) all the subscribers get the chit amount by turns with a liability to pay future subscriptions;

Such companies are regulated under The Chit Fund Act, 1982 and are exempted from the
provisions of Section 45-IA [Requirement of registration and net owned fund], Section 45-IB
[Maintenance of liquid assets] and 45-IC [Creation of Reserve Fund] of the RBI Act, 1934.

(xi) Mortgage Guarantee Companies

'Mortgage guarantee company' means a company which primarily transacts the business of
providing mortgage guarantee where 'mortgage guarantee' means a guarantee provided by a
mortgage guarantee company for the repayment of an outstanding housing loan and interest
accrued thereon up to the guaranteed amount to a creditor institution, on the occurrence of a
trigger event. Mortgage Guarantee Companies are exempted from the provisions of Section 45-
IA (requirement of registration and net owned fund), Section 45-IB (maintenance of liquid
assets) and Section 45-IC (creation and transfer to Reserve Fund a certain percentage of the net
profit) of the RBI Act as a separate regulatory framework is being prescribed for such
companies.

D. Exemption from sections 45-IA and 45-IC of the RBI Act, 1934

(xii) Venture Capital Fund Companies

Venture capital (VC) is money that is provided to seed early-stage, emerging growth
companies. Venture capital funds invest in companies in exchange for equity in the companies
they invest in, which usually have a novel technology or business model in high technology
industries, such as biotechnology and IT. Venture capital fund companies are required to obtain a
certificate of registration under Section12 of the Securities and Exchange Board of India Act,
1992 (15 of 1992). Such companies, if they do not hold or accept public deposit are exempted
from requirement of registration, maintenance of liquid assets, creation of special reserve fund,
Prudential Norms Directions and Acceptance of Public Deposit Directions. Therefore, the
following does not apply to such companies:

• Section 45-IA and Section 45-IC of the Reserve Bank of India Act, 1934;
• Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank)
Directions, 2016,
• Non-Banking Financial Company - Systemically Important Non-Deposit taking
Company and Deposit taking Company (Reserve Bank) Directions, 2016 and
• Non-Banking Financial Company – Non- Systemically Important Non-Deposit taking
Company (Reserve Bank) Directions, 2016

E. Exemption from sections 45-IB and 45-IC of the RBI Act, 1934

(xiii) Government Companies (now being phased out)

A Government Company is a company in which not less than 51% of the paid up capital is held
by the Central Government, or by any State Government or Governments or partly by the Central
Government and partly by one or more State Governments and includes a company which is
subsidiary of a Government Company as thus defined. The following did not apply to an NBFC
which is a government companies:

• Sections 45-IB and 45-IC of the Reserve Bank of India Act, 1934 (2 of 1934),
• Paragraphs 4 to 7 of the Non-Banking Financial Companies Acceptance of Public
Deposits (Reserve Bank) Directions, 1998 and
• Non-Banking Financial (Deposit Accepting or Holding) Companies Prudential Norms
(Reserve Bank) Directions, 2007.

However, RBI through its notification number RBI/2017-18/181

DNBR (PD) CC.No.092/03.10.001/2017-18 dated May 31, 2018 decided to make the NBFC
regulations applicable to Government NBFCs as per the timeline mentioned below:

Sec 45 IB Maintenance of March 31, 2019– 5% of outstanding deposits

percentage of assets – March 31, 2020 – 10% of outstanding deposits
15% of the outstanding March 31, 2021 – 12% of outstanding deposits
deposits March 31, 2022 – 15% of outstanding deposits
Sec 45 IC Reserve Fund March 31, 2019

F. Exemption from section 45-IA of the RBI Act, 1934

(xiv) Core Investment Companies

The provisions of section 45-IA of the Act shall not apply to a non-banking financial company
being a Core Investment Company referred to in the Core Investment Companies (Reserve
Bank) Directions, 2011, which is not a Systemically Important Core Investment Company (i.e. it
does not have net owned fund of Rs 500 crores or more);

The provisions of section 45-IA (1)(b) of the Act shall not apply to a non-banking financial
company being a Systemically Important Core Investment Company as defined in the Core
Investment Companies (Reserve Bank) Directions, 2011, subject to the condition that it meets
with the capital requirements and leverage ratio as specified in the said directions.
MINIMUM NET OWNED FUND REQUIREMENTS FOR NBFCs

Before moving to the norms applicable to NBFCs in relation to Net Owned Fund it would be
expedient to understand and distinguish the terms Owned Fund and Net Owned Fund. ‘Owned
Fund’ means aggregate of the paid-up equity capital, preference shares which are compulsorily
convertible into equity, free reserves, balance in share premium account and capital reserves
representing surplus arising out of sale proceeds of asset, excluding reserves created by
revaluation of asset, after deducting there from accumulated balance of loss, deferred revenue
expenditure and other intangible assets. On the other hand, 'Net Owned Fund' is the amount as
arrived at above, minus the amount of investments of such company in shares of its subsidiaries,
companies in the same group and all other NBFCs and the book value of debentures, bonds,
outstanding loans and advances including hire purchase and lease finance made to and deposits
with subsidiaries and companies in the same group, to the extent it exceeds 10% of the owned
fund.

As per the clause (1)(b) of section 45-IA of RBI Act, 1934, no NBFC can commence business of
NBFI without having the net owned fund of twenty-five lakh rupees or such other amount, not
exceeding two hundred lakh rupees, as the Bank may, by notification in the Official Gazette,
specify.
In terms of Notification No.DNBS.132/CGM(VSNM)-99 dated April 21, 1999, the minimum
NOF requirement for new companies applying for grant of CoR to commence business of an
NBFC was increased to Rs. 200 lakh. However, the requirement of minimum NOF for
companies that were already in existence before April 21, 1999 was retained at Rs. 25 lakh.

On March 27, 2015, feeling the need for strengthening the financial sector and technology
adoption, and in view of the increasing complexities of services offered by NBFCs, RBI issued
Notification No.DNBR.007/ CGM (CDS) -2015, through which it increased the requirement of
net owned fund to 200 lakhs Rupees for all companies. However, NBFCs already holding a
certificate of registration issued by the RBI and having net owned fund of less than two hundred
lakhs of rupees, were given an opportunity to continue to carry on the business of non-banking
financial institution, if such company achieves net owned fund of, -
 • one hundred lakhs of rupees before April 1, 2016; and
• two hundred lakhs of rupees before April 1, 2017.

For NBFCs, whose NOF were below Rs. 200 lakh, were required to submit a statutory auditor's
certificate certifying compliance to the revised levels at the end of each of the two financial years
as given above. NBFCs failing to achieve the prescribed ceiling within the stipulated time period
are no longer eligible to hold the CoR as NBFCs. The Bank has initiated the process for
cancellation of CoR against such NBFCs. A list of NBFCs whose CoR has been cancelled is
available at https://rbi.org.in/Scripts/BS_NBFCList.aspx . As of September 11, 2018 as many as
4230 NBFCs has been de-registered by RBI.

It is important to note that for the above purpose of the term “net owned fund” as per clause 7(I)
of the section 45-IA, means–
a) the aggregate of the paid-up equity capital and free reserves as disclosed in the latest
balance-sheet of the company after deducting therefrom–
(i) accumulated balance of loss;
(ii) deferred revenue expenditure; and
(iii) other intangible assets; and
b) further reduced by the amounts representing–
(i) investments of such company in shares of–
• its subsidiaries;
• companies in the same group;
• all other non-banking financial companies; and
(ii) the book value of debentures, bonds, outstanding loans and advances (including hire-
purchase and lease finance) made to, and deposits with,–
• subsidiaries of such company; and
• companies in the same group, to the extent such amount exceeds ten per cent of
(a) above.

Further through notification no. DNBS (PD) CC.No.373/03.10.001/2013-14 dated April 7, 2014
RBI observed that in certain cases, an NBFC while arriving at the NOF figure did not reckon its
investment in group companies on the ground that investments in the group companies were
made by the Venture Capital Fund (VCF) sponsored by the NBFC, although, in term, the
contribution to the funds held by the VCF had come primarily from the NBFC
itself. Notification further states that, a VCF or any such Alternative Investment Fund
(AIF) merely means a pool of capital by investors and the investment made by such an AIF/VCF
is done on behalf of the investors.
Therefore, RBI clarified that while arriving at the NOF figure, investment made by an NBFC in
entities of the same group concerns shall be treated alike, whether the investment is made
directly or through an AIF / VCF, provided that the funds in the VCF/AIF have come from the
NBFC to the extent of 50% or more; or where the beneficial owner, in the case of Trusts is the
NBFC, if 50% of the funds in the Trusts are from the concerned NBFC. For this purpose,
“beneficial ownership” would mean holding the power to make or influence decisions in the
Trust and being the recipient of benefits arising out of the activities of the Trust. Therefore, RBI
has advised NBFCs to keep the principle of substance over form in arriving at the NOF.

NOF of NBFC- Micro Finance Institutions (NBFC-MFI)

An NBFC-MFI is a non-deposit taking NBFC (other than a company licensed under Section 8 of
the Companies Act, 2013 (or Section 25 of the Companies Act, 1956) and having not less than
85% of its net assets are in the nature of “qualifying assets” which consist of small loans to
economically weaker section of the society. Such companies must have Minimum Net Owned
Funds of Rs.5 crore.

NOF requirement for Asset Reconstruction Companies

RBI through notification DNBR. PD (ARC) CC. No. 03/26.03.001/2016-17 dated April 28,
2017, decided to fix the minimum NOF requirement for ARCs at ₹ 100 crore, keeping in view
the greater role envisaged for ARCs in resolving stressed assets as also the recent regulatory
changes governing sale of stressed assets by banks to ARCs. All the ARCs which were already
registered with RBI on the date of the Notification and not having the revised minimum NOF as
on date were required to achieve a minimum NOF of ₹ 100 crore latest by March 31, 2019 and
such compliance should be certified by their Statutory Auditors periodically.
NOF ofInfrastructure Debt Funds (IDF-NBFC)

Infrastructure Debt Funds (IDFs), can be set up either as a Trust or as a Company. A trust based
IDF would normally be a Mutual Fund (MF), regulated by SEBI, while a company based IDF
would normally be a NBFC regulated by the Reserve Bank. To register as NBFC, it should have
a minimum Net Owned Funds (NOF) of Rs.300 crore.

MAINTENANCE OF LIQUID ASSETS

In keeping with the spirit of financial sector liberalization, efforts were made to integrate NBFCs
into the mainstream of overall financial sector and therefore, based on Shah Committee’s
recommendation, section 45-IA to 45-IC was inserted in by the RBI (Amendment) Act, 1997 and
was made applicable w.e.f. from January 9, 1997. One of the essential features of these
amendments was to ensure adequate liquidity in hands of deposit accepting NBFCs. Therefore,
section 45-IB was made applicable which required Maintenance of certain percentage of liquid
assets.

Section 45-IB requires NBFCs toinvest in unencumbered approved Indian securities, atleast 5 %
or more (as specified by RBI from time to time) of their outstanding deposits at the close of
business on the last working day of the second preceding quarter. RBI may modify the rate but
within the limit of 5% to 25% only. Further, RBI may specify different percentages of
investment in respect of different classes of NBFCs.
The term “approved securities” herein means securities of any State Government or of the
Central Government and bonds fully guaranteed by any such Government in respect of both the
principal and the interest thereon.
Approved securities would be regarded unencumbered even where the approved securities are
lodged by the NBFC with another institution for an advance or any other arrangement to the
extent to which such securities have not been drawn against or availed of or encumbered in any
manner.

In May, 1997, as certain malpractices pertaining to NBFCs came to light, the RBI took prompt
corrective steps and the financial sector was also resilient enough to withstand this shock. RBI
vide Notification No.DFC.121/ED(G)-98 dated January 31, 1998, revised the percentage of
liquid assets to be maintained by NBFCs for all NBFCs except Residuary Non Banking
Companies (RNBCs) to 12.5% and 15% of their ‘public deposits’ with effect from 1.4.1998 and
1.4.1999 respectively. However, later vide NOTIFICATION No. DNBS.139/CGM(VSNM)-2000
dated January 13, 2000 RBI further amendment and stated that such NBFCs can maintain assets
not less than 15% of public deposit outstanding at the close of business on last working day of
the second precedingaccepted, in approved securities and the remaining 5% in unencumbered
term deposits in any scheduled commercial bank.

W.e.f. February 13, 2009, RBI included term deposits or bonds of Small Industries Development
Bank of India (SIDBI), National Bank of Agriculture and Rural Development (NABARD) as
allowable security in addition to term deposit of scheduled commercial banks, for calculating
remaining 5% of public deposit beyond 10%.

RNBCs were initially exempted from the requirement to maintain such assets but later vide
Notification No. DFC.120/ED(G)-98 dated January 31, 1998, RBI required RNBCs to maintain
ten percent of the deposits outstanding at the close of business on the last working day of the
second preceding quarter, in approved securities.

Penal Provisions

RBI has also incorporated a penal provision in case the amount invested by a non-banking
financial company at the close of business on any day falls below the rate specified. In such
cases company has to pay a penal interest at a rate of three per cent per annum above the bank
rate on such amount by which the amount actually invested falls short of the specified
percentage, and where the shortfall continues in the subsequent quarters, the rate of penal interest
is determined at five per cent per annum above the bank rate on such shortfall for each
subsequent quarter. This interest has to be paid within a period of fourteen days from the date on
which a notice is issued by the RBI demanding payment of the same is served on the non-
banking financial company and, in the event of a failure of the non-banking financial company to
pay the same within such period, penalty may be levied by a direction of the principal civil court
having jurisdiction in the area where an office of the defaulting non-banking financial company
is situated. However, if the RBI is satisfied that the defaulting non-banking financial company
had sufficient cause for its failure to comply with the requirement of maintenance of such liquid
assets, it may not demand the payment of the penal interest.

Forms

To ensuring compliance with the provisions maintenance of such liquid asset RBI has required
all residuary non-banking company (RNBC) to file a quarterly statement in form NBS-3A and all
NBFCs other than RNBCs to file quarterly form NBS-3. Such form must be submitted to the
Regional Office of Department of Supervision (Financial Companies Wing) of Reserve Bank of
India under whose jurisdiction the Registered Office of the non-banking financial company is
situated. It must be certified and signed by the authorised official of the company to be true and
correct.

Non- Banking Financial Companies Accepting Deposits

An NBFC which accepts fixed deposit from public provided such companies are registered as
deposit accepting NBFCs. Deposit accepting NBFCs are subject to stricter compliance and
regulatory requirements. An NBFC is 'Non-banking finance company' which is registered
under RBI. It can lend money in the shape of loans.

However, NBFCs cannot accept demand deposits i.e. deposits repayable on demand.In exercise
of the powers conferred by sections 45J, 45JA, 45K,45Land 45MA of Reserve Bank of India
Act, RBI has issued NON-Banking Financial Companies Acceptance of Deposits (Reserve
Bank) Directions, 2016, which supersede the earlier directions given on January31, 1998.

Among the various other definitions given in these directions the definition of Non-Banking
Financial Company given in direction3(xiv) states “non-banking financial company” means only
the non-banking institution 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 the Bank
under section 3 of Factoring Regulation Act 2011;
Hence, the directions shall apply to all the NBFC registered under section 45-IA (5) of RBI Act,
including Asset Finance Companies, Loan Companies and Investment Companies which have
accepted deposits.

Let us understand the other types of NBFCs that are included in the definition of NBFC.

1.Asset Finance Company: The Asset Finance Company is the financial institution engaged in
the principal business of financing physical assets that correspond to productive/economic
activity such as machinery, automobile, tractors, loath machines, power generators, earth moving
and material handling equipment moving on own power and general-purpose industrial
machines.

The Asset Financing refers to the act of pledging company’s assets Viz. Bills Receivables,
short-term inventories or investments to borrow loan or cash. This type of financing is used when
the company is seeking the short-term borrowing such as working capital and often the cash is
borrowed against the bills receivables.

Principal Business

The principal business for this purpose is defined as aggregate of financing real/physical assets
supporting economic activity and income arising there from is not less than 60% of its total
assets and total income respectively.

2.Investment Companies: The Investment Companies are the non-finance banking companies
that are primarily engaged in the business of buying and selling of securities. Simply, a company
that pools the resources of investors to reinvest it in the marketable securities ranging from
shares to debentures to money market instruments are called the investment companies.

As per the definition given by NBFC Acceptance of Deposits (Reserve Bank) Directions 2016 in
section 3(viii)"investment company" means any company which is a financial institution
carrying on as its principal business the acquisition of securities;
The investment companies hold the securities of other companies solely for making the
investments. Here, the fund manager decides the type of security in which the pooled money is to
be invested in order to have a diverse and a managed portfolio.

Basically, the investment companies are divided into three types:

 Open-End Management Investment Company also called as Mutual Funds, has no limit
on the number of units the fund issues which means, the investor can continuously buy or
redeem its shares at the current net asset value (NAV). The Open-end mutual funds are
more convenient for the investors since it enables them to buy as many shares as they
want and can easily redeem it at their disposal.

 Closed-End Management Investment Companies also called as Investment Trusts, issues

a fixed number of shares through initial public offerings. These are essentially the
publicly traded companies that raise a fixed amount of capital through the issue of a fixed
number of shares traded on the stock exchange. Here, the shares are limited and hence the
investors cannot buy as many shares as they want and similarly they cannot sell their
existing shares before the expiry of the scheme. But, however, if any investor seeks to
sell his shares the same are traded on the stock exchange.

 Unit Investment Trusts also called as Unit Trusts share the similarities of both the closed
end and open-end mutual funds. Here also, the investment company holds the portfolio of
stock, shares, debentures and other money market instruments purely for investment
purposes. Like, open end funds, most of these can be bought and sold directly from the
issuing investment company while in some instances these are also traded on the
secondary market. Unit trusts often have a low minimum investment requirement and the
shares can be bought and sold anytime the investor wants.

The investment companies give an advantage to the small investors to make the investments in
the wide array of securities which otherwise could not have been possible.

3.Loan company: The Loan Company is a financial institution principally engaged in the
business of providing finance to the public, whether by making loans or advances or otherwise,
for any activity other than its own (Excludes equipment leasing and hire-purchase activities).The
loan is a kind of an agreement wherein the lender temporarily lends property, usually cash to the
borrower with a promise that the borrower will return it along with the interest as per the terms
and conditions as agreed upon. The loan companies offer several kinds of loans based on the
individual’s preferences. Such as demand loan, term loan, secured loan, unsecured loan,
industrial loan, commercial loan, agricultural loan, etc.

As per the definition given by NBFC Acceptance of Deposits (Reserve Bank) Directions 2016 in
section 3(X),"loan company" means any 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 but does not include an Asset Finance Company.

All the Asset Finance companies, loan companies and Investment companies who have accepted
deposits are governed by Non-Banking Financial Companies Acceptance of Public Deposits
(Reserve Bank) Directions, 2016.

Some of the important directions given are as follows:

Minimum Credit rating

-All the NBFCs who have net owned funds of RS 25 Lakh and above are required to obtain
minimum investment grade or other specified credit rating for fixed deposits from any one of the
approved credit rating agencies at least once a year. The NBFC is required to submit a copy of
credit rating along with the return on Prudential Norms to the RBI.

Where the Asset Finance Company has failed to obtain the minimum investment grade rating for
its deposits before 31 March 2016, it shall not renew or accept any new deposits thereafter.

Where there has been any change in the credit rating either upwards or downwards from its
existing rating the same has to be informed to RBI, in writing, within 15 working days from the
date of being rated.

Ceiling on quantum of deposit:

An asset finance company or a loan company or an investment company or a factor

(a) having minimum NOF as stipulated by the Bank, and

(b) complying with all the prudential norms,

shall accept or renew public deposit, only to the extent of one and one-half times of its NOF.If an
asset finance company is holding public deposits in excess of the limit of one and one-half times
of its NOF, it shall not renew or accept fresh deposits till such time it reaches the revised limit.
Also, the public deposit which has matured shall be renewed only with the express and voluntary
consent of the depositor.

Prohibition from accepting demand deposit: No non-banking financial company shall accept any
public deposit which is repayable on demand.

Period of Public Deposit: A NBFC can accept or renew a deposit which shall be repayable after a
period of twelve months but not later than sixty months from the date of acceptance or renewal.

Downgrading of Credit Rating

In the event of down grading of Investment grading for the required minimum rating, NBFC
being an asset finance company or a loan company or an investment company or a factor, shall

1. Stop accepting fresh deposits and stop renewing them with immediate effect
2. all existing deposits shall runoff to maturity; and
3. report the position within fifteen working days, to the concerned Regional Office
of the Bank where the NBFC is registered.

Ceiling on the rate of interest

Non-banking financial company shall invite or accept or renew public deposit at a rate of interest
exceeding twelve and half per cent per annum. Interest may be paid or compounded at rests
which shall not be shorter than monthly rests.

Deposits from Non-Resident Indians

A NBFC can accept deposits from Non-Resident Resident in terms of the notification given
under Non-Resident (External) Account Scheme at a rate not exceeding the rate specified by RBI
for such deposits with scheduled commercial banks.
The period of deposits from NRIs shall be not less than one year and not more than three years.

Payment of brokerage

Non-banking financial company shall pay to any broker on public deposit collected by or
through him, -

(i) brokerage, commission, incentive or any other benefit by whatever name called, upto two per
cent of the deposit so collected; and

(ii) expenses by way of reimbursement on the basis of relative vouchers/bills produced by him,
upto 0.5 percent of the deposit so collected.

Intimation of maturity of deposits to depositors

The NBFC shall intimate the details of maturity of the deposit to the depositor at least two
months before the date of maturity of the deposit.

Advertisement and statement in lieu of advertisement:

(1) Every non-banking financial company soliciting public deposit shall comply with the
provisions of the Non-Banking Financial Companies and Miscellaneous Non-Banking
Companies (Advertisement) Rules, 1977 and shall also specify in every advertisement to be
issued thereunder, the following: -

(i) the actual rate of return by way of interest, premium, bonus other advantage to the
depositor;
(ii) the mode of repayment of deposit;
(iii) maturity period of deposit;
(iv) the interest payable on deposit;
(v) the rate of interest which will be payable to the depositor in case the depositor withdraws
the deposit prematurely;
(vi) the terms and conditions subject to which a deposit will be renewed;
(vii) any other special features relating to the terms and conditions subject to which the
deposit is accepted/renewed;
(viii) the information, relating to the aggregate dues (including the non-fund-based facilities
provided to) from companies in the same group or other entities or business ventures in
which, the directors and/or the NBFC are holding substantial interest and the total
amount of exposure to such entities; and
(ix) that the deposits solicited by it are not insured.

(2) Where an NBFC displays any advertisement in electronic media such as TV, even without
soliciting deposits, it shall incorporate a caption/band in such advertisements indicating the
following:

(i) As regards deposit taking activity of the company, the viewers may refer to the advertisement
in the newspaper/information furnished in the application form for soliciting public deposits;

(ii) The company is having a valid Certificate of Registration dated _______ issued by the Bank
under section 45-IA of the RBI Act. However, the Reserve Bank of India does not accept any
responsibility or guarantee about the present position as to the financial soundness of the
company or for the correctness of any of the statements or representations made or opinions
expressed by the company and for repayment of deposits/discharge of the liabilities by the
company.

(3) Where a non-banking financial company intends to accept public deposit without inviting or
allowing or causing any other person to invite such deposit, it shall, before accepting such
deposit, deliver to the Bank for record, a statement in lieu of advertisement containing all the
particulars required to be included in the advertisement pursuant to the Non-Banking Financial
Companies and Miscellaneous Non-Banking Companies (Advertisement) Rules, 1977 as also
the particulars stated in clause (1) hereinabove, duly signed in the manner provided in the
aforesaid Rules.

(4) A statement delivered under clause (3) above shall be valid till the expiry of six months from
the date of closure of the financial year in which it is so delivered or until the date on which the
balance sheet is laid before the company in general meeting or where the annual general meeting
for any year has not been held, the latest day on which that meeting should have been held in
accordance with the provisions of the Companies Act, 1956 (Act 1 of 1956), whichever is
earlier, and a fresh statement shall be delivered after the expiry of the validity of the statement,
in each succeeding financial year before accepting public deposit in that financial year.

Copies of balance sheet and accounts together with the Directors' report and notes on
accounts to be furnished to the Bank (1)

Every non-banking financial company accepting/holding public deposit shall deliver to the Bank
an audited balance sheet as on the last date of each financial year and an audited profit and loss
account in respect of that year as passed by the company in general meeting together with a copy
of the report of the Board of Directors laid before the company in such meeting in terms of
section 217(1) of the Companies Act, 1956 (Act 1 of 1956) within fifteen days of such meeting
as also a copy of the report and the notes on accounts furnished by its Auditor.

Restrictions on investments in land and building and Unquoted shares

(1) No AFC, which is accepting public deposit, shall, invest in

a. land or building, except for its own use, an amount exceeding ten per cent of its owned fund;

b. unquoted shares of another company, which is not a subsidiary company or a company in the
same group of the non-banking financial company, an amount exceeding ten per cent of its
owned fund.

However, the ceiling on the investment in unquoted shares shall not be applicable to an Asset
Finance Company or a loan company or an investment company in respect of investment in the
equity capital of an insurance company upto the extent specifically permitted, in writing, by the
Bank.

SPECIAL PROVISIONS FOR SYSTEMICALLY IMPORTANT NBFCs

Recognizing the importance of Systemically Important NBFCs and the size of assets they deal
with The Reserve bank of India had made certain Directions applicable for All Deposit taking
Non –Banking Financial Companies and systemically important non-deposit taking non-banking
financial companies.These are

Monitoring of Frauds in NBFCs (Reserve Bank) Directions, 2016

In exercise of the powers conferred by sections 45K, 45L and 45M of the Reserve Bank of India
Act, 1934 (Act 2 of 1934), RBI has issued Monitoring of Frauds in NBFCs (Reserve Bank)
Directions, 2016

Applicability:

These Directions shall apply to all deposit taking non-banking financial companies (NBFC-D)
and ‘systemically important non-deposit taking non-banking financial companies' (NBFC-ND-
SI) herein after referred to as Applicable NBFCs

General Directions

1. Applicable NBFCs shall put in place a reporting system for recording frauds without any
delay. They should fix staff accountability in respect of delays in reporting of fraud cases
to the Bank.
2. Applicable NBFCs shall strictly adhere to the timeframe fixed in this Direction for
reporting fraud) failing which, applicable NBFCs would be liable for penal action as
prescribed under the provisions of Chapter V of the Reserve Bank of India Act, 1934 (the
RBI Act).
3. Applicable NBFCs should specifically nominate an official of the rank of General
Manager or equivalent who will be responsible for submitting all the returns to the Bank
and reporting referred to in this Directions.
4. In case no frauds are detected, applicable NBFCs are not required to submit ‘Nil’ report
to Frauds Monitoring Cell/Regional Offices of Department of Non-Banking Supervision
of the Bank. At the same time enough precautions should be taken by applicable NBFCs
to ensure that the cases reported by them are duly received by Frauds Monitoring
Cell/Regional Offices of Department of Non-Banking Supervision as the case may be.
5. Applicable NBFCs shall disclose the amount related to fraud, reported in the company for
the year in their balance sheets.

Classification of Frauds:
 1.Frauds have in order to have uniformity in reporting, frauds have been classified as under
mainly based on the provisions of the Indian Penal Code:

a. Misappropriation and criminal breach of trust

b. Fraudulent encashment through forged instruments, manipulation of books of account or through
fictitious accounts and conversion of property
c. Unauthorized credit facilities extended for reward or for illegal gratification.
d. Negligence and cash shortages
e. Cheating and forgery
f. Irregularities in foreign exchange transactions
g. Any other type of fraud not coming under the specific heads as above.

2. Cases of ‘negligence and cash shortages’ and ‘irregularities in foreign exchange transactions’
referred to in items (d) and (f) above are to be reported as fraud if the intention to cheat / defraud
is suspected / proved. However, the following cases where fraudulent intention is not suspected /
proved, at the time of detection, will be treated as fraud and reported accordingly:

(a) Cases of cash shortages more than ₹ 10,000/- and

(b) Cases of cash shortages more than ₹ 5000/- if detected by management /auditor / inspecting
officer and not reported on the occurrence by the persons handling case

3. Applicable NBFCs having overseas branches/offices should report all frauds perpetrated at
such branches/offices also to the Bank as per the format and procedure detailed under Chapter
IV.

Reporting of Frauds to Reserve Bank of India

Frauds involving ₹ 1 lakh and above

Fraud reports should be submitted

(i)In all cases of fraud of ₹ 1 lakh and above perpetrated through misrepresentation, breach of
trust, manipulation of books of account, fraudulent encashment of FDRs, unauthorized handling
of securities charged to the applicable NBFC, misfeasance, embezzlement, misappropriation of
funds, conversion of property, cheating, shortages, irregularities, etc.

(ii) in cases where central investigating agencies have initiated criminal proceedings suo moto
and/or where the Bank has directed that they be reported as frauds.

(iii) where frauds perpetrated in their subsidiaries and affiliates/joint ventures of Applicable
NBFCs. (iv)

Where the amount involved in fraud is ₹ 1 crore and above, the reports in the prescribed format
shall be sent within three weeks from the date of detection of the fraud to:

Central Fraud Monitoring Cell

Department of Banking Supervision,
Reserve Bank of India, 10/3/8, Nrupathunga Road,
P.B. No. 5467
Bengaluru – 560001

and to the Regional Office of the Department of Non-Banking Supervision of the Bank under
whose jurisdiction the Registered Office of the applicable NBFC falls.

Where the amount involved in fraud is less than ₹ 1 crore,

Reports in the format given in FMR – 1 shall be sent to the Regional Office of the Department of
Non-Banking Supervision of the Bank under whose jurisdiction the Registered Office of the
applicable NBFC falls, within three weeks (21 days) form the date of detection of the fraud.

Applicable NBFCs are advised to furnish case-wise quarterly progress reports on frauds
involving ₹ 1 lakh and above in the format given in FMR – 3 only to Regional Office of the
Bank, Department of Non-Banking Supervision under whose jurisdiction the Registered Office
of the applicable NBFC falls within 15 days of the end of the quarter to which it relates.
 Applicable NBFCs are permitted to close the fraud cases only where the actions are complete
and prior approval is obtained from the respective Regional Offices of DNBS. The action would
be considered complete when

a. the fraud cases pending with CBI/Police/Court are finally disposed of;
b. the examination of staff accountability has been completed;
c. the amount of fraud has been recovered or written off;
d. insurance claim wherever applicable has been settled; and
e. the applicable NBFC has reviewed the systems and procedures, identified as the causative factors
and plugged the lacunae and the fact of which has been certified by the appropriate authority
(Board / Audit Committee of the Board).

Frauds committed by unscrupulous borrowers

(i) Frauds committed by unscrupulous borrowers including companies, partnership

firms/proprietary concerns and/or their directors/partners by various methods including the
following:

(a) Fraudulent discount of instruments;

(b) Fraudulent removal of pledged stocks/disposing of hypothecated stocks without the NBFC’s
knowledge/inflating the value of stocks in the stock statement and drawing excess finance;

(c) Diversion of funds outside the borrowing units, lack of interest or criminal neglect on the part
of borrowers, their partners, etc. and also due to managerial failure leading to the unit becoming
sick and due to laxity in effective supervision over the operations in borrowal accounts on the
part of the NBFC functionaries rendering the advance difficult of recovery;

(ii) In respect of frauds in borrowal accounts, additional information as prescribed under Part B
of FMR – 1 should be furnished.

Frauds involving ₹ 1 crore and above

In respect of frauds involving ₹ 1 crore and above, in addition to the requirements given above,
applicable NBFCs shall report the fraud by means of a D.O. letter addressed to the Chief General
Manager-in-charge of the Department of Banking Supervision, Reserve Bank of India, Frauds
Monitoring Cell, Central Office Bengaluru and a copy endorsed to the Chief General Manager-
in-charge of the Department of Non-Banking Supervision, Reserve Bank of India, Central Office
within a week of such frauds coming to the notice of the applicable NBFC.

The letter shall contain brief particulars of the fraud such as

• amount involved,
• nature of fraud,
• modus operandi in brief,
• name of the branch/office,
• names of parties involved (if they are proprietorship/ partnership concerns or private
limited companies, the names of proprietors, partners and directors),
• names of officials involved, and
• whether the complaint has been lodged with the Police.

A copy of the D.O. letter should be endorsed to the Regional Office of the Bank, Department of
Non-Banking Supervision under whose jurisdiction the Registered Office of the applicable
NBFC is functioning.

Cases of attempted fraud

(a) All individual cases involving ₹ 25 lakh or more should be continued to be placed before the
Audit Committee of applicable NBFC’s Board. The report containing attempted frauds which is
to be placed before the Audit Committee of the Board should cover inter alia the following viz;

• The modus operandi of the attempted fraud;

• How the attempt did not materialize in the fraud or how the attempt failed / was foiled;

• The measures taken by the applicable NBFC to strengthen the existing systems and controls;
• New systems and controls put in place in the area where fraud was attempted;

• In addition to the above, yearly consolidated review of such cases detected during the year
containing information regarding area of operations where such attempts were made,
effectiveness of new process and procedures put in place during the year, trend of such cases
during the last three years, need for further change in process and procedures, if any, etc. as on
March 31 every year (starting from the year ending March 31, 2013) within three months of the
end of the relative year.

Cases to be reports to the state Police:

The following cases should invariably be referred to the State Police:

• Cases of fraud involving an amount of ₹ 1 lakh and above, committed by outsiders on

their own and/or with the connivance of applicable NBFCs staff/officers
• Cases of fraud committed by employees of applicable NBFCs, when it involves the
NBFC funds exceeding ₹ 10,000/-.

Non-banking Financial Companies-Corporate Governance (Reserve Bank) Directions, 2015.

In exercise of the powers conferred by Sections 45-L, 45-M and 45-MA of the Reserve Bank of
India Act, 1934 (2 of 1934), RBI has made the Non-banking Financial Companies-Corporate
Governance (Reserve Bank) Directions, 2015.

Applicability

These Directions shall apply to every non-deposit accepting Non-Banking Financial Company
with asset size of Rs.500 crore and above (NBFCs-ND-SI), as per its last audited balance sheet,
and all deposit accepting Non-Banking Financial Companies (NBFCs-D), henceforth called as
Applicable NBFCs.
The provisions of these Directions shall not apply to a Systemically Important Core Investment
Company as defined in the Core Investment Companies (Reserve Bank) Directions, 2011.

Constitution of Committees of the Board

(1) Audit Committee

i. All Applicable NBFCs shall constitute an Audit Committee, consisting of not less than three
members of its Board of Directors.

Explanation I: The Audit Committee constituted by a non-banking financial company as

required under Section 177 of the Companies Act, 2013 shall be the Audit Committee for the
purposes of this paragraph.

Explanation II: The Audit Committee constituted under this paragraph shall have the same
powers, functions and duties as laid down in Section 177 of the Companies Act, 2013.

ii. The Audit Committee must ensure that an Information System Audit of the internal systems
and processes is conducted at least once in two years to assess operational risks faced by the
NBFCs.

(2) Nomination Committee

All Applicable NBFCs shall form a Nomination Committee to ensure 'fit and proper' status of
proposed/ existing directors.

Explanation I: The Nomination Committee constituted under this paragraph shall have the same
powers, functions and duties as laid down in Section 178 of the Companies Act, 2013.

(3) Risk Management Committee

All Applicable NBFCs shall form a Risk Management Committee, besides the Asset Liability
Management Committee.

4. Fit and Proper Criteria

(1) All Applicable NBFCs shall

 i. ensure that a policy is put in place with the approval of the Board of Directors for
ascertaining the fit and proper criteria of the directors at the time of appointment, and on
a continuing basis.

ii. obtain a declaration and undertaking from the directors giving additional information on
the directors.

iii. obtain a Deed of Covenant signed by the directors

iv. furnish to the Reserve Bank a quarterly statement on change of directors, and a certificate
from the Managing Director of the NBFC that fit and proper criteria in selection of the
directors has been followed.

The statement must reach the Regional Office of the Reserve Bank within 15 days of the close of
the respective quarter. The statement submitted by NBFCs for the quarter ending March 31,
should be certified by the auditors.

Where the Bank feels that, to protect the public interest, it may examine the Fit and proper
criteria of directors to a particular NBFC, it may do so irrespective of the asset size of NBFC.

5. Disclosure and transparency

(1) All Applicable NBFCs shall put up to the Board of Directors, the following:

i. the progress made in putting in place a progressive risk management system and risk
management policy and strategy followed by the NBFC;

ii. conformity with corporate governance standards viz., in composition of various committees,
their role and functions, periodicity of the meetings and compliance with coverage and review
functions, etc.

(2) All Applicable NBFCs shall also disclose the following in their Annual Financial Statements,
with effect from March 31, 2015:

i. registration/ license/ authorization, by whatever name called, obtained from other financial
sector regulators;
ii. ratings assigned by credit rating agencies and migration of ratings during the year;

iii. penalties, if any, levied by any regulator;

iv. information namely, area, country of operation and joint venture partners with regard to Joint
ventures and overseas subsidiaries and

v. Asset-Liability profile, extent of financing of parent company products, NPAs and movement
of NPAs, details of all off-balance sheet exposures, structured products issued by them as also
securitization/ assignment transactions and other disclosures, as given in Annex 4.

6. Rotation of partners of the Statutory Auditors Audit Firm

All Applicable NBFCs shall rotate the partner/s of the Chartered Accountant firm conducting the
audit, every three years so that same partner does not conduct audit of the company continuously
for more than a period of three years. However, the partner so rotated will be eligible for
conducting the audit of the NBFC after an interval of three years, if the NBFC, so decides.
NBFCs shall incorporate appropriate terms in the letter of appointment of the firm of auditors
and ensure its compliance.

7. Framing of Internal Guidelines

All applicable NBFCs shall frame their internal guidelines on corporate governance with the
approval of the Board of Directors, enhancing the scope of the guidelines without sacrificing the
spirit underlying the above guidelines and it shall be published on the company's web-site, if any,
for the information of various stakeholders.

NON-BANKING FINANCE COMPANIES – MICRO FINANCE INSTITUTIONS (NBFC-

MFI): Website:www.mfinindia.org

A Sub-Committee of the Central Board of the Reserve Bank under the Chairmanship of Shri Y.
H. Malegam was setup in January 2011. Upon its recommendation a separate category of NBFCs
viz. Non-Banking Financial Company-Micro Finance Institution (NBFC-MFI) was formed and
separate directions were issued vide Notification DNBS.PD.No.234 CGM (US) 2011 dated
December 02, 2011 containing the regulatory framework for NBFC-MFIs.
Microfinance Institution is an organization which provides loans to the people at lowest strata of
Income. The benefit is extended in the form of unsecured loan to the smallest category of the
society like rural women, peasants, workers and other such small people who have no capacity to
visit the banks for loan application in connection with their occupations. Although Micro
Finance institutions are formed into various types, they all provide financial help to the needy
section of the society in the form of loans and other financial products. The various types of
MFIs in India:

• JLG or Joint Liability Group:Joint Liability Group is a concept established in India in

2014 by the rural development agency National Bank for Agriculture and Rural
Development (NABARD) to provide institutional credit to small farmers. Joint Liability
Group is a group of 4-10 people of same village/locality of homogenous nature and of
same Socio-Economic Background who mutually come together to form a group for the
purpose of availing loan from a bank without any collateral.

• SHG or Self Help Group:A self-help group (SHG) is a village-based financial

intermediary committee usually composed of 10–20 local women or men who come
together to save regular small sums of money, mutually agreeing to contribute to a
common fund and to meet their emergency needs on the basis of mutual help. They pool
their resources to become financially stable, taking loans from the money collected by
that group and by making everybody in that group self-employed

• The Grameen Bank Model:A bank unit is set up with a Field Manager and a number of
bank workers, covering an area of about 15 to 22 villages. The manager and workers start
by visiting villages to familiarize themselves with the locals in which they will be
operating. Then a prospective clientele is identified and the purpose, functions, and mode
of operation of the bank is explained to the local population. The prospective borrowers
are formed into the groups of 5 members. In the first stage, only two of them receive, a
loan. The group is observed for a month to see if the members are conforming to rules of
the bank. Only if the first two borrowers repay the principal plus interest over a period of
fifty weeks, the other members of the group become eligible themselves for a loan.
Because of these restrictions, there is substantial group pressure to keep individual
 records clear. In this sense, collective responsibility of the group serves as collateral on
the loan.

• Rural Cooperatives:Rural Co Operatives mainly finance agriculture-based activities

including farming, dairy, fishiculture, along with some small-scale industries and self-
employment activities.

Restrictions on Usage of Microcredit from MFI

The micro financial institution does not give loan assistance for certain businesses. Some of them
are listed below for your ease of reference:

1. If you have any other loan or debt, microfinance institutions will not come
forward to your help.
2. Your business plan cannot be about production or manufacturing of tobacco or
alcohol.
3. The borrower cannot take micro loans from these financial institutions to set up
gambling business.
4. You cannot purchase any land or property if that does not belong to the business
for which you have taken a loan from these institutions.
5. Any illegal or unsolicited business will not be funded by microfinance institutions
under any circumstances.
6. MFIs don’t provide loans to meet the borrower’s personal need. The loans are
provided only for business or other income-generating purposes.

Regulatory Framework

In exercise of the powers granted under section 45J of The RBI Act 1934, RBI has vide its
Notification DNBS.PD.No.234 CGM(US)2011 dated December 02, 2011 issued directions
containing the regulatory framework for NBFC-MFIs. These directions are called The Non-
Banking Financial Company -Micro Finance Institutions (Reserve Bank) Directions, 2011

Some of the important directions are discussed below:

Entry point Norms

NEW NBFC-MFI

All the companies desirous of being registered as NBFC-MFI shall have a net owned fund of Rs
5 crore and above. In order to promote development in North Eastern states, the requirement of
NOF is Rs. 2 crores.

Existing NBFCs

All the registered existing NBFC who intend to get converted into NBFC-MFI were advised to
get themselves into NBFC-MFI before 31 October 2012. They were required to maintain NOF of
RsRs.3 crore by March 31, 2013 and at Rs.5 crore by March 31, 2014. In case the NBFC failed
to comply with the NOF directions they were restricted to lend only 10% of their total assets to
Self-help Groups, Joint Liability Groups

Prudential Norms

1. Capital Adequacy Norms:All new NBFC-MFIs shall maintain a capital adequacy ratio
consisting of Tier I and Tier II Capital which shall not be less than 15 percent of its
aggregate risk weighted assets.
2. The total of Tier II Capital at any point of time, shall not exceed 100 percent of Tier I
Capital.
3. The risk weights for on-balance sheet assets and the credit conversion factor for off-
balance sheet items shall be as provided in Non-Banking Financial (Non-Deposit
Accepting or Holding) Companies Prudential Norms (Reserve bank) Directions 2007.

Asset Classification and Provisioning Norms.

i. Standard asset means the asset in respect of which, no default in repayment of

principal or payment of interest is perceived and which does not disclose any
problem. Also, the asset carries only normal risk attached to the business
ii. Nonperforming asset means an asset for which, interest/principal payment has
remained overdue for a period of 90 days or more.

Provisions

The provisions for Bad debts had to be at the highest of the following
 a) 1% of the outstanding loan portfolio or
b) 50% of the aggregate loan instalments which are overdue for more than 90 days and less
than 180 days and 100% of the aggregate loan instalments which are overdue for 180
days or more

Margin caps

(i)For large MFIs whose loans portfolios exceeding Rs.100 crore, the margin cap shall not
exceed 10%. And for other MFIs it shall not exceed 12%.

The interest rates charged by an NBFC-MFI to its borrowers will be the lower of the following:

a. The cost of funds plus margin as indicated in para (i) above; or

b. The average base rate of the five largest commercial banks by assets multiplied by 2.75.
The average of the base rates of the five largest commercial banks shall be advised by the
Reserve Bank on the last working day of the previous quarter, which shall determine
interest rates for the ensuing quarter.
• NBFC-MFIs will ensure that the average interest rate on loans during a financial year
does not exceed the average borrowing cost during that financial year plus the margin,
within the prescribed cap.
• The rate of interest on individual loans may exceed 26%, however the maximum variance
permitted for individual loans between the minimum and maximum interest rate cannot
exceed 4 per cent.
• The average interest paid on borrowings and charged by the MFI are to be calculated on
average monthly balances of outstanding borrowings and loan portfolio respectively.
• Processing charges shall not be more than 1 % of gross loan amount. Processing charges
need not be included in the margin cap or the interest cap.
• NBFC-MFIs shall recover only the actual cost of insurance for group, or livestock, life,
health for borrower and spouse. Administrative charges where recovered, shall be as per
IRDA guidelines.

Fair Practices in Lending

I. Transparency in Interest Rates

a. There shall be only three components in the pricing of the loan viz. the interest charge, the
processing charge and the insurance premium (which includes the administrative charges in
respect thereof).

b. There will be no penalty charged on delayed payment.

c. NBFC-MFIs shall not collect any Security Deposit/ Margin from the borrower.

d. There should be a standard form of loan agreement.

e. Every NBFC-MFI should provide to the borrower a loan card reflecting

(i) the effective rate of interest charged;

(ii) all other terms and conditions attached to the loan;

(iii) information which adequately identifies the borrower; and

(iv) acknowledgements by the NBFC-MFI of all repayments including instalments received and
the final discharge;

(v) All entries in the Loan Card should be in the vernacular language.

f. The effective rate of interest charged by the NBFC-MFI should be prominently displayed in all
its offices and in the literature issued by it and on its website.

II.Multiple-lending, Over-borrowing and Ghost-borrowers

a) NBFC-MFIs can lend to individual borrowers who are not member of Joint Liability Group
(JLG)/Self Help Group (SHG) or to borrowers that are members of JLG/SHG.

b) a borrower cannot be a member of more than one SHG/JLG.

c) not more than two NBFC-MFIs should lend to the same borrower.

d) there must be a minimum period of moratorium between the grant of the loan and the due date
of the repayment of the first instalment. The moratorium shall not be less than the frequency of
repayment. For e.g.: in the case of weekly repayment, the moratorium shall not be less than one
week.
e) recovery of loan given in violation of the regulations should be deferred till all prior existing
loans are fully repaid.

f) All sanctioning and disbursement of loans should be done only at a central location and more
than one individual should be involved in this function. In addition, there should be close
supervision of the disbursement function.

III.Membership of Credit information Company

Every NBFC-MFI has to be a member of at least one Credit Information Company (CIC)
established under the CIC Regulation Act 2005, provide timely and accurate data to the CICs and
use the data available with them to ensure compliance with the conditions regarding membership
of SHG/ JLG, level of indebtedness and sources of borrowing

IV.Non- Coercive Methods of Recovery

a) NBFC-MFIs shall ensure that a Code of Conduct and systems are in place for recruitment,
training and supervision of field staff. The Code of Conduct should also incorporate the
Guidelines on Fair Practices Code issued for NBFCs vide circular CC No.80 dated September
28, 2006 as amended from time to time.

b) Recovery should normally be made only at a central designated place. Field staff shall be
allowed to make recovery at the place of residence or work of the borrower only if borrower fails
to appear at central designated place on 2 or more successive occasions.

FACTORING

What Is Factoring?

Factoring is a financial transaction and a type of debtor finance in which a business sells its
accounts receivable to a third party at a discount. It is also known as “Accounts Receivable
Financing”.

The main reason that companies choose to factor is that they want to receive cash quickly on
their receivables, rather than waiting the 30 to 60 days it often takes a customer to pay. Factoring
allows companies to quickly build up their cash flow, which makes it easier for them to pay
employees, handle customer orders and add more business.

Types of factoring can be listed as:

• Domestic and international factoring

• With recourse and without recourse factoring
• Disclosed and undisclosed factoring

Process of Factoring

History of Factoring

The first foundation stones towards the creation of modern-day factoring were laid in ancient
Mesopotamia, around 5,000 years ago. Not long after that, in ancient Egypt and Greece, debts
were acknowledged in writing and recorded on papyrus. But it wasn’t until the Roman era, when
the first debt collection specialists appeared, they received a commission of up to 1% of the
money collected from the debtor. The Romans spread that concept throughout Europe as their
Empire grew. The term ‘Factoring’ actually comes from the Latin word, ‘Facere’.
This phenomenon became especially important in America in the 19th century when a rapidly
growing population resulted in rising demand for European-made goods, particularly textiles. In
order to respond to demand promptly, it became necessary to maintain stocks of goods on hand.

The Factoring Regulation Act, 2011

The Factoring Regulation Act, 2011 was notified on January 22, 2011.

The Act aims to regulate Factors and assignment of receivables in favor of Factors, as also
delineate the rights and obligations of parties to assignment of receivables.

The Act is divided into 7 Chapters covering 35 sections and is followed by a schedule.

Chapter I: Preliminary

Chapter II: Registration of Factors

Chapter III: Assignment of Receivables

Chapter IV: Rights and Obligations of parties to Contract for Assignment of Receivables

Chapter V: Registration of Assignments

Chapter VI: Offences and Penalties

Chapter VII: Miscellaneous

Section 2 of the Act consists of definitions of terms relevant to the Act. Some of the definitions
are:

“Assignment” as transfer by agreement, of undivided interest of any assignor in any receivable

due from any debtor in favor of a factor and includes an assignment where either the assignor or
the debtor, are situated or established outside India.

“Assignee” means a factor in whose favor the receivable is transferred.

“Assignor” means any person who is the owner of the receivable.

“Debtor” means any person liable to the assignor, whether under a contract or otherwise, to pay
any receivable or discharge any obligation in respect of the receivable whether existing,
accruing, future, conditional or contingent.

“Factor” means a non-banking financial company as defined in clause (f) of section 45-I of the
Reserve Bank of India Act, 1934 which has been granted a certificate of registration under sub-
section (1) of section 3 or anybody corporate established under an Act of Parliament or any State
Legislature or any Bank or any company registered under the Companies Act, 1956 engaged in
the factoring business.

“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 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 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 any activity relating to the production, storage,
supply, distribution, acquisition or control of such produce or goods or provision of
any services.

“Financial Contract” means any spot, forward, future, option or swap transaction involving
interest rates, commodities, currencies, shares, bonds, debentures or any other financial
instrument, any repurchase of securities and lending transaction or any other similar transaction
or combination of such transactions entered into in the financial markets.

“Receivables” means all or part of or undivided interest in any right of any person under a
contract including an international contract where either the assignor or the debtor or the
assignee is situated or established in a State outside India; to payment of a monetary sum
whether such right is existing, future, accruing, conditional or contingent arising from and
includes, any arrangement requiring payment of toll or any other sum, by whatever name called,
for the use of any infrastructure facility or services.

Registration of Factors:
Chapter II of the Act, covering sections 3-6 deals with provisions for registration of factors.

For the purpose of carrying on a business of Factor, certificate of registration from the Reserve
Bank is mandatory.

The application for certificate of registration shall be made in such form and with such fees as
maybe prescribed. Every applicant has to comply with all the requirements to be fulfilled by an
applicant for grant of certificate of registration as non-banking financial company under the
Reserve Bank of India Act, 1934 and all the provisions of that Act, so far as they relate to the
registration of non-banking financial companies, shall (except those provided for under this Act)
mutatis mutandis apply.

Except as otherwise provided under the Act, every factor shall be governed by the Reserve Bank
of India Act, 1934, the rules and regulations made thereunder and the directions or guidelines
issued by the Reserve Bank, from time to time.

The Reserve bank has the powers to direct the factors to furnish to it, at such intervals and within
such time periods such statements, information or particulars relating to factoring business
undertaken by the factor. It also has the powers to give directions in general or a factor in
particular or to a group of factors, if the RBI considers it necessary in the interest of business
enterprises availing factoring services or in the interest of any of the stakeholders.

Assignment of Receivables:

Any assignor may, by an agreement in writing assign any receivable due and payable to him by
any debtor, to any factor, being the assignee, for a consideration as maybe agreed between the
assignor and the assignee and the assignor shall at the time of such agreement, disclose to
assignee any defenses and right of set off that maybe available to the debtor.

On execution of the assignment in writing, all the rights, remedies and any security interest
created over any property exclusively to secure the due payment of receivables shall vest in the
assignee and the assignee shall have absolute right to recover such receivable and exercise all the
rights and remedies of the assignor whether by way of damages or otherwise or whether notice of
assignment is given or not.
Any assignment of receivables which constitute security for repayment of any loan advanced by
any Bank or other creditor and if the assignor has given notice of such encumbrance to the
assignee, then on accepting assignment of such receivable, the assignee shall pay the
consideration for such assignment to the Bank or the creditor, as the case may be.

The assignor cannot demand payment from the debtor, unless the debtor has been notified of
such assignment, by the assignor or the assignee, along with express authority in its favor
granted by the assignor.

Once the debtor makes the payment to the assignee in relation to the receivables specified in the
notice, shall fully discharge the debtor making the payment, from corresponding liability in
respect of such payment.

Where no notice of assignment of receivables is given by the assignor or under his authority by
the assignee, any payment made by the debtor in respect of such receivables to the assignor shall
be held in trust for the benefit of the assignee which shall be forthwith be paid over to such
assignee, as the case may be, or its agent duly authorised in this behalf.

Rights and Obligations of Parties to Contract for Assignment of Receivables:

Chapter IV covering sections 11-18 deals with the rights and obligations of Parties to contract for
assignment of receivables.

The debtor has the right of notice of assignment before any demand is made to him by the
assignee and until the notice is served to the debtor, the debtor shall be entitled to make
payments to the assignor in respect of the assigned receivables, in accordance with the original
contract and such payment shall fully discharge the debtor from corresponding liability under the
original contract.

When the notice of assignment is served, the debtor shall intimate the assignee the details of
the deposits or advance or payments on account made to the assignor before the receipt of notice
of assignment and also provide any other information to the assignee relating to the receivable as
and when called upon by the assignee to do so. Also, he will not be entitled to a valid discharge
of his liability in respect of assigned receivables, unless he makes the payment due on an
assigned receivable to the assignee.
Where a debtor makes any payment to an assignor which represents payment due on an assigned
receivable, such payment shall be deemed to be for the benefit of the assignee, and the assignor shall be
deemed to have received the amount of such payment as a trustee of the assignee and the assignor shall
make payment of such amount to the assignee.

If the assignor of receivables is a micro or small enterprise, the liability of the debtor to make payment
due on assigned receivables shall be subject to the provisions contained in sections 15 to 17 of the Micro,
Small and Medium Enterprises Development Act, 2006 with regards to the delayed payments of the
receivables. In case of delay of payment, the assignee shall be entitled to receive interest for the delayed
period and shall take steps under the provisions of Micro, Small and Medium Enterprises Development
Act, 2006, for the purpose of the recovery of the interest and shall pay such interest to the micro or small
enterprise.

Principle of Debtor Protection: Any assignment of the receivables without the consent of the debtor in
writing, shall not affect the rights and obligations of the debtor. Upon assignment of receivables, the
payment instruction under the contract entered into between assignor and debtor may modify the name of
person, address or account to which the debtor is required to make payment, but such instructions shall
not modify the amount of debt specified in the original contract or the place of payment originally
specified and if not, the place of payment cannot be a place other than where the debtor is situated and the
date of payment or any other terms of the original contract, relating to payment.

In a claim by the assignee against the debtor for payment of the assigned receivable, the debtor may raise
against the assignee:

• all defences and right of set off arising from the original contract or any other contract that was
part of the same transaction, of which the debtor could avail himself as if the assignment had not
been made and such claim were made by the assignor instead of the assignee.
• The assignee shall be entitled to recover from the assignor any loss suffered by it as a result of
any such defences and right of set off being exercised by the debtor.
• Any other right of set off that was available to the debtor at the time of notice of the assignment
was received by the debtor.

Any agreement made before service of the notice of assignment of a receivable that affects the assignee’s
rights in respect of that receivable shall be effective as against the assignee and the assignee shall acquire
rights in the assigned receivables, as modified by such agreement. Any agreement made, after the notice
that affects the assignee’srights shall be ineffective as against the assignee unless the assignee consents to
it or the receivable is not fully earned by performance and either the modification is provided for in the
original contract or, in the context of the original contract, a reasonable assignee would consent to the
notification.

If the assignee commits any breach of the original contract with the debtor, such breach shall not entitle
the debtor to recover from the assignee any sum paid by the debtor to the assignee or the assignee
pursuant to the factoring transactions.

Registration of Assignments:

Chapter V covering sections 19-20 deals with registration of assignments.

The following is the procedure for registration of assignments and the matters incidental thereto.

• The factor shall file the particulars of every transaction in his favour with the Central Registry set
up under the SARFAESI Act, 2002, within a period of 30 days from the date of such assignment
in Form I on payment of Rs. 500/- as fee.
• A record called the Central Register shall be kept at the head office of the Central Registry for
entering the particulars of the transaction relating to assignment or receivables in favour of a
factor
• On realisation of the assigned receivables against the debtor the factor shall file the satisfaction in
Form II along with a fee of Rs. 250/-
• The provisions for registration of transactions contained in SARFAESI Act will be applicable for
this also.

Public Inspection: The particulars of transactions entered in the Central Register shall be open during the
business hours for inspection by any person on payment of prescribed fee. The Central Register
maintained in electronic form shall also be open during the business hours or such extended hours as may
be specified by the Central Registry for inspection by any person through electronic media on payment of
prescribed fee.

Offences and penalties

Chapter VI of the Act lists out various offences and penalties under the Act.

If there is any default in registration of assignments, such company and every officer of the
company who is in default shall be punishable with fine which may extend to Rs. 5,000/- for
every day during which the default continues.
If any factor fails to comply with any direction of RBI, the RBI may impose a penalty which
may extend to Rs. 5,00,000/- and in the case of a continuing offence, with an additional fine
which may extend to Rs. 10,000/- for every day during which the default continues.

Any penalty imposed by the Reserve Bank under this section shall be payable within a period of 14 days
from the date on which notice issued by the Reserve Bank demanding payment of the sum is served on
the factor and in the event of failure of the factor to pay the sum within such period, may be levied on a
direction made by the principal civil court having jurisdiction in the area where the registered office of the
factor is situated; or, in the case of a factor incorporated outside India, where its principal place of
business in India is situated

Where an offence under this Act has been committed by a factor, every person who at the time the
offence was committed was in charge of, and was responsible to, the factor, for the conduct of the
business of the factor, as well as the factor, shall be deemed to be guilty of the offence and shall be liable
to be proceeded against and punished accordingly.

Miscellaneous provisions:

• The provisions of this Act shall have overriding effect on other laws, but it will not bar
the application of other laws for the time being in force.
• No assignee of any receivable shall be entitled to take any measures for recovery of any
assigned receivable, through any court or Tribunal unless his claim in respect of the
receivable is made within the period of limitation specified under the Limitation Act,
1963.
• A factor shall maintain confidentiality and shall not disclose to any person information
obtained by it from, any assignor, its present and future customers, its commercial and
business activities and the terms of sale between the assignor and any debtor and other
detail about the assignor.
• Power to give exemptions, to form rules and regulations under the Act rests with the
Central Government.

Non- Applicability of the Act

Section 31 of the Act provides that the provisions of this Act shall not apply to any assignment of
receivables arising under or from the following transactions:
 • Any merger, acquisition or arrangements of business activities or sale or change in the
ownership of legal status of the business.
• Transaction on any stock exchange or commodities exchange.
• Financial contracts governed by netting agreements, except a receivable owned on the
termination of all outstanding transactions.
• Foreign exchange transactions except receivables in any foreign currency.
• Inter-bank payment systems, interbank paymentagreements or clearance and settlement
systems relating to securities or other financial assets or instruments.
• Bank deposits
• A letter of credit or independent guarantee.
• Rights and obligations of any person under the law governing negotiable instruments,
negotiable warehouse receipts or to instruments which are for the time being, by law or
custom negotiable or any mercantile document of title to goods.
• Sale of goods or services for any personal, family or household use.
• Any assignment of loan receivable by a bank or non-banking financial company to
another bank or non-banking financial company.
• Securitization transactions.

List of Factoring Companies in India

1. Canbank Factors Limited

https://www.canbankfactors.com
2. SBI Global
https://www.sbiglobal.in
3. HSBC Ltd.
https://www.hsbc.co.in/1/2/corporate/trade-and-factoring-services
4. IFCI Factors Limited
https://www.ifcifactors.com
5. ECGC
https://www.ecgc.in/Portal/productnservices/maturity/mfactoring.asp
6. Citibank NA,
Indiahttps://www.online.citibank.co.in/portal/newgen/corporate/product_services/trade_fina
nce.htm
7. SIDBI
https://www.sidbi.com/?q=receivable-finance-scheme
8. Standard Chartered Bank
https://www.sc.com/in/business-banking-sme/trade-working-capital.html
9. Yes Bank Limited
https://www.yesbank.in/corporate-banking/products-and-services/transaction-banking-
solutions/trade-finance-and-services
10. India Factoring and Finance Solutions Pvt. Ltd.
https://www.indiafactoring.in
11. DBS
https://www.dbs.com/in/institutional/financial-institutions/financing-for-
corporates/factoring/accounts-receivable-purchase/faq.aspx
 About Author

CMA(Dr.) RAJKUMAR ADUKIA

Author of 300 plus books,
WINNER OF NATIONAL BOOK HONOUR AWARD 2018
B.Com. (Hons.), LLB, FCA, FCS, FCMA, MBA,
Dip IFRS (UK), DLL&LW, DIPR, Dip in Criminology, PhD
Mobile: 9820061049 Email-Id:cmadrrajkumaradukia@gmail.com

CMA (Dr.) Rajkumar S Adukia is eminent Cost Accountancy professional providing

professional services to his clients. He has been a faculty to various professional institutions like
ICAI, ICSI, ICAI (CMA), Advocates, and other institutions like Management, Banking etc. He
has written article for National Coast Convention 2018 and regularly contributes to articles for
Institute’s publications and newsletters.

CMA (Dr.)Adukia left no stone unturned during his career span expanding to more than 35
years. His vast experience includes training and professional services to banks, financial
institutions, Corporates, Government Departments, and Regulators in the field of Law, Taxation,
Business Consultancy, Audit, Corporate Restructuring, Insolvency and bankruptcy Laws, Real
Estate, Valuation, Intellectual Property Laws, Anti Trust Laws, Alternative Dispute Resolution
etc. He is highly acclaimed academician, an eminent, versatile and experienced Cost Accountant
Professional. He leads by example in all he does

He has written books on “The Insolvency and Bankruptcy Code, 2016” ,“How to Pass
Insolvency Exams” and “How to Pass Valuation Exams”

He is a Law Graduate from Government Law College, Mumbai. He is active member of

various professional bodies; he has been member of the Central Council of the Institute of
Chartered Accountants of India for 18 years.

He is a legal consultant, writer, and speaker. He has an exceptional academic record, having
secured top ranks in B. Com, Law, CMA and CA exams. He is a frequent speaker on various
seminars and conferences organized by the various accounting Institutes, Chambers Of
Commerce, CBDT, CBEC and other professional institutions.

Significant Professional Achievements:

He is the President of GST Research foundation, a society registered under the Societies
Registration Act, 1860.

He is Chairman of Association of Indian Investors, a Section 8 Company wherein its main

thrust is to educate the layman about the principles of safe investment, the complexity of capital
market, changing rules of market operations, design and implement effective Internal Financial
Control framework and provide Corporate Governance Services.

He is also Vice President of All India Insolvency Professional. Organization is providing

services in the field of insolvency and bankruptcy, corporate restructuring etc. The Organization
is currently having 200 professionals all over India as its members.

Current& Past Memberships:

• International Financial Reporting Standards (IFRS)Foundation SME Group,

• INSOL India National Committee for Regional Affairs and
• International Bar Association
♦ Asia Pacific Regional Forum
♦ Forum for Barristers and Advocates
♦ Arbitration Committee
♦ Bar Issues Commission (BIC)
• CAG Advisory Committee
• Quality Review Board, Government of India

His long and dedicated service and contribution to the profession include:

• Chairman of WIRC of ICAI from 1997 to 1998.

• International Member of Professional Accountants in Business Committee (PAIB) of
International Federation of Accountants (IFAC) from 2001 to 2004.
• Member of Inspection Panel of Reserve Bank of India.
• Member of J.J. Irani Committee (which drafted Companies Bill 2008).
• Member of Secretarial Standards Board of ICSI.
• Member of Working Group of Competition Commission of India, National Housing
Bank, NABARD, RBI, CBI etc.
• Independent Director of Mutual Fund Company and Asset Management Company.
• Worked closely with the Ministry of Corporate Affairs on the drafting of various
enactments.
• Actively involved with ICAI as a Central Council Member during the period when the
convergence to IFRS was conceptualized in India and has been instrumental in
materializing the idea.

Eminent Faculty

CMA(Dr.) Adukia is an eminent faculty and an authoritative speaker. He has addressed more
than 250 seminars across the globe including:

• Insolvency and Bankruptcy Board of India

• Institute of Chartered Accountants of India
 • Institute of Company Secretaries of India
• Institute of Cost Accountants of India
• Chamber of Indian Micro, Small & Medium Enterprises
• Speaker in IIA’s 2013 International Conference in Orlando on Green Audit.
• Faculty in Indian Institute of Corporate Affairs for courses on Insolvency Laws and
Corporate laws.
• Faculty Speaker in Workshop on Commodity Risk Management for Bankers organized
by CAFRAL (Centre for Advanced Financial Research and Learning)
• Faculty at National Institute of Securities Management (NISM) and Indian Institute of
Corporate Affairs (IICA)
• Addressed the Programme for Principal Inspecting Officers & Inspecting Officers by
Reserve Bank of India- Department of Non Banking Supervision.
• Addressed the National apex Chamber of Commerce and State apex Chamber of
Commerce including his address to ASSOCHAM, Confederation of Indian Industry
(CII), Federation of Indian Chamber of Commerce and Industry (FICCI), and All India
Manufacturers Organisation(AIMO).
• Addressed the CBI officers, officers of Serious Fraud Investigation Office (SFIO), and
various State Police Academies.
• Addressed the SCOPE- Standing Conference of Public Enterprises which is an apex
professional organization representing the Central Government Public Enterprises. It has
also some State Enterprises, Banks and other Institutions as its members.
• Addressed the National Academy of Audit and Accounts (NAAA)
• Dena bank
• Central bank

Education

Having graduated from Sydenham College of Commerce & Economics in 1980 as 5th rank
holder in Bombay University, he also received a Gold Medal for highest marks in Accountancy
& Auditing. He is a fellow member of Institute of Cost Accountants of India. He cleared the
Cost Accountancy Examination with 3rd Rank in Final Exam. with. He also secured 1st Rank in
Intermediate and 6th Rank in Final Chartered Accountancy Course. He has been awarded G.P.
Kapadia prize for best student of the year 1981. He holds a Degree in law from GLC, Mumbai,
PhD in Corporate Governance in Mutual Funds, MBA, Diploma in IFRS (UK), Diploma in
Labour law and Labour welfare, Diploma in IPR, Diploma in Criminology.
He has done Master in Business Finance, a one-year post qualification course by
ICAI. He has also done Certificate Courses conducted by ICAI on;

 Arbitration
 Forensic Audit and Fraud prevention
 Concurrent Audit
He is a panel member at the following Arbitral Institutions/Forums:

1. International Bar Association

2. Bombay High Court
3. Indian Council of Arbitration
4. India International ADR Association
5. International and Domestic Arbitration Centre India
6. ASSOCHAM ICADR
7. Mumbai Centre for International Arbitration
8. Main Mediation Centre Maharashtra & Goa
9. International Bar Association
10. The International Centre of Alternate Dispute Resolution
11. The Institute of Chartered Accountants of India
12. Bombay Stock Exchange
13. National Stock Exchange
14. Western Region - Ministry of Corporate Affairs, Government of India
15. South Eastern region - Ministry of Corporate Affairs, Government of India
16. North Western Region - Ministry of Corporate Affairs, Government of India

Awards and Accolades

He has been felicitated with awards like;

• The Jeejeebhoy Cup for proficiency and character,

• State Trainer by the Indian Junior Chamber,
• “Rajasthan Shree” by Rajasthan Udgosh, a noted Social Organization of Rajasthan and
• Several other awards as a successful leader in various fields.
• National Book Honour Award 2018

CMA (Dr) Adukia continuously endeavors to help the clients achieve the desired results through
customized and innovative solutions which involve focusing on exploring opportunities and
leveraging them to enhance the growth and expansion of his clients. CMA Adukia values
diligence, knowledge, creativity and innovation in addressing his clients’ needs.

Sharing the knowledge is enhancing the knowledge. CMA Adukia encourages the precise
energies in research, training, seminars, and books writing in whichever field one is passionate
about.

You are invited to come forward and accomplish your passion. You may whatsapp to
CMA(Dr.) Adukia on 9820061049 or email on cmadrrajkumaradukia@gmail.com or Join
him on Google Group CMA(Dr.)Rajkumar Adukia.