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COPYRIGHT
•The presentation is a property of Vinod Kothari & Co.
Abhirup Ghosh
Vinod Kothari & Company
Kolkata New Delhi Mumbai
In continuation to the above case, during one financial year, the Company fails to generate substantial
amount of trading income and the income from the investments made in shares represent the majority of
the gross income. Whether the Company now becomes an NBFC?
• In this case, the Company fulfils both the asset and income criteria, therefore, it satisfies the principal
test.
• However, it has to be determined whether the Company intends to carry on the business of NBFC. If
the intention of the company is to stick to its existing line of business, then mere fulfilment of the
principal business test in one financial year will not change the nature of the entity.
• However, if in subsequent years similar trend follows and then it will be evident that the actual
nature of the Company is that of an NBFC.
SOME FAQS & CASE STUDIES ON PRINCIPALITY
TEST 2/2
What if the Company takes NBFC registration, in the second year it fails to the satisfy the principal
business test and again in the third year it attains the criteria? Does that mean the Company will obtain
CoR in the first year, surrender in the second and again obtain in the third year?
• No. There can be temporary fluctuations in the business, that cannot change the nature of the
business. If the intention of the Company is to carry on the business of NBFC, it can continue to hold
COR in the second year as well.
DIFFERENCE BETWEEN BANKS AND NBFCS (1/2)
Particulars Banks NBFCs
Definition Banking is acceptance of deposits NBFCs are companies carrying financial
withdrawable by cheque or demand; business.
NBFCs cannot accept demand deposits
Scope of business Limited by sec 6 (1) of the BR Act. No bar on NBFCs carrying activities other
than financial activities.
Licensing requirements Licensing requirements are quite stringent. It is quite easy to form an NBFC. Acquisition
Transfer of shareholding also controlled of NBFCs is procedurally regulated and
by RBI. are subject to approval.
Major limitations on business No non-banking activities can be carried. Cannot provide checking facilities.
Major privileges Can exercise powers of recovery under None, except 196 NBFC, specified by
SARFAESI and DRT law. Central Government, have powers under
SARFAESI or DRT law.
DIFFERENCE BETWEEN BANKS AND NBFCS (2/2)
Particulars Banks NBFCs
Part of payment and settlement Banks are a part of the payment and NBFCs are not a part of the payment
system settlement system. and settlement system.
Deposits Can accept both demand deposits as Only some NBFCs are allowed to
well as term deposits accept term deposits
Foreign investment Upto 74% allowed to private sector Upto 100% allowed
banks.
Regulations BR Act and RBI Act lay down stringent Controls over NBFCs are relatively
controls over banks. lesser stringent.
SLR/CRR requirements Banks are covered by SLR/ CRR NBFC-Ds have to maintain a certain
requirements. ratio of deposits in specified
securities; no such requirement for non
deposit taking companies.
Priority sector lending requirements Certain minimum exposure to priority Priority sector norms are not
sector required. applicable to NBFCs.
STATISTICS
Over 93% of the registered NBFCs are either
Investment Companies or Loan Companies
NUMBER OF NBFCS IN INDIA
12400
12225
12200
12029
12000
11842
11800
11682
11600 11522
11402
11400
11200
11000
Ministry of
Nidhi Companies Stock Exchanges
Corporate Affairs
Insurance
IRDA Merchant Bankers
Companies
SEBI AIFs
REGISTRATION OF NBFCS
In order to carry on the business of NBFC, a company has to register itself with the Reserve Bank of India
under section 45-IA of the Reserve Bank of India Act, 1934
Conditions as per section 45-IA
The applicant should be registered as a company under Companies Act
The minimum net-owned funds of the applicant should be Rs. 200 lakhs
Meaning of net owned funds
Owned funds – exposure in group companies, to the extent the exceed 10% of owned funds
Meaning of owned funds
Aggregate of paid up equity capital and free reserves as reduced by accumulated balance of
losses, deferred revenue expenditure and other intangible assets
If any person carries on the business of NBFC without obtaining registration, the same will attract penal
provisions of section 58B of the RBI Act and shall be punishable with imprisonment which shall not be less
than 1 year but may extend upto 5 years and with fine which shall not be less than Rs. 1 lakh but may
extend upto Rs. 5 lakhs
NBFCS WHICH ARE NOT REQUIRED TO OBTAIN
REGISTRATION WITH THE RBI
Housing Finance Companies,
Merchant Banking Companies,
Stock Exchanges,
Companies engaged in the business of stock-broking/sub-broking,
Venture Capital Fund Companies,
Nidhi Companies,
Insurance companies,
Chit Fund Companies
Core Investment Companies having asset size of less than Rs. 100 crores or not holding public funds
TYPES OF NBFCS
TYPES OF NBFCS 1/2
Deposit taking
Based on the NBFCs Total assets of all
Systemically Those with asset
ability to NBFCs in a group must
important NBFC size of Rs. 500 be aggregated to
accept deposits Non-deposit crores or above determine the limits
taking NBFC
10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
**Assuming investments in group companies is the only financial activity a company carries out
NON-OPERATIVE FINANCIAL HOLDING
COMPANIES
Financial institution through which promoter / promoter groups will be
permitted to set up a new bank;
It’s a wholly-owned Non-Operative Financial Holding Company (NOFHC)
which will hold the bank as well as all other financial services companies
regulated by RBI or other financial sector regulators, to the extent
permissible under the applicable regulatory prescriptions.
LOAN COMPANIES
Company which is a financial institution carrying on as its principal business
the providing of finance whether by making loans or advances or otherwise
for any activity other than its own. That means -
At least 50% of its total assets must be loan assets; and
At least 50% of the gross income should come from such loan assets
Loan for car to be used Though the loan is used for financing an asset, however, the asset
Loan
for personal use does not support an economic/ productive activity
Loan for car to be used The loan is used for financing an asset, which supports an economic/
Asset Finance
for commercial use productive activity
The end use of the loan is not restricted. It may or may not be used
Loan against property Loan
for financing asset.
Working capital loan The loan will be used to meet the working capital needs of the
secured by assets of the borrower. It is not being used for financing any asset that could Loan
borrower support productive/ economic activity
MICRO FINANCE COMPANIES
NBFC-MFI is a non-deposit taking NBFC having not less than 85% of its assets in the nature of qualifying assets which
satisfy the following criteria:
The minimum net owned funds of the company must be Rs. 5 crores
INFRASTRUCTURE FINANCE COMPANIES
CRAR of 15%
MEANING OF INFRASTRUCTURE
Social and Commercial
Transport Energy
Infrastructure
Roads and bridges; Ports; Inland Electricity Generation; Electricity Education Institutions; Hospitals; Three-
Waterways; Airport; Railway Track, Transmission; Electricity Distribution; Oil star or higher category classified hotels
tunnels, viaducts, bridges; Urban pipelines; Oil/ Gas/ Liquefied Natural located outside cities with population of
Public Transport Gas (LNG) storage facility; Gas more than 1 million; Common
pipelines infrastructure for industrial parks, SEZ,
tourism facilities and agriculture
Water & Sanitation Communication markets; Fertilizer; Post harvest storage
infrastructure for agriculture and
horticultural produce including cold
Solid Waste Management; Water Telecommunication (Fixed network); storage; Terminal markets; Soil-testing
supply pipelines; Water treatment Telecommunication towers; laboratories; Cold Chain; Hotels with
plants; Sewage collection, treatment Telecommunication & Telecom Services project cost of more than Rs.200 crores
and disposal system; Irrigation; Storm each in any place in India and of any
Water Drainage System; Slurry star rating; Convention Centres with
Pipelines project cost of more than Rs.300 crore
each.
INFRASTRUCTURE DEBT FUND COMPANIES
Company registered as NBFC to facilitate the flow of long term debt into infrastructure projects;
Raise resources through issue of Rupee or Dollar denominated bonds with minimum maturity of 5 years;
The intention of this type of NBFC is to raised funds from domestic/ offshore institutional investors and refinance
existing debt of infrastructure companies, thereby creating fresh headroom for banks to lend to fresh infrastructure
projects
NBFC-FACTORS
Meaning of factoring: [Factoring Regulation Act,
NBFC-Factor must be registered under Companies Act, 1956 2011]
fee or otherwise.
Certificates of Government
Deposit (CD) Securities Equity Shares Bonds
Retrieve or (Tradable)
collect financial
instrument
Mutual Fund Exchange Traded Indian
Debentures Units Funds Depository
Receipts
Account
aggregation
CIS (Collective Alternate Balances under
Consolidate, contract the National
Financing Investment Investment Funds Insurance Policies
organise and Pension System
arrangement Schemes) units (AIF) units (NPS)
present financial
information
Units of Units of Real Any other item,
Infrastructure Estate Investment prescribed by
Investment Trusts Trusts the RBI from time
to time
ACCOUNT AGGREGATOR – CONTD..
Needs to be registered with the RBI as an NBFC
Needs minimum NOF of Rs. 2 crores
Cannot carry out any activities other than account aggregation
Leverage of the company at any time after the registration of the NBFC should not
exceed 7 times
PEER TO PEER LENDING PLATFORM
It is an electronic platform which connects lenders and borrower
The lenders can be incorporated as well as unincorporated
entities
Same for borrowers
Has to be registered with the RBI as an NBFC
Collaboration
If the platform only acts as a DSA of one or more financial
institutions, it will not require registration
Minimum net owned funds of Rs. 5 crores
Long list of restrictions on these entities, including
Taking exposure on the borrowers themselves
Facilitating secured loans on their platform
Arranges for
finance Not cross sell financial products, except for loan specific
insurance products
Not facilitate international flow of funds
ABOUT US Vinod Kothari & Co.,
Based in Kolkata, Mumbai, Delhi