Key Requirements for Acquiring an NBFC License in India

Non-Banking Financial Companies (NBFCs) play a important role in the Indian financial system by providing various financial services such as loans, investments, and asset financing. The licensing and regulation of NBFCs in India are governed by the Reserve Bank of India (RBI) under the Reserve Bank of India Act, 1934. Acquiring an NBFC license is a complex process that involves meeting specific legal requirements and compliance standards.

Legal Provisions for NBFC Licensing

Under Section 45-IA of the Reserve Bank of India Act, 1934, it is mandatory for every financial institution engaged in non-banking financial activities to obtain a Certificate of Registration (CoR) from the RBI. The licensing process is stringent, ensuring that only compliant and financially sound entities operate as NBFCs in India.

Key Requirements for Acquiring an NBFC License

• Company Incorporation

The applicant company must be incorporated as a Private Limited Company or a Public Limited Company under the Companies Act, 2013.

The primary objective of the company must be to carry out financial activities, which should be clearly stated in the Memorandum of Association (MoA).

• Minimum Net Owned Fund (NOF)

The company must possess a minimum Net Owned Fund (NOF) of INR 2 crore. For NBFCs operating in specific sectors like microfinance, housing finance, or infrastructure finance, the NOF requirements may be higher as prescribed by the RBI.

The NOF should be maintained in the form of paid-up equity capital, free reserves, and positive balance in profit and loss account.

• Fit and Proper Criteria for Directors

The directors of the company must meet the RBI's "fit and proper" criteria, which involve aspects like experience, financial soundness, and integrity.

The company must appoint at least one director with financial sector experience.

• Business Plan

A complete business plan for at least the next five years should be prepared, highlighting business objectives, financial projections, and strategies for risk management.

• Compliance with RBI Guidelines

The applicant company must comply with all RBI regulations, including the Fair Practices Code, Know Your Customer (KYC) norms, Anti-Money Laundering (AML) guidelines, and corporate governance standards.

• Submission of Required Documents

The company must submit various documents along with the application, including:

Certificate of Incorporation and MoA/AoA.

Board resolution for NBFC registration.

Detailed information about directors and shareholders.

Banker’s report confirming the no lien on the minimum NOF.

Audited financial statements.

Income tax returns of the company and directors.

A detailed business plan.

• Application Filing with RBI

The application for NBFC registration must be submitted online through the RBI’s COSMOS portal.

A physical copy of the application along with the necessary documents should be submitted to the regional office of RBI.

• Due Diligence by RBI

The RBI conducts thorough due diligence, including verification of submitted documents, background checks on promoters and directors, and scrutiny of the financials.

If the application meets all requirements, the RBI grants the Certificate of Registration.

Corporate Law Compliance for NBFCs

NBFCs are also required to adhere to provisions under the Companies Act, 2013, concerning corporate governance, appointment of auditors, annual compliance, and disclosure norms.

Periodic filing of financial statements, income tax returns, and other statutory reports is mandatory.

RBI mandates periodic returns such as NBS-1, NBS-2, and others to ensure financial transparency.

FAQs on NBFC Licensing in India

- Can a company start operations immediately after applying for an NBFC license?

A: No, a company can commence NBFC operations only after obtaining the Certificate of Registration from RBI.

- Is it mandatory to have a registered office in India to acquire an NBFC license?

A: Yes, the company must have a registered office in India to be eligible for the license.

- What are the common reasons for rejection of an NBFC license application?

A: Common reasons include inadequate NOF, incomplete documentation, non-compliance with RBI guidelines, and unsatisfactory background checks on directors.

- Can foreign investors invest in NBFCs?

A: Yes, Foreign Direct Investment (FDI) up to 100% is allowed in NBFCs under the automatic route, subject to compliance with FEMA regulations.

- How long does it take to obtain an NBFC license?

A: The process can take anywhere between 3 to 6 months, depending on the completion of documentation and RBI's scrutiny.

- Can an NBFC accept public deposits?

A: Only deposit-taking NBFCs (NBFC-D) registered with RBI are permitted to accept public deposits. Other NBFCs cannot accept public deposits.

- What is the validity period of an NBFC license?

A: The NBFC license is valid until it is canceled or revoked by the RBI due to non-compliance or other regulatory reasons.

Conclusion

Acquiring an NBFC in India is a detailed and regulated process that requires compliance with various legal provisions under the RBI Act, 1934, and the Companies Act, 2013. Proper documentation, financial prudence, and adherence to RBI guidelines are critical to obtaining the license. Ensuring legal compliance not only facilitates a smooth licensing process but also builds a strong foundation for sustainable business operations. Companies seeking to venture into the financial services sector are advised to consult with legal and financial experts to the complexities effectively.