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Setting up NBFCs, & NBFC Regulations in India

What Are NBFCs?

Non Banking Financial Companies (“NBFC”) are companies set up under the companies act 2013 that are involved in activities that include but are not limited to:
• The Issuance of loans and advances
• Acquisition of shares
• Acquisition of Bonds
• Hire Purchase activities
• Insurance and Re-insurance
• The business of Chit Fund
Whether a company is an NBFC can be determined with the help of the 50-50 rule. This means that a company is said to be principally engaged in financial activities if :
A) The financial assets of the company comprise at least 50% of the total assets held by the company, AND
B) Where at least 50% of revenue is derived from financial assets.
Companies that fulfill the above conditions will have to be registered as NBFCs with the RBI.
NBFCs are broadly categorized as deposit taking and non-deposit taking entities. Within this classification they are further divided as follows:

NBFC Types

How are NBFCs governed?

BFCs are governed by the RBI Act 1934. Section 45-IA of the act requires all financial companies to require a certificate of registration from the RBI before starting business as an NBFC. Companies are also required to maintain a minimum net owned fund value of INR 2 crores.
There are however exceptions to this registration requirement. The following companies are not required to register with the RBI before commencing business, provided certain conditions are fulfilled :
• 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 and
• Chit Fund Companies
These companies must still comply with other regulations as applicable to their respective businesses.

How to set up an NBFC in India?

To set up a regulated NBFC and application should be made in the requisite format with the RBI along with documentations that includes but is not limited to.
– Shareholding structure
– Details of directors
– Details of business activities undertaken
– Financials of the company
– Declarations from the company and its directors
– Certificate from auditors of the company
– Projected business plan for 3 years
– Memorandum and Articles of Association;
– Certificate of Incorporation;
– Permanent Account Number;
– CIBIL Report;
– Net Worth Certificate; and
– Banker’s Report

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