OVERVIEW Of NBFC Incorporation & Compliances

Non-Banking Financial Companies, or NBFCs, are involved in gathering deposits, loans, and advances as well as buying stocks, shares, and other marketable securities issued by the government, a local authority, or another party. According to the Companies Act of 2013, these businesses are registered. Although NBFCs are not banks, they execute lending functions on a par with banks. NBFCs must comply with specific rules and filing requirements, much like banks, and must do so on a regular basis. Failure to do so may result in serious fines or even the termination of the NBFC Registration Certificate.
Recently, NBFC compliance has become increasingly challenging. Banks used to gain from Non-Banking Financial Firms, and NBFC compliance used to be lot easier and lax, however the RBI just created new NBFC Compliance. According to the Master Direction, NBFC Returns (Reserve Bank) Directions, 2016, the NBFCs are required to provide the RBI with a number of returns including their acceptance of deposits, ALM, compliance with prudential standards, etc. The master directives serve as the framework for safe and secure NBFC operational procedures that comply with RBI regulations. Because NBFC Compliances & Returns are complicated, you should study them attentively to avoid paying hefty fines.

Understanding the concept
A company that engages in the business of loans and advances, the acquisition of shares, stocks, bonds, debentures issued by the government or local authority, or other marketable securities of nature such as leasing, hire-purchase, insurance, or chit business is known as a non-banking financial company. However, this definition excludes activities with a more traditional definition of an industry, such as agriculture, industry, the purchase or sale of any goods.
A Non-Banking Financial Company’s primary activity is to accept deposits under any plan, whether in a single payment or over time.

Types of NBFC
1. Asset finance companies (AFCs): These are businesses that are financial institutions (FIs) and whose main line of business is financing physical assets that support economic and productive activity. Examples of such assets include cars, tractors, lathes, generators, earthmoving and material handling equipment, vehicles that can be driven independently, and general-purpose industrial machines. The term “principal business” refers to an organisation that finances real or tangible assets that support economic activity, and the revenue from such assets must account for at least 60% of the organization’s total assets and income, respectively.
2. Investment Company: IC is a financial institution that conducts the acquisition of securities as its primary activity.
3. Loan company: An FI that conducts the provision of financing, whether via the issuing of loans or advances or otherwise, for any activity other than its own as its primary business is not an Asset Finance Company.
4. Infrastructure Finance Company (IFC): IFC is an NBFC with the following characteristics: a) infrastructure loans account for at least 75% of the company’s total assets; b) at least Rs. 300 crore are in net owned funds; c) IFC has a minimum credit rating of “A” or an equivalent grade; and d) IFC has a CRAR (Capital to Risk-weighted Assets Ratio) of 15%.
5. Systematic important core investment company (CIC-ND-SI): The business’s primary method of operation is the acquisition of securities and shares with an asset value of INR 100 crore or more. The company can invest in bank deposits, money market instruments, government securities, loans to and investments in debt issuances of group companies, or guarantees issued on behalf of group companies. The company must hold 90% of its assets in the form of shares, and the value of equity shares cannot be less than 60% of the total value of the company’s assets.
6. Infrastructure debt fund: These businesses are responsible for facilitating long-term debt financing for infrastructure projects.
7. Micro finance institution: The borrower of the loan shall not have an annual income of INR 1, 00,000 in rural households and INR 1, 60, 000 in semi-urban households. 85% of the assets of the NBFC-MFI must meet these requirements. The borrower’s total debt does not exceed INR 1,00,000. If the loan amount exceeds INR 15, 000, the term is no longer than 24 months, and there is no penalty for early repayment. The ability of the borrower to repay the loan will determine whether it is repaid.

Documents required for NBFC registration
• Incorporation certificate
• Detailed information on the company along with their prospectus
• Copy of PAN and CIN number of the company
• Address proof
• Certified copy of Articles of Association and Memorandum of Association
• List of directors
• Credit or CIBIL report of the directors
• Resolution of board
• Certificate issued by auditor that the company is not holding the public deposit and does not accept it as well and ownership specifying funds on date of application
• Information relating to bank accounts, loan, balances etc. are to be complied
• Self-attested ITR returns of the company by the director
• Business plan for consecutive three years, cash flow, and income statement has to be compiled.

Advantages of NBFC
1. Low time and expense – establishing an NBFC is simpler than registering a bank. In terms of starting a bank, both the time and the expense are excessive.

2. Simple loan recovery – Since NBFCs are extremely organised and offer loans with various repayment terms, it is simple to collect debts from borrowers.
3. Quick fund distribution – Compared to the typical banking process, applying for a loan from an NBFC is simpler and requires fewer paperwork.
4. Interest rate – In comparison to traditional banking, NBFCs provide business loan interest rates that are competitively lower.
5. Eligibility – A consumer might still be approved for a 100% loan from an NBFC despite having a poor credit score.

Registration process of NBFC
Step 1: Register the firm under the 2013 Companies Act.
Step 2: A company’s minimum net owned funds should be at least INR 2 crores.
Step 3 is to pick a director with similar expertise. The newly appointed director must be impartial.
Step 4: The director’s high CIBIL score will have an impact on whether or not an NBFC gets registered.
Step 5 is submitting the COSMOS application using the official RBI website.
Step 6: Submit the necessary paperwork with the application.
Step 7: The CARN will be produced.
Step 8: The documents must be presented to the regional branch of the RBI in hard copy. Step 9 – After reviewing the application, the firm will be granted a licence.

RBI Compliance that is applicable to every NBFC’s irrespective of nature of business
1. Annual report filing: Each NBFC is expected to submit the annual report and the company’s audited financial statements within 15 days after the AGM.
2. Statutory auditors certificate: All NBFCs are required to provide an annual certificate from a statutory auditor along with their certificate of registration (CoR), which certifies that they conduct business as NBFCs.
3. Change in direction or principle officer- The NBFC must notify RBI of any changes in directors or a principle officer within one month of the change taking place. The notification must be issued in writing and include just the essential details, such as
• the name(s) of the principal officer or director who has been appointed.
• Name and address of the director, along with their designation as the appointed individual
• Specimen of the designated officer’s signature.

Final words
Although NBFCs are simple to set up and operate, they have complex compliance requirements that should be subjected to peer review prior to filing, as required by the Reserve Bank of India. As a result, NBFCs should follow the compliances listed above and submit their returns on time.