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A Quick glance of Non Banking Finance Company(NBFC)

Sections related to “NBFC” according to the RBI Act

Section - 68 Section 45 I

In this Chapter, unless the context otherwise requires, –
1. [(a) ‘‘business of a non-banking financial institution’’ means carrying on of the business of a financial institution referred to in clause (c) and includes business of a non-banking financial company referred to in clause (f);]
2. [(aa)] ‘‘company’’ means a company as defined in section 3 of the Companies Act, 1956 and includes a foreign company within the meaning of section 591 of that Act:
(b) ‘‘corporation’’ means a corporation incorporated by an Act of any legislature;
3. [(bb) ‘‘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 not include, –
(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 as defined in clause (c) of section 5 of the Banking Regulation Act, 1949;
(iv) any amount received from, –
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(b) a State Financial Corporation,
(c) any financial institution specified in or under section 6A of the Industrial Development Bank of India Act, 1964, or
(d) any other institution that may be specified by the Bank in this
behalf:
(v) amounts received in the ordinary course of business, by way of–
(a) security deposit,
(b) dealership deposit,
(c) earnest money,
(d) advance against orders for goods, properties or services,
(vi) any amount received from an individual or a firm or an association of individuals not being a body corporate, registered under any enactment relating to money lending which is for the time being in force in any State; and
(vii) any amount received by way of subscriptions in respect of a chit.
Explanation I.– ‘‘Chit’’ has the meaning assigned to it in clause (b) of section 2 of the Chit Funds Act, 1982 (40 of 1982).
Explanation II. – Any credit given by a seller to a buyer on the sale of any property (whether movable or immovable) shall not be deemed to be deposit for the purposes of this clause;]
[Explanation III. - The amounts accepted by a co-operative society from the members or shareholders, by whatever name called, but excluding the amounts received as share capital, shall be deemed to be deposits for the purposes of this clause, if such members or shareholders are nominal or associate members, by whatever name called, who do not have full voting rights in the meetings of such cooperative society.] 2 [(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, 1[but does not include any institution, which carries on as its principal business,–
(a) agricultural operations; or
(aa) industrial activity; or]
(b) the purchase or sale of any goods (other than securities) or the providing of any services; or
(c) 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;]
2 [Explanation. – For the purposes of this clause, ‘‘industrial activity’’ means any activity specified in sub-clauses (i) to (xviii) of clause (c) of section 2 of the Industrial Development Bank of India Act, 1964;]
(d) ‘‘firm’’ means a firm as defined in the Indian Partnership Act, 1932 3[* * *];
(e) ‘‘non-banking institution’’ means a company, corporation 4[or cooperative society].
1[(f) ‘‘non-banking financial company’’ 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;]
2. [45-IA. Requirement of registration and net owned fund.
(1) Notwithstanding anything contained in this Chapter or in any other law for the time being in force, no non-banking financial company shall commence or carry on the business of a non-banking financial institution without–
(a) obtaining a certificate of registration issued under this Chapter; and
3. [(b) having the net owned fund of twenty-five lakh rupees or such other amount, not exceeding hundred crore rupees, as the Bank may, by notification in the Official Gazette, specify:
Provided that the Bank may notify different amounts of net owned fund for different categories of non-banking financial companies.]
(2) Every non-banking financial company shall make an application for registration to the Bank in such form as the Bank may specify: Provided that a non-banking financial company in existence on the commencement of the Reserve Bank of India (Amendment) Act, 1997 shall make an application for registration to the Bank before the expiry of six months from such commencement and notwithstanding anything contained in sub-section (1) may continue to carry on the business of a non-banking financial institution until a certificate of registration is issued to it or rejection of application for registration is communicated to it.
(3) Notwithstanding anything contained in sub-section (1), a non-banking financial company in existence on the commencement of the Reserve Bank of India (Amendment) Act, 1997 and having a net owned fund of less than twentyfive lakh rupees may, for the purpose of enabling such company to fulfil the requirement of the net owned fund, continue to carry on the business of a nonbanking financial institution–
(i) for a period of three years from such commencement; or
(ii) for such further period as the Bank may, after recording the reasons in
writing for so doing, extend, subject to the condition that such company shall,
within three months of fulfilling the requirement of the net owned fund,
inform the Bank about such fulfilment: Provided that the period allowed to continue business under this subsection shall in no case exceed six years in the aggregate.
(4) The Bank may, for the purpose of considering the application for registration, require to be satisfied by an inspection of the books of the non-banking financial company or otherwise that the following conditions are fulfilled: –
(a) that the non-banking financial company is or shall be in a position to pay its present or future depositors in full as and when their claims accrue;
(b) that the affairs of the non-banking financial company are not being or are not likely to be conducted in a manner detrimental to the interest of its present or future depositors;
(c) that the general character of the management or the proposed management of the non-banking financial company shall not be prejudicial to the public interest or the interest of its depositors;
(d) that the non-banking financial company has adequate capital structure and earning prospects;
(e) that the public interest shall be served by the grant of certificate of registration to the non-banking financial company to commence or to carry on the business in India;
(f) that the grant of certificate of registration 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 which the Bank may, by notification in the Official Gazette, specify; and
(g) any other condition, fulfilment of which in the opinion of the Bank, shall be necessary to ensure that the commencement of or carrying on of the business in India by a non-banking financial company shall not be prejudicial to the public interest or in the interest of the depositors.
(5) The Bank may, after being satisfied that the conditions specified in subsection (4) are fulfilled, grant a certificate of registration subject to such conditions which it may consider fit to impose.
(6) The Bank may cancel a certificate of registration granted to a non-banking financial company under this section if such company–
(i) ceases to carry on the business of a non-banking financial institution in India; or
(ii) has failed to comply with any condition subject to which the certificate of registration had been issued to it; or
(iii) at any time fails to fulfil any of the conditions referred to in clauses (a) to (g) of sub-section (4); or
(iv) fails–
(a) to comply with any direction issued by the Bank under the provisions of this chapter; or
(b) to maintain accounts in accordance with the requirements of any law or any direction or order issued by the Bank under the provisions of this Chapter; or
(c) to submit or offer for inspection its books of account and other relevant documents when so demanded by an inspecting authority of the Bank; or
(v) 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:
Provided that before cancelling a certificate of registration on the ground that the non-banking financial company has failed to comply with the provisions of clause (ii) or has failed to fulfil any of the conditions referred to in clause (iii) the Bank, unless it is of the opinion that the delay in cancelling the certificate of registration shall be prejudicial to public interest or the interest of the depositors or the non-banking financial company, shall give an opportunity to such company on such terms as the Bank may specify for taking necessary steps to comply with such provision or fulfillment of such condition; Provided further that before making any order of cancellation of certificate of registration, such company shall be given a reasonable opportunity of being heard.
(7) A company aggrieved by the order of rejection of application for registration or cancellation of certificate of registration may prefer an appeal, within a period of thirty days from the date on which such order of rejection or cancellation is communicated to it, to the Central Government and the decision of the Central Government where an appeal has been preferred to it, or of the Bank where no appeal has been preferred, shall be final: Provided that before making any order of rejection of appeal, such company shall be given a reasonable opportunity of being heard. Explanation. – For the purposes of this section,–
(I) “net owned fund” 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–
(1) investments of such company in shares of–
(i) its subsidiaries;
(ii) companies in the same group;
(iii) all other non-banking financial companies; and
(2) the book value of debentures, bonds, outstanding loans and advances (including hire-purchase and lease finance) made to, and deposits with, –
(i) subsidiaries of such company; and
(ii) companies in the same group, to the extent such amount exceeds ten per cent of (a) above.
(II) “subsidiaries” and “companies in the same group” shall have the
same meanings assigned to them in the Companies Act, 1956.
45-IB. Maintenance of percentage of assets.
(1) Every non-banking financial company shall invest and continue to invest in India in unencumbered approved securities, valued at a price not exceeding the current market price of such securities, an amount which, at the close of business on any day, shall not be less than five per cent, or such higher percentage not exceeding twenty-five per cent, as the Bank may, from time to time and by notification in the Official Gazette, specify, of the deposits outstanding at the close of business on the last working day of the second preceding quarter: Provided that the Bank may specify different percentages of investment in respect of different classes of non-banking financial companies.
(2) For the purpose of ensuring compliance with the provisions of this section, the
Bank may require every non-banking financial company to furnish a return to it in
such form, in such manner and for such period as may be specified by the Bank.
(3) If the amount invested by a non-banking financial company at the close of
business on any day falls below the rate specified under subsection (1), such
company shall be liable to pay to the Bank, in respect of such shortfall, 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
shall be five per cent per annum above the bank rate on such shortfall for each
subsequent quarter.
(4) (a) The penal interest payable under sub-section (3) shall be payable within a
period of fourteen days from the date on which a notice issued by the Bank
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 nonbanking financial company is situated and such direction shall be made only upon
an application made in this behalf to the court by the Bank; and
(b) When the court makes a direction under clause (a), it shall issue a
certificate specifying the sum payable by the non-banking financial company
and every such certificate shall be enforceable in the same manner as if it were
a decree made by the court in a suit.
(5) Notwithstanding anything contained in this section, if the Bank is satisfied that
the defaulting non-banking financial company had sufficient cause for its failure
to comply with the provisions of sub-section (1), it may not demand the payment
of the penal interest.
Explanation, – For the purposes of this section,–
(i) “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;
(ii) “unencumbered approved securities” includes the approved securities
lodged by the non-banking financial company 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;
(iii) “quarter” means the period of three months ending on the last day of
March, June, September or December.
45-IC. Reserve fund.
(1) Every non-banking financial company shall create a reserve fund and transfer
therein a sum not less than twenty per cent of its net profit every year as disclosed
in the profit and loss account and before any dividend is declared.
(2) No appropriation of any sum from the reserve fund shall be made by the nonbanking financial company except for the purpose as may be specified by the
Bank from time to time and every such appropriation shall be reported to the
Bank within twenty-one days from the date of such withdrawal:
Provided that the Bank may, in any particular case and for sufficient cause
being shown, extend the period of twenty-one days by such further period as it
thinks fit or condone any delay in making such report.
(3) Notwithstanding anything contained in sub-section (1), the Central
Government may, on the recommendation of the Bank and having regard to the
adequacy of the paid-up capital and reserves of a non-banking financial company
in relation to its deposit liabilities, declare by order in writing that the provisions
of sub-section (1) shall not be applicable to the non-banking financial company
for such period as may be specified in the order:
Provided that no such order shall be made unless the amount in the reserve
fund under sub-section (1) together with the amount in the share premium
account is not less than the paid-up capital of the non-banking financial
company.]