Section 58B(4A) of the RBI Act states that if companies that are to be registered with the RBI as NBFC are engaged in non-bank financial activities such as lending, investing or accepting deposits as their principal activity without applying for registration as NBFC, they will be liable to imprisonment for at least one year, which may, however, extend to five years, and shall be fined at least one lakh rupee, but which may extend to five lakh rupees. Since the violation of the provisions referred to in article 45-IA is of a criminal nature, it cannot be aggravated. A non-bank financial company (NBFC) is a company registered under the Companies Act 1956/2013 that deals with loans and advances, the acquisition of shares/shares/bonds/debt securities/securities issued by the government or a local authority, or other negotiable securities of a similar nature, leasing, hire-purchase, insurance, but does not include an institution whose main activity is agricultural The activity is the industrial activity, the purchase or sale of goods (other than securities) or the provision of services and the sale/purchase/construction of real estate. A non-bank institution that is a corporation and whose principal activity is to receive deposits under a plan or agreement in the form of lump sum or payments in the form of contributions or otherwise is also a residual non-bank corporation. It is therefore possible that there are companies holding the CoR in order to start/continue IFNB activities without actually carrying out IFNB activities. These companies continue to hold the CoR, although they are not required to hold the CoR granted by the RBI. Therefore, in order to ensure that only NBFCs that actually carry out financial transactions as a core activity hold the CoR, the requirement for annual certification by auditors has been introduced. NBFC companies are financial intermediaries engaged in the activity of accepting deposits and providing funds. They channel scarce financial resources into capital formation. Recently, in a 2006 circular, the press release was revived by the RBI in one way or another from its ashes, and it received a new identity number in the form of an annual certificate, which was to be issued by the NBFC auditor in support of the commencement/continuation of NBFI`s business activities and to meet the «core business» criteria.
Nevertheless, critics are concerned about NBFC`s lack of accountability to regulators and their ability to operate outside of usual banking rules and regulations. In some cases, they may be supervised by other authorities – the Securities and Exchange Commission (SEC) if they are publicly traded companies, or the Financial Industry Regulatory Authority (FINRA) if they are brokers. In other cases, however, they may be able to work with a lack of transparency. (ii) a derivative instrument that is or may be settled by any means other than the exchange of a fixed amount of cash or other financial assets for a fixed number of the entity`s equity instruments. Australian Tax Decision No. SD 246 concluded that when determining a person`s principal business, a number of factors are taken into account, including the number of transactions, the time spent by employees and the turnover related to each business activity to determine each person`s share of the overall business. In general, figures included in an entity`s balance sheet or income statement are not taken into account when these activities are reported on a net basis. «Customer» does not necessarily mean «more than 50%». If a company operates various businesses, the largest of which, for example, accounts for 30% of its total activity, this 30% of the activities are its main activity. NBFCs provide funds to companies operating in transport, wealth creation, job creation, bank loans in rural segments and support the financially weaker strata of society.
Emergency services such as financial advice and support are also provided to clients regarding insurance, etc. All of these activities have made the role of the NBFC an indispensable role in the development of our economy. The Reserve Bank of India has also clarified in its circulars issued in this regard from time to time the intention to obtain such an annual certificate. It is common for RBI to issue a Certificate of Registration (CoR) to new companies on the basis of their intention to participate in NBFI`s activities, but such an intention may not have been fulfilled and the company may not be allowed to carry on NBFI activities even if it holds the CoR of RBI. In the case of an existing company that the CoR considers to be carrying out ifnb`s activity, its business profile may have changed over time and the criteria for the main activity may no longer be met. In the case of D.C. Kothari and Another v Assistant Registrar of Companies (decision date: 24/4/1992), the Chennai Supreme Court held that with respect to the term «principal activity», although there is no generally understandable definition in the law, the principal activity is the principal activity of the company at the relevant time and the main source of income. etc.
However, with regard to the powers conferred on the bank to avoid double regulation, certain categories of NBFCs regulated by other regulatory bodies are exempt from the requirement to register with the RBI, i.e. venture capital funds/investment banking companies/securities dealers registered with SEBI, insurance companies with a valid registration certificate issued by IRDA, Nidhi companies as set out in section 620A of the Companies Act 1956, Chit companies within the meaning of section 2(b) of the Chit Funds Act, 1982, housing finance companies regulated by the National Housing Bank, the Stock Exchange or a mutual benefit company. P2P borrowers are usually people who might otherwise not qualify for a traditional bank loan or who prefer to do business with non-banks. Investors have the opportunity to build a diversified portfolio of loans by investing small amounts in a range of borrowers. Since bank FDs are no longer treated as financial assets, they may escape one or both conditions and thus escape the counterparty provision that would otherwise have led them to apply for registration as NBFC. However, it should be borne in mind that only fixed-term deposits in banks have been excluded and not other liquid funds of a similar nature. The intention of the RBI behind the inclusion of the qualification criteria in relation to NBFC is to include in its area of responsibility only those companies that wish to continue NBFC`s activities. Prima facie determines whether or not a company wishes to continue NBFC`s activities on the basis of its main objectives, as mentioned in the company`s Memorandum of Association (âMOAâ).
The 2007 Guidelines on Prudential Standards for Non-Bank Financial Corporations (Reserve Banks) – both the acceptance of deposits and the acceptance of non-deposits – also reaffirmed the requirement to obtain a Chartered Public Accountant Certificate, adding that this certificate must also indicate nbfc`s asset income model in order to qualify it as an asset finance company, investment company or loan company. Such a certificate from the auditors had to be submitted with reference to the company`s situation at the end of the financial year ended 31 March and submitted by 30 June of each year at the latest. However, the Principality`s test for determining whether a non-bank entity is an NBFC has never been notified by the RBI. Well, under section 372A of the Companies Act, an investment company was defined in the same way. As a company whose main activity is the acquisition of shares, bonds, shares or other securities. The law does not set criteria for determining the term «principal transaction». However, court decisions have emphasized that «core activity» cannot be quantified in absolute terms with the figures given in a company`s financial statements (e.g., balance sheet). Rather, it is the intention of the party that counts. If he intends to carry out a commercial activity as his main activity. In the case of companies that operate exclusively in the financial sector, it becomes easy to categorize whether it can be called NBFC or not. «Mainly means that more than 50% of a company`s total gross income is due to the trading of money or monetary capital in significant competition with the activities of domestic banks. In general, the determination of supremacy is based on the distribution of gross income for the year in question.
However, the classification of a corporation as a financial corporation or as a non-financial corporation is not changed because of an occasional year in which its gross income does not exceed the 50% limit.