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Please remember the following information regarding Non-Banking Financial Companies (NBFCs):
NBFCs play a vital role in providing funding to the Indian economy, and the Reserve Bank of India (RBI) is responsible for regulating and supervising these institutions. The RBI oversees the issuance and cancellation of NBFC licenses under the RBI Act, 1934.
In 2019, the RBI canceled 1701 NBFC licenses due to non-compliance with minimum capital requirements. This article looks into the conditions for obtaining an NBFC license, the circumstances leading to license cancellation, and the process for appealing such cancellations.
Conditions for Obtaining an NBFC License:
- All companies must be registered under the Companies Act 2013.
- The company must engage in financial activities as specified in the RBI Act, 1934.
- The financial flow of the business should exceed 50% of the company's total capital assets.
- A net-owned fund of minimum paid-up capital of Rs 2 Crore is required.
- The RBI may inspect the company's books and records to ensure it can meet depositor claims and maintain an adequate capital structure.
Cancellation of the NBFC License by RBI:
The RBI can cancel an NBFC's license if it is not adhering to the provisions of the RBI Act, 1934, or not acting in the public interest. Circumstances leading to license cancellation include cessation of business, non-compliance with registration conditions, failure to maintain the minimum paid-up capital requirement, and failure to comply with any RBI-issued direction or notification.
Filing an Appeal Against License Cancellation:
An NBFC can appeal against the cancellation of its license under certain circumstances such as fulfilling the net-owned fund requirement, lack of hearing opportunity, or timely replying to the RBI’s show-cause notice.
Appeal Process:
An appeal against the cancellation can be filed with the Appellate Authority in the Department of Financial Services under sub-section (7) of Section 45-IA of the RBI Act, 1934. The appeal must be filed within 30 days from the date of receipt of the cancellation order. Additionally, a writ petition under Article 226 can be filed before the High Court.
Steps to Follow Before Filing an Appeal:
- Verify compliance with the Registrar of Companies.
- Review RBI returns (NBS-9).
- Ensure tax audit reports are up to date.
- Conduct a quality test of assets and liabilities.
- Ensure a minimum Net Owned Fund of Rs 2 Crore.
- Clearly state the reasons for filing the appeal.
Impact of NBFC License Cancellation:
An NBFC whose license has been canceled must cease all operations immediately and is prohibited from conducting any business activities as an NBFC from the date of license cancellation.
Conclusion:
NBFCs are crucial for financial inclusion, and the RBI has stringent measures to regulate their operations and ensure compliance with financial norms, aiming to foster a stable and transparent financial ecosystem in the country. For professional assistance in managing NBFC compliance and licensing needs, reach out to services that offer comprehensive support in navigating the regulatory framework.