Legal Service India - Why is NBFC a House Divided unto Itself
law  in India

Why is NBFC a House Divided unto Itself?

Written by:
click here for LIVE help-desk
Chat with us  (2 PM - 9 PM IST)
Legal Advice | Find a lawyer | Constitutional law | Judgments | forms | PIL | family law | Cyber Law | Law Forum | Income-Tax | Consumer laws | Company laws
Search On:laws in IndiaLawyers Search

Copyright Online in India
Right from your Desktop

Home \ Company Law

Latest Articles | Articles 2013 | Articles 2012 | Articles 2011 | Articles 2010 | Articles 2009 | Articles 2008 | Articles 2007 | Articles 2006 | Articles 2000-05

NBFC’s (Non Banking Financial Companies) are reported periodically to be under the RBI (Reserve Bank of India) lens for one reason or the other. Under the circumstances, any effort by RBI to rationalize the regulatory framework of NBFC’s is highly welcome. Of particular concern to RBI appears to be the exposure of those NBFC’s that even while not accepting deposits from the public are still raising resources banks and financial institutions and diverting to the stock market. The evolution of RBI as the banking sector regulator to also being the regulator for NBFC’s has not been well planned. A particularly manifest evidence of this is the confusion in legislation and in policy reflected in the multiplicity of overlapping and irrational classifications of the various types of NBFC’s.
The most apt illustration of this is the fact that whereas the ‘Reserve bank of India Act 1934’ does itself define the term NBFC, there is a different definition of the same term viz. NBFC in the ‘Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1988’ that the RBI itself has issued under sections 45 J, 45K, 45M and 45MA of the aforesaid Act of 1934. Why has RBI made NBFC a house divided unto itself by adopting an incongruous definition of an already defined term in its own parent statute?

NBFC under the RBI Act

Under section 45-I(a) of the RBI Act,1934 ‘business of non banking financial institution ’, is defined in terms of the business of a financial institution and NBFC.
Sec: 45-I(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);]

The Act defines ‘Financial Institution’ (FI) u/s 45-I(c) as
"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 (26 of 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 lump sum 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,
The definition of FI uses the definition of a Non Banking Institution. (NBI) and NBI has been defined under the Act as follows:
Sec.45-I(e) : "non-banking institution" means a company, corporation or co-operative society.

‘NBFC’, itself is defined under sec. 45-I(f) of the Act, as under
Sec. 45-I(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.]

An analysis of forgoing provisions reveals that except for specifically notified categories, a company that is a FI, or a NBI receiving deposits, alone would qualify as an NBFC. A further reading of the definitions of FI and NBI reveals that for a company to be an NBFC it should either carry on any of the businesses as enumerated in (i) to (vi) of Sec. 45-I(c) or it should otherwise receive public deposits in any manner.

Regulatory Framework of NBFC’s

Section 45-IA of the Act requires registration of NBFC with RBI and maintenance of minimum NOF.
Sec 45-IA : (1) Notwithstanding any thing contained in this chapter or any other law for the time being in force, no non-banking financial company shall commence or carry on the business of non-banking financial institution without-
(a) obtaining a certificate of registration issued under this chapter ; and
(b) having the net owned fund of twenty-five lakh rupees or such other amount, not exceeding two hundred lakh rupees, as the Bank may, by notification in the official Gazette, specify;

(2) Every non-banking financial company shall make an application for registration to the Bank in such form as the Bank may specify.
RBI is entrusted with the responsibility of regulating and supervising NBFC by virtue of powers vested in Chapter IIIB and by sections 45J, 45K and 45 MA of the RBI Act, 1934 (2 of 1934). The regulatory and supervisory objective is to;
# ensure healthy growth of financial companies;
# ensure that these companies function as a part of the financial system within the policy framework, in such a manner that their existence and functioning do not lead to systematic aberration; and that
# the quality of surveillance and supervision exercised by the Bank over the NBFCs is sustained by keeping pace with developments that take place in this sector of the financial system.

Accordingly, the RBI has issued directions from time to time. Of particular relevance to NBFCs is the APD direction, where the RBI has adopted another definition of NBFC.

NBFC under Acceptance of Public Deposits (Reserve Bank) Directions, 1998 (APD Directions)
Para 2(1)(xi) of APD directions defines NBFC as Non-banking financial company means only the non-banking institution which is a loan company or an investment company or a hire-purchase finance company or an equipment leasing company or a mutual benefit financial company.

The terms used in the above cited provisions are also defined in the APD directions, as under:
Loan company [ para 2(1)(viii) of APD directions]
Loan company means a company which is a financial institution carrying on as it’s principal business the providing of finance whether by making loans or advances or otherwise for any activity other than its own but doesnot include an equipment leasing company or a hire-purchase finance company.

Investment company [ para 2(1)(vi) of APD directions]
Investment Company is a company which is a financial institution carrying on as it’s principal business the acquisition of securities.

Hire-purchase Finance Company [ para 2(1)(iv) of APD directions]
any company which is a financial institution carrying on as its principal business the activity of hire purchase transactions.

Equipment Leasing Company [ para 2(1)(ii) of APD directions]

means a company which is a financial institution carrying on as it’s principal business, the activity of leasing of equipment.

Mutual Benefit Financial Company [ para 2(1)(ix) of APD directions]

means a company which is a financial institution notified by The Central Government under section 620A of The Companies Act 1956. Each category of above notified companies is an NBFC for the APD Directions. As per the definition given in the APD directions, these companies are a kind of ‘financial institution’. APD directions do not define financial institution. Therefore ‘financial institution’ mentioned under the APD directions imports its meaning from the definition in section 45-I(c) of the RBI Act. This is consequent to Para 2(2) of APD direction which states Words or expressions used but not defined herein are defined in The Reserve Bank of India Act, 1934 (2 of 1934), or in Companies Act, 1956 (1 of 1956) [ or Non-Banking Financial Companies Prudential Norms (Reserve Bank) Directions 1998 or Residuary Non-Banking Companies (Reserve Bank) Directions, 1987], shall have the same meaning as assigned to them in those Acts.

As a consequence, each of these four categories of NBFC’s under the APD Directions are also within the statutory meaning under the Act of the term NBFC. Thus, NBFC’s under the APD Directions are a subset of the NBFC’s under the Act.

Comparison of the two definitions

APD directions cater to a certain type of NBFCs. It is not clear as to why RBI has chosen to define NBFC in a way different from the definition in the RBI Act. It is clear that NBFC as defined in the APD directions is subsumed fully in the statutory definition of NBFC in the Act. In this scenario, it would have been easy and simple enough for the RBI to refer to the statutory definition of NBFC as in the Act and then narrow it down for its purposes. In framing of the APD directions, RBI defines NBFC’s anew and thereupon goes on to identify subcategories such as Loan company , Investment company, Hire-purchase, Finance company or Equipment leasing company and Mutual benefit financial company, so as to attract different paragraphs of the Directions. Needless confusion has been created by RBI as it would have been simpler easier and more rational to use the definition already available in the Act.

The author can be reached at: a / Print This Article


Lawyers Search

• Find a lawyer
• Know your legal options
• Information about your legal issues

File Mutual Consent Divorce

Right Away
Call us at Ph no: 9650499965
Copyright Registration Online Right from your Desktop...
*Call us at Ph no: 9891244487

Legal Advice

Get legal advice from Highly qualified lawyers within 48hrs.
with complete solution.

    Your Name                Your E-mail

Legal Service India

lawyers in Delhi
lawyers in Chandigarh
lawyers in Allahabad
lawyers in Lucknow
lawyers in Jodhpur
lawyers in Jaipur
lawyers in New Delhi
lawyers in Nashik
Contract laws
Protect your website
Army law
lawyers in Mumbai
lawyers in Pune
lawyers in Nagpur
lawyers in Ahmedabad
lawyers in Surat
Faridabad lawyers
Noida lawyers
lawyers in Dimapur
Trademark Registration in India
Woman issues
Famous Trials
lawyers in Kolkata
lawyers in Janjgir
lawyers in Rajkot
lawyers in Indore
Gurgaon lawyers
Ghaziabad lawyers
lawyers in Guwahati
Protect your website
Law Colleges
Legal Profession
Transfer of Petition
Lawyers in India - Search by City legal Service India
lawyers in Chennai
lawyers in Bangalore
lawyers in Hyderabad
lawyers in Cochin
lawyers in Agra
lawyers in Siliguri
Lawyers in Auckland
Cause Lists
Immigration Law
Medico Legal
lawyers in Dhaka
lawyers in Dubai
lawyers in London
lawyers in New York
lawyers in Toronto
lawyers in Sydney
lawyers in Los Angeles
Cheque bounce laws
Lok Adalat, legal Aid and PIL

About Us | Privacy | Terms of use | Juvenile Laws | Divorce by mutual consent | Lawyers | Submit article | Lawyers Registration | Sitemap | Contact Us

legal Service is Copyrighted under the Registrar of Copyright Act ( Govt of India) © 2000-2015
ISBN No: 978-81-928510-0-6