NBFC Registration: Net Owned Funds, Fit-and-Proper Director and Unauthorised Deposits
A non-deposit-taking NBFC with an asset size of ₹480 crore has applied to RBI for a certificate of registration. Its net owned funds are ₹1.6 crore. One of its directors is an undischarged insolvent, though he has been on the board for three years. The company also advertises that it accepts public deposits up to 25% of its net worth and has collected ₹3 crore from 40 depositors. It argues that its principal business is lending and that RBI must grant CoR because it has applied and has a business plan. RBI is examining whether to reject the application and whether to take action for accepting deposits.
1. Can RBI reject the CoR application? Consider net owned funds, the fit-and-proper director and the principal business test.
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RBI can reject the application. Section 45-IA of the RBI Act, 1949, requires a company carrying on financial activity as its principal business to obtain a certificate of registration and to satisfy the conditions, including minimum net owned funds and fit-and-proper directors. A NOF of ₹1.6 crore is far below the prescribed minimum for a new NBFC, so the application fails the entry norm. The undischarged insolvent director is a serious fit-and-proper objection; the fact that he has been on the board for three years does not cure it. The principal business test is also not satisfied merely by a business plan; the company must show that financial assets and financial income are the dominant part of its business. RBI has discretion, but the statutory conditions are cumulative. The application is therefore liable to be rejected.
2. What is the legal position of the ₹3 crore collected as public deposits? What action can RBI take?
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The ₹3 crore collected as public deposits is unauthorised. A non-deposit-taking NBFC cannot accept public deposits merely by advertising a percentage of net worth; acceptance requires specific authorisation from RBI, an investment-grade rating, and compliance with the NBFC deposit directions. Collecting deposits without authorisation contravenes Section 45-IA and the RBI Act, and exposes the company to directions to repay, penalties, and prosecution. RBI can also issue a show-cause notice, prohibit further collection, freeze the company's accounts, and direct it to return the money to depositors. The 25% net-worth claim is not a legal licence. The depositors may also have civil remedies, and RBI can publicise the unlicensed entity to warn the public.
3. If RBI rejects the CoR, can the company continue lending? What remedies are available?
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No. Carrying on the business of a non-banking financial institution without a certificate of registration is prohibited. If RBI rejects the CoR, the company cannot continue lending as an NBFC. It may appeal to the Central Government within 30 days under Section 45-IA, and it may also seek judicial review, but an appeal does not automatically suspend the refusal. The company could explore conversion into a non-financial business or a joint venture with a registered NBFC, but it cannot use the pending appeal as a cover for fresh lending. Continuing after rejection can lead to penalties and prosecution. The directors should also address the fit-and-proper issue before any fresh application.