Position of Law - Definition of NBFC as per Section 45 of the RBI Act 1934
Analysis of Press release issued by RBI on NBFC Dated 8th April 1999
Analysis of Section 3: Reserve Bank of India Act 1934
Clause (f) of Section 45I
Quote
"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;"
Definition of LLP as per Limited Liability Partnership Act, 2008
"Limited liability partnership" means a partnership formed and registered under this Act;"
Definition of Company
|
Company |
As per RBI Act |
As per Companies Act 2013 |
Remarks |
|
Governing Section |
45I(aa) |
2(20) |
|
|
Definition |
[(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: |
"company" means a company incorporated under this Act or under any previous company law; |
Since LLP doesn't fall under the definition of company and NBFC provisions applies only to the companies, therefore RBI provisions related to NBFC are not applicable on LLP. Further, LLP is governed by Limited Liability Partnership Act 2008, and has to adhere to all its provision only. |
Note: Section 3 of the Companies Act 1956 defines " company" as a company formed and registered under this Act.
Now, since the Companies Act 1956 has been substituted with Companies Act 2013 and the definition of company under the said act is defined in Section2(20) as given in above Table.
Section 45-IA of the RBI Act 1934
Quote
"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;"
Unquote
A company as defined under section 45I(aa) of the RBI Act 1934 and as per companies act (read with our remarks) cannot do financing activities without registering as NBFC with RBI.
Analysis of Press Release of RBI Dated 8th April 1999
Quote
"The Reserve Bank of India today announced that in order to identify a particular company as a non-banking financial company (NBFC), it will consider both, the assets and the income pattern as evidenced from the last audited balance sheet of the company to decide its principal business. The company will be treated as an NBFC if its financial assets are more than 50 per cent of its total assets (netted off by intangible assets) and income from financial assets should be more than 50 per cent of the gross income. Both these tests are required to be satisfied as the determinant factor for principal business of a company.
Summary of quotes and unquotes
Currently, the definition of NBFC under the RBI Act does not specifically cover LLPs. Only companies registered under the Companies Act can form NBFCs.
A company is, therefore, considered to be an NBFC if it carries on any of the financial activities listed under clause (i) to (vi) of section 45 I (c) of the Act. In case of companies exclusively engaged in financial activity, the nature of "principal business" is evident. However, where a company carries on multiple businesses, both financial and non-financial, in varied proportion, in the absence of the definition of "principal business", the definition of a NBFC is an exclusive definition in the sense that all non-banking companies carrying on some sort of financial business are NBFCs except when carrying on any non-financial business as principal business.
Can LLP be converted into a Private Limited Company?
Section 366 of the Companies Act, 2013 and Company (Authorized to Register) Rules, 2014 allows LLP to convert into a Company as per the provisions contained therein.
Pre-condition
LLP must have at least 2 partners; approval from all the partners is required. Advertisement in newspaper, in form URC-2, in a local language wherein the registered office of LLP is situated and a national newspaper. No Objection Certificate (NOC) is required from the Registrar of Companies where such LLP is registered.
Can a private limited company be registered as NBFCs?
In terms of Section 45-IA of the RBI Act, 1934, no Non-banking Financial company can commence or carry on business of a non-banking financial institution without a) obtaining a certificate of registration from the Bank and without having a Net Owned Funds of ₹ Two crore.
Therefore, a company can apply for registration with RBI for NBFC by complying with the following:
i. it should be a registered company under the Companies Act 2013
ii. It should have a minimum net owned fund of ₹ 200 lakh.
The author can also be reached at casmitakhurana@gmail.com
CAclubindia
