NBFC

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Sheetal (Querist)
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24 March 2011 A company receiving its income only from Interest on investment . Almost 80% of revenue is from receipt of interest.

Will this situation means that the company is NBFC?
What is the provision for a company to automatically fall under the catagory of NBFC?

Please Guide....

Pravin Gupta CS

Pravin Gupta CS (Expert)
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25 March 2011 As per sec. 451 A of RBI Act, 1934 " a NBFC menas a company registered under companies act, 1956 and is engaged in the business of Loans and advances . acqusition of scrips, leasing , hire purchase, insurence business, chit business.. but does not include any institution whose pricipal business is that of agriculture activity, industrial act.

Nbfc comapny also divided in 3 catagory:
1. Assets finance company
2. investment company
3. Loan company

so if the company's major income comes from intrest income and nature of business is investment than its required NbFC registration........

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Sheetal

Sheetal (Querist)
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25 March 2011 whether there is any fixed % prportion of Income ..meaning more than 80% or 60% of income should be from interest?

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Asha Kanta Sharma online

Asha Kanta Sharma

(Expert)
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03 August 2024 Yes, a company that receives a significant portion of its income from interest on investments can be classified as an NBFC (Non-Banking Financial Company), but there are specific criteria and guidelines that must be met.

### **Criteria for Classification as an NBFC**

To be classified as an NBFC, a company must fulfill the following criteria set by the Reserve Bank of India (RBI):

1. **Principal Business Activity:**
- **Definition:** As per RBI guidelines, an NBFC is a company whose principal business is the business of financial activities. The principal business activity is determined based on the following:
- The company must be engaged in the business of accepting and holding deposits (not applicable for all types of NBFCs).
- It should be involved in financial activities such as loans, investments, leasing, hire purchase, etc.

2. **Income from Financial Activities:**
- **Income Ratio:** For a company to be classified as an NBFC, the RBI stipulates that its financial activities should constitute a significant portion of its total income. While the RBI does not specify an exact percentage for all types of NBFCs, the general practice is to ensure that the primary income source is from financial activities.
- **Typical Benchmark:** As a rule of thumb, if a significant proportion of a company's income (often cited as 50% or more) comes from financial activities (interest, dividends, etc.), it might be classified as an NBFC. However, different categories of NBFCs might have varying criteria.

3. **Regulatory Registration:**
- **RBI Registration:** For a company to officially operate as an NBFC, it must obtain a registration from the RBI. This involves applying for a license, meeting the minimum net owned fund requirements, and adhering to RBI guidelines and regulations.

4. **Types of NBFCs:**
- There are various categories of NBFCs such as Asset Finance Companies (AFCs), Investment Companies, Loan Companies, Infrastructure Finance Companies (IFCs), etc. Each type has specific criteria regarding income, operations, and business focus.

### **Specific Guidelines for NBFCs:**

- **Net Owned Funds:** The company must meet the minimum net owned fund requirements set by the RBI.
- **Business Focus:** The company's primary business should involve financial services, and the majority of its activities should be in financial intermediation or investment.

### **For Your Situation:**

If a company receives 80% of its revenue from interest on investments, it might be an NBFC, particularly if its other business activities align with financial services. However, it is crucial to ensure compliance with all RBI guidelines and to obtain formal registration as an NBFC.

### **Steps to Take:**

1. **Review RBI Guidelines:** Check the latest RBI guidelines for NBFCs to ensure compliance with all criteria and regulations.
2. **Consult with Experts:** Engage with financial and legal experts to evaluate whether your company meets all the requirements for classification as an NBFC.
3. **Apply for Registration:** If applicable, apply for RBI registration as an NBFC and comply with all regulatory requirements.

In summary, while the high percentage of income from interest suggests that the company might be involved in financial activities, classification as an NBFC depends on meeting the full range of RBI criteria and obtaining the necessary registration.