In the dynamic world of finance, mutual funds have emerged as a popular investment vehicle for individuals and institutions alike. The process of setting up and registering a mutual fund in India is governed by a series of regulatory requirements and involves various stakeholders, including asset management companies (AMCs), trustees, and custodians. This comprehensive guide aims to demystify the process of mutual fund registration, highlighting the key steps and legal considerations involved.
Understanding NBFC | NON-BANKING FINANCIAL COMPANYBefore diving into the NBFC registration process, it's essential to understand what an NBFC is and its significance in the financial ecosystem. Non-Banking Financial Companies (NBFCs) are financial institutions that provide services similar to traditional banks but do not hold a banking license. Despite not having a banking license, NBFCs play a crucial role in India's financial system by offering various financial services such as loans, advances, investments, and credit facilities. They cater to a wide range of sectors and segments, providing financial solutions to individuals, small businesses, and even large corporations. They are financial intermediaries registered as companies, indulged in various financial services that range from providing loans and advances, accepting deposits, delivering credit, acquisition of shares, stocks, debenture, bonds, securities, hire-purchase insurance. and play an pivotal role in financial development of our economy. While the Indian financial system is dominated by banks, NBFC’s increase the financial inclusion of the corporate sector, facilitate credit to the unorganized sector & small and local borrowers by supplementing and posing competition to the banking sector in India.
NBFCs are regulated by the RBI under the framework of the Scale Based Regulation (SBR), which categorizes NBFCs based on their size, activity, and perceived riskiness.
The regulatory structure of NBFCs is divided into four layers: Base Layer (NBFC-BL), Middle Layer (NBFC-ML), Upper Layer (NBFC-UL), and Top Layer (NBFC-TL). Each layer has its own set of regulations and compliance requirements. The SBR aims to align the regulatory framework of NBFCs with their changing risk patterns and ensure the stability and growth of the financial sector.
- Investment & Credit Company (NBFC - ICC): (New Category)
- Infrastructure Finance Company (IFC)
- Infrastructure Debt Fund: Non- Banking Financial Company (IDF-NBFC)
- NBFC-Factors
- Gold Loan NBFCs in India
- Micro-Finance NBFC (MFI)
- Any Loan disbursed by an a MicroFinance NBFC to a borrower with a rural household annual income not more than ₹ 1,00,000 or any urban and semi-urban household income not more than ₹ 1,60,000;
- the borrower should not be indebted for more than ₹ 1,00,000;
- loan of ₹ 15,000 or more shall be granted for a period of 24 months or more with a prepayment option without any penalty;
- loan should be granted without any collateral;
- aggregate amount of loans granted by MFI for income generation should be more than 50 % of the total loans granted by such NBFC-MFI;
- repayment of loan shall be weekly, fortnightly or monthly as per the choice of the borrower.
- Non-Operative Financial Holding Company (NOFHC)
- Mortgage Guarantee Companies (MGC)
- Holds not less than 90 percent of its Total Assets in the form of equity investments, preferential shares, debts or loans in group companies;
- Any Loan disbursed by an a MicroFinance NBFC to a borrower with a rural household annual income not more than ₹ 1,00,000 or any urban and semi-urban household income not more than ₹ 1,60,000;
- (B) Its equity investments (including instruments that are compulsorily convertible into equity shares within a period not exceeding 10 years from the date of issue) in group companies constitute not less than 60% of its total assets;
- Except through block sales for dilution or disinvestment purposes, it does not trade in its investments in shares, debts or loans in group companies;
In order to provide operational flexibility per the principle of activity-based classification, the RBI has, in a recent update, consolidated or harmonized 3 categories of NBFC’s Namely Loan Companies (LC), Asset Finance Companies (AFC) and Investment Companies, into a single Category named Investment and Credit Company (NBFC-ICC).
Loan Company (LC)Loan Company means a financial institution that is carrying out Loan disbursal to earn Interest income as its principal business, but it does not include an Asset Finance Company, an equipment leasing company, or a hire-purchase Company. A loan company can undertake the activities performed by a hire-purchase or leasing company. The nature of the business of a loan company, a hire-purchase company, a leasing company is similar, but the funding requirements for these companies are pretty different from each other.
Investment Company (IC)Investment Companies are those which carry out trading of securities on listed exchanges as a primary business and are also involved in NBFC operations.
Asset Finance Company (AFC)An Asset Finance Company (AFC) is a non-deposit taking NBFC which is involved in the primary business of financing of physical assets supporting productive/economic, like automobiles, tractors, lathe machines, cranes, generator sets, earthmoving and material handling equipment, moving on own power and general-purpose industrial machines as its principal business. The principal business is defined as aggregate of financing real/physical assets supporting economic activity and income arising from there is more or equal than 60% of its total assets and total income respectively.
Infrastructure finance companies carry out financing of a minimum of three-fourths of their total assets in infrastructure loans. The Net Owned Funds (NOF) are more than 3 billion and a minimum crediting rating of 'A' with Capital to Risk-Weighted Assets Ratio is 15%.
IDF-NBFC are companies registered as NBFC to facilitate the flow of long-term debt into infrastructure projects. IDF-NBFC raises resources through Multiple-Currency bonds of minimum 5-year maturity. Only Infrastructure Finance Companies (IFC) can sponsor IDF-NBFCs.
NBFC Factors has the principal business of factoring. Factoring is a financial transaction and a type of debtor finance to provide the financial assistance now to cover the invoice amount to be collected at a later date.
Gold Loan NBFC carry out financing by keeping Gold as security from the customers. In recent years, gold loan NBFCs witnessed an upsurge in the Indian financial market, owing mainly to the appreciation in the gold price and consequent increase in the demand for the gold loan by all sections of society, especially the poor and middle-class society. Growth of gold loan NBFCs is seen both in terms of the size of their balance sheet and their physical presence which in turn compelled to increase their dependence on public funds including bank finance and non-convertible debentures. Aggressive structuring of gold loans resulting from the uncomplicated, undemanding, and fast process of documentation along with the higher Loan to Value (LTV) ratio includes some of the major factors that caused the growth of Gold loan NBFCs.
Micro Finance Institution (MFI) is a kind of NBFC which offers financial services to the low-income segment of the population. MFIs give loans and offer insurance, deposit, and other services to its members. These companies, MFI also offer credits and other financial services to the representatives of the poor population except for extremely poor which are Below the Poverty Line (BPL). NBFC-MFI is a non-deposit taking NBFC having not less than 85% of its assets in the nature of qualifying assets. Following are the criteria for as asset to be classified as Qualifying Asset:
It is a financial institution through which promoter/promoter groups will be permitted to set up a new bank. It’s a wholly-owned Non-Operative Financial Holding Company (NOFHC) which will hold the bank as well as all other financial services companies regulated by RBI or other financial sector regulators, to the extent permissible under the applicable regulatory prescriptions.
Non-Operative Financial Holding Company (NOFHC) means a non-deposit taking NBFC as referred to in the 'Guidelines for the Licensing of New Banks in the Private Sector'1 issued by Reserve Bank, which holds the shares of a banking company and the shares of all other financial services companies in its group, whether regulated by Reserve Bank or any other financial regulator, to the extent permissible.
MGC is a financial institution for which at least 90 percent of the business turnover is a mortgage guarantee business or at least 90 percent of the gross revenue is from a mortgage guarantee business and a net owned fund of about 100 crores.
CIC-ND-SI is an NBFC undertaking the acquisition of shares and securities which fulfills the following conditions:-
| Investment activities | Lending or related activities | Other activities |
|---|---|---|
| Investment Company | Loan Company | Mortgage Guarantee Company |
| Core Investment Company | Asset Finance Company | Peer-to-Peer Lending Company |
| Non-Operative Financial Holding Company | Micro Finance Institution | Account Aggregator |
| Infrastructure Finance Company | ||
| Infrastructure Debt Fund | ||
| NBFC - Factor |
Before starting the NBFC registration process, there are certain prerequisites that need to be fulfilled:
Company Formation: The applicant company must be registered under the Companies Act, 2013, and possess a Certificate of Incorporation (CoI) issued by the Registrar of Companies (RoC). The Memorandum of Association (MOA) and Articles of Association (AOA) should align with the proposed business plan.
Net Owned Fund: The applicant company must have a minimum net worth of ₹2 crores as per the RBI guidelines. This net worth should be maintained throughout the registration process and beyond.
Qualified Management: The company should have a qualified management team with at least one director having a minimum of 10 years of experience in banking, specifically in the areas of credit and risk or retail banking. The directors and key management personnel should be fit and proper individuals with no history of misconduct or involvement in loan fraud.
Capital Requirement: The company must meet the capital requirement specified by the RBI. The minimum net owned fund required is ₹10 crores, but it may vary based on the type of NBFC. Regulatory minimum Net Owned Fund (NOF) for NBFC-ICC, NBFC-MFI and NBFC-Factors shall be increased to ₹10 crore. The following glide path is provided for the existing NBFCs to achieve the NOF of ₹10 crore:
Business Plan: A comprehensive business plan for the next 5 years should be submitted along with the application. The plan should outline the company's objectives, strategies, financial projections, risk management framework, and compliance with regulatory norms.
Prudential Norms Compliance: The company must adhere to prudential norms set by the RBI, including regulations on capital adequacy, asset classification, provisioning, exposure limits, and risk management.
AML and KYC Compliance: The company should have robust anti-money laundering (AML) and know your customer (KYC) procedures in place to comply with regulatory requirements. This includes implementing customer due diligence measures, maintaining records, and reporting suspicious transactions.
Grievance Redressal Mechanism: The company should establish an effective customer support department and appoint a nodal officer to address customer grievances. A tech-enabled workflow for tracking and resolving complaints should be implemented.
Note: The Net Owned Fund mentioned above shall be available in Company’s bank account in the form of Fixed Deposit at the time of filing of Application for registration of NBFC.
- Certificate of Incorporation: This is the certificate that proves the company's legal existence.
- Memorandum of Association (MOA) and Articles of Association (AOA): These are the charter documents of the company that define its purpose and the rules governing its operation.
- Board Resolution: A formal decision taken by the board of directors of the company in favor of NBFC registration.
- Bank Account Details: Details of the bank account where the company maintains its funds.
- Certificate of Net Owned Funds: A certificate/proof from banker and auditor indicating compliance with Net Owned Fund Requirements.
- CA Certificate: A certificate of Chartered Accountant regarding details of group/ associate/ subsidiary/ holding companies along with details of investments in other NBFCs as shown in the Proforma Balance Sheet
- Audited Balance Sheet and Profit & Loss Account: These financial statements should be for the last three years.
- Income Tax Returns: The company's income tax returns for the last three years.
- Details of Partners/Directors: This includes personal details, qualifications, and experience of the partners or directors of the company.
- Address Proof: Proof of the registered office address of the company.
- Clean Banker Report: A report from the bank stating the company's creditworthiness.
- Net Worth Certificate: A certificate that states the net worth of the company.
- Credit Report of Directors: A report that provides information about the creditworthiness of the company's directors.
- Educational Qualifications of Directors: Proof of the educational qualifications of the company's directors.
- Experience Certificate of Directors: Proof of the professional experience of the company's directors.
- Declaration from Directors/Partners: Self-declaration by the directors for not being charged with any penal action Self-attested documents of Directors, & Shareholders:
- PAN of the Directors
- Aadhar of the directors
- Copy of ITR of the past 3 years
- Net worth statement & Credit report
- Proof of Highest Educational Qualification
- Diverse Financial Services: NBFCs offer a wide range of financial services, including loans, credit facilities, retirement planning, money markets, underwriting, and merger activities.
- Flexibility: They often have more flexible terms and conditions compared to traditional banks, making them more accessible to a broader range of customers.
- Promotion of Rural Development: NBFCs play a significant role in promoting rural development, especially in areas where banking facilities are not readily available. They provide credit to the unbanked areas, contributing to the economic growth of these regions.
- Filling the Credit Gap: In scenarios where traditional banks are unable to provide loans, NBFCs step in to fill the credit gap. They cater to the diverse financial needs of various sectors.
- Innovative Products: NBFCs are known for their innovative financial products tailored to the specific needs of their clients. This innovation helps in attracting a larger customer base.
- Risk Diversification: They play a role in diversifying the risk associated with the financial sector. By providing services different from traditional banks, they reduce the risk concentration.
- Support to MSME: NBFCs provide significant support to Micro, Small, and Medium Enterprises (MSMEs), which might not have access to traditional banking services.
- Higher Returns: Typically, investments like fixed deposits with NBFCs offer higher interest rates compared to banks, making them an attractive option for investors.
- Personalized Services: NBFCs often provide more personalized and efficient services to their customers due to their smaller size compared to big banks.
- Economic Development: By providing credit to the underserved and unbanked regions, they play a pivotal role in the overall economic development of the country.
- Popularity Among Institutional Investors: NBFCs have gained significant traction among institutional investors due to their role in providing credit access to semi-rural and rural India, areas traditionally underserved by banks.
- Provides Loans and Credit Facilities: Many businesses and startups prefer availing loans from NBFCs over traditional banks due to faster processing, competitive interest rates, and loan availability even for those with a poor credit history.
- Supporting Investments in Property: Investing in property through NBFCs offers advantages such as flexible rates, easy repayment options, and quick processing with acceptable property collaterals.
- Trading Money Market Instruments: NBFCs offer softer interest rates on money market instruments like commercial paper, even when the base rate of banks remains unchanged.
- Funding Private Education: NBFCs make education loans more accessible with their flexible rates and easy repayment terms.
- Facilitates Retirement Planning: They offer various products and services tailored to help individuals plan for their retirement.
- Merger and Acquisition Advisory: NBFCs provide expert advice to companies looking to merge with or acquire other businesses.
- Wealth Management: They offer services like managing portfolios of stocks and shares, ensuring that individuals and businesses can grow their wealth effectively.
- Engage a Skilled NBFC Consultant
- Choose an Apt Company Name
- Company Formation
- Strategize Your Base of Operations
- Secure the Certificate of Incorporation
- Safeguard Your Net Owned Funds
- Compile Essential Documentation
- Craft a Comprehensive Business Blueprint
- An overview of your mission and vision
- Detailed product offerings
- Your lending methodology
- Risk management strategies
- Analysis of industry competitors
- Strengths, Weaknesses, Opportunities, and Threats (SWOT) assessment
- Financial growth predictions
- Register with the RBI
- Online Application Submission
- Dispatch Hard Copies
- Regional Office Review
- Central Office Assessment
- Kickstart Your NBFC Operations
Seek the expertise of an NBFC registration specialist with a decade of experience. Ensure they have a diverse team, including Chartered Accountants, Company Secretaries, legal experts, and seasoned bankers.
Your company name should resonate with financial services. Consider incorporating terms like "Finance," "FinTech," "Capital," "Invest," "Leasing," or "FinServ."
Initiate the process of registering your entity as either a Private Limited or Public Limited company.
Decide on the location of your registered office and delineate your operational territories.
Obtain this certificate from the Registrar of Companies to validate your company's legal status.
Ensure your company's bank account holds the necessary Net Owned Funds, showcasing your financial stability.
Prepare all the necessary paperwork required for the NBFC license application.
Outline a detailed business strategy for the upcoming five years, encompassing:
Submit your application for NBFC registration under the RBI Act, 1934, via the RBI's official portal.
Post your application on the RBI's official site and obtain a unique CARN (Company Application Reference Number) for future correspondence.
Forward duplicate hard copies of your application to the RBI's regional branch for verification.
The regional RBI office will evaluate the authenticity and completeness of your submitted documents.
Post regional verification, your application will be forwarded to the RBI's central office. They will grant the NBFC registration if all criteria under section 45-IA are met.
Once registered, ensure to commence your NBFC's business activities within six months from the Certificate of Registration's issuance date.
Net Owned Funds (NOF) Net owned Fund consists of paid-up equity capital, free reserves, balance in share premium account and capital reserves representing surplus arising out of sale proceeds of assets but excludes reserves created by revaluation of assets. From the aggregate of items, accumulated loss balance and the book value of intangible assets should be deducted, if any, to arrive at owned funds. Investments in shares of other NBFCs and in shares, debentures of subsidiaries and group companies in excess of ten percent of the owned fund mentioned above will be deducted to arrive at the Net Owned Fund. The NOF should be computed on the basis of last audited Balance Sheet and any capital raised after the Balance Sheet date should not be accounted for while computing NOF.
- Incorporation of the Asset Management Company (AMC): The first step involves setting up an AMC, which will manage the mutual funds. This requires approval from SEBI and adherence to specific eligibility criteria, including minimum net worth, experience in financial services, and a track record of fairness and integrity.
- Formation of the Trust and Trustee Appointment: A mutual fund is established as a trust per the Indian Trusts Act, 1882. The trust deed is drafted and registered, outlining the fund's objectives, investment strategies, and operational guidelines. The trustee(s) are appointed to ensure compliance with the trust deed and SEBI regulations. Trustees play a pivotal role in safeguarding the interests of the investors.
- Filing Application with SEBI: The AMC, along with the trust deed, must apply to SEBI for registration of the mutual fund. This application includes detailed documentation about the fund's structure, investment objectives, risk management strategies, and the expertise of its management team.
- Infrastructure and Systems Setup: Post-approval, the AMC must establish a robust infrastructure, including technological systems for fund management, customer service, and compliance monitoring. This phase also involves setting up processes for investor transactions, reporting, and communication.
- Appointment of Custodian and Registrars: A custodian, responsible for holding and safeguarding the securities owned by the fund, is appointed. Additionally, registrars are chosen to handle investor-related services, including unit transactions and customer queries.
- Scheme Launch and Marketing: Once the regulatory and infrastructure setups are complete, the mutual fund can launch its schemes. Marketing strategies are crucial at this stage to attract investors and build a strong market presence.