Cancellation of NBFC License: Procedure for Filing its Appeal

NBFC stands for the Non-Banking Financial Company. In India, it plays a crucial role in providing sound sources of funding to the economy. Hence, the Reserve Bank of India (RBI) is solely responsible for regulating and supervising the NBFC to make sure healthy growth of the financial institutions. Also, the RBI has been empowered to use its power provided under the RBI Act, 1934 in the issuance and cancellation of NBFC License. 

Further, according to a data collected by MINT, the Reserve Bank of India had cancelled 1701 licences of NBFCs in the year 2019 till 31st March. Licenses of those NBFCs are cancelled who failed to meet the minimum capital requirements.

Furthermore, it is significant to note that as many as 779 licences were cancelled in the month of October and November 2018, just after the crisis in the shadow of banking sector unfolded with the IL&FS (Infrastructure Leasing and Financial Services Ltd) defaulting on debt repayments. The defaults led to a lack of liquidity for other non-banks and also triggering a crisis in the sector. In this blog, we would be dealing with the cancellation of the NBFC License in detail.

Conditions for obtaining NBFC License from RBI

It is compulsory for every NBFC (Non-Banking Financial Company) to obtain a certificate of registration/license from the RBI before starting any business operations. Following listed are the conditions required to be complied by every NBFC at the time of obtaining the certificate of registration –

1. All the Companies are mandatorily required to be registered as per the provisions of Companies Act 2013.
2. A Company is required to undertake the financial activities mentioned in the provisions of the RBI Act, 1934. 
3. A company shall get its NBFC registration/license certificate, if at any time; there is a boost in the financial flow of the business such that it exceeds the threshold of 50 per cent of the total capital assets of the company.
4. A minimum Paid-up capital fund of Rs 2 Crore is required by the company as Net Owned Fund.
5. In order to make sure that the company is in a position to pay off its present or future depositor’s claims, and has adequate capital structure and earning prospects and moreover, the affairs of the company are not detrimental to the interest of both its present or future depositors, then the RBI may ask the company to inspect its books of account  and records

Cancellation of the NBFC License by RBI

If at any time, the RBI finds that an NBFC is carrying out the business activities in the manner not specified in the provisions of the RBI Act, 1934 or not acting in favour of the public interest then the RBI has the power and autonomy to cancel the certificate of registration or NBFC License conferred to an NBFC.

What are the circumstances in which the NBFC License can be cancelled?

Following are the instances in which the NBFC License gets cancelled -  

1. In India, the NBFC had ceased to carry on the business activities of a non-banking financial institution
2. If in case the NBFC has failed to comply with the conditions or the requirements of registration specified under the RBI Act, 1934 along with any additional conditions prescribed by the RBI at the time of issuance of the Certificate of registration. For example- if in case the NBFC fails to maintain the requirement of minimum paid-up capital, i.e. went to below Rs 2 crore
3. If in case the NBFC fails to fulfil the conditions prescribed above in respect to the affairs and capital of the Company.
4. If in case the concerned NBFC fails to comply with any direction or notification issued by the Reserve Bank of India
5. If in case the NBFC fails to maintain the books of accounts and records in accordance with the provisions prescribed under the RBI Act, 1934 or RBI directions.
6. If in case the NBFC fails to submit its books of accounts, records and any other relevant documents to the RBI for the purpose of inspections.
7. If in case the NBFC has been prohibited and restricted from accepting deposit by an order passed by the RBI and the concerned order has been in force.

What are circumstances in which a Writ petition should be referred to High Court?

Following are the circumstances in which a writ petition can be filed in a High Court – 

1. When the requirement of having the Net owned fund of Rs 2 crore has been fulfilled after 31 March 2017 but before 31 March 2018
2. The opportunity of being heard has not been provided to the concerned company
3. Show cause notice issued by the Reserve Bank of India (RBI) and the reply for seeking time extension has submitted well on time.

Where to file Appeal against cancellation of NBFC License?

1. An appeal may be filed before the Appellate Authority in the department of financial services, under sub-section (7) of Section 45-IA of the RBI Act, 1934. The time limit to file an appeal is 30 days starting from the date of receipt of order
2. Writ Petition under Article 226 can be filed before the high court.

Steps to follow before filing an Appeal against NBFC License Cancellation

Following are the steps which are to follow before filing an Appeal against NBFC License Cancellation mandatorily– 

1. Double check your ROC (Registrar of Companies) Compliance
2. Check your RBI (Reserve Bank of India) Returns (NBS-9)
3. Tax Audit Reports
4. Quality test of the Assets and Liability
5. Minimum NOF (Net Owned Fund) of Rs 2 crore
6. Adequate reason for filing an appeal

Impact of NBFC License Cancellation 

The NBFC institution whose registration has been cancelled by the RBI (Reserve Bank of India) shall stop functioning as one, from the date of the issuance of the License Cancellation. It shall further be prohibited from doing all the regular activities and affairs with an immediate effect and shall not transact as an NBFC.

Conclusion 

Since the non-banking financial companies (NBFCs) have become an integral part of the financial inclusion in our Indian economy, the Reserve Bank of India (RBI) has become rigorous towards operations and affairs of the non-banking financial company. That’s why RBI nowadays has become strict and is trying to simplify the process of the NBFC by liberalising its rules and regulations.