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A Complete Guide on NBFC Compliance under FEMA

A Complete Guide on NBFC Compliance under FEMA

Maintaining the smooth functioning of the global market, the Foreign Exchange Management Act puts forth certain guidelines and compliances that are to be followed. NBFC compliance under FEMA is a similar case. The NBFC – Non-Banking Finance Companies are also to undergo certain compliances for a better run. The NBFCs are not necessarily required to follow NBFC compliance under FEMA, but only when there is the involvement of foreign actors; investors across the world are involved in borrowing and lending to the said NBFC, it is required. One more thing which NBFC owners must take care about is NBFC Registration. In this blog we are going to guide you about everything related to NBFC.  

What is NBFC – Non-Banking Financial Companies? 

A bank is a financial institution that has the license to accept deposits and grant loans to individuals. A Non-Banking Financial Company functions similar to that of a bank by providing loans or hire purchase but it cannot accept deposits from individuals and provide them with any type of accounts. NBFCs can only accept a lump sum amount or a contribution as a deposit. These NBFCs provide loans and securities to small and medium scale enterprises, at the micro-level. These Non-Banking Financial Companies are registered under the Companies Act, 2013. 

Types of Non-Banking Financial Companies 

Following are the main types of Non- Banking Financial Companies-  

  • Asset Finance Companies 
  • Investment Companies 
  • Loan Companies 
  • Infrastructure Companies 
  • Infrastructure Debt Funds 
  • Systematically Important Core Investment Company 
  • Non-Banking Financial Companies – Factors 
  • Non-Banking Financial Company – MFI (Micro Finance Institution) 

What is FEMA – Foreign Exchange Management Act? 

FEMA or the Foreign Exchange Management Act is known to regulate the foreign exchange and external payments and trades supporting the market. It allows the Reserve Bank of India to enact relevant regulations benefiting the trade policy. 

FEMA ensures transparency in investments that are across the world with the aim to increase the investments. Since globalization has increased involvement in international markets, FEMA compliance is a must-have for India. Companies are under strict directions to follow the compliance to deflect penalties and inconveniences. FEMA regulates compliances that the NBFCs need to follow to proceed with their foreign transactions in a smooth manner. 

NBFC and FEMA 

Guiding the Foreign Direct Investments, Foreign Exchange Management Act provides for certain compliances for the Non-Banking Financial Companies, to follow while transacting from foreign countries. NBFC compliance under FEMA is mandatorily required to initiate and promote transactions and investment from foreign investors, and to help establish and flourish the non-banking financial institution. Compliances under FEMA are required only when there is the involvement of a foreign factor. Such compliances regulate and supervise the proper flow of currency. The NBFCs are not only regulated by the FEMA but also the RBI.  

NBFC and RBI 

As per the RBI Act, it is necessary for every Non-Banking Financial Company to obtain a certificate of registration from the Bank. The NBFC registering with the Bank should be a company registered as per Section 3 of the Companies Act, and should have a net owned fund minimum of Rs.2 Cr.  

Routes of Foreign Investment 

There are following types of routes under Foreign Investment-  

Foreign investment under automatic route 

  • Underwriting 
  • Stockbroking 
  • Merchant banking 
  • Portfolio management services 
  • Venture capital 
  • Factoring 
  • Asset management 
  • Custodian services 
  • Housing finance 
  • Leasing and finance 
  • Rural credit 
  • Micro credit 
  • Credit card business 

Non- Fund based Activities Routes  

  • Financial consultancy 
  • Investment Advisory Services 
  • Credit rating agencies 
  • Forex broking 
  • Money changing business 

Procedure for NBFC compliance under FEMA 

Follow the steps given below for the NBFC Registration-

  • A duly filled up application Form 83 from the official RBI website for any form of foreign investment. 
  • Documents to be submitted to the designated Authorized Dealer by the borrower for any borrowing or any external commercial borrowing. 
  • After confirming the documents, the authorized dealer forwards the copy for allotment of a loan registration number. 
  • The RBI verifies the documents and issues the loan registration number to the borrower. 

Documents required for NBFC compliance under FEMA 

Following are the necessary documents for the NBFC Compliances under FEMA-  

  • Documents necessary for KYC[1]
  • Application Form 83. 
  • Bank statement of the non-banking finance company. 
  • Other documents required for NBFC registration with the RBI, such as banker’s report, income tax returns, net worth certificates, etc. 

Conclusion 

The Non-Banking Finance Company should be established as per the Companies Act after obtaining a registration certificate from the RBI. This would further progress towards the NBFC compliance under FEMA only when there is the involvement of foreign transactions and investments. This whole procedure provides for a better market and economy. For further queries, one can further contact Bizadvisors.

Read our article:A Complete Overview of FEMA Compliances for the Pharmaceutical Sector

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