When does a business need to register as an NBFC?

Registration under Section 45-IA of the Reserve Bank of India Act, 1934 is required where a company carries on the business of a non-banking financial institution, subject to the exemptions provided. Whether an entity falls within that description depends on the nature of its activity and on the principal business criteria applied by the Reserve Bank of India. Certain categories of financial activity regulated by other regulators are treated separately.

What is the scale based regulation framework?

The Reserve Bank of India applies a layered regulatory framework to non-banking financial companies, under which entities are placed in different layers according to size, activity and perceived risk, with regulatory requirements calibrated accordingly. The layer applicable to an entity determines aspects of its governance, capital and compliance obligations. Categorisation is reviewed periodically by the regulator.

Does a lending app need its own RBI licence?

Not necessarily. Lending must be carried on by a regulated entity, but a digital platform may operate as a lending service provider to a regulated entity rather than lending on its own account. The digital lending framework governs how such arrangements must be structured, including in relation to flow of funds, disclosure and customer protection. Whether a licence is required depends on who is lending and on whose balance sheet.

Is prior RBI approval needed to change control of an NBFC?

The applicable Reserve Bank of India directions require prior written approval for change in control or management of a non-banking financial company, and for changes in shareholding beyond specified thresholds, subject to the conditions in those directions. Public notice requirements may also apply. The requirement should be assessed before a transaction is signed, not after.

What is a default loss guarantee arrangement?

A default loss guarantee is an arrangement under which a third party, typically a lending service provider, guarantees to compensate a regulated lender for losses on a defined loan portfolio up to a specified extent. The Reserve Bank of India has prescribed conditions and a cap on such arrangements. Structures that transfer credit risk beyond what is permitted are treated as outside the framework.

What is a payment aggregator and does it require authorisation?

A payment aggregator facilitates the collection of payments from customers on behalf of merchants and settles funds to those merchants. Such activity is regulated under the Payment and Settlement Systems Act, 2007 and the directions issued under it, and requires authorisation from the Reserve Bank of India subject to the eligibility conditions prescribed. Related activity may be permitted within an authorised entity's arrangement.

Can foreign investment be made in an NBFC?

Foreign investment in financial services entities is permitted subject to the Foreign Exchange Management Act, 1999 and the rules made under it, including the sectoral conditions applicable to activities regulated by a financial sector regulator. Approval requirements, entry routes and reporting obligations vary with the activity and with the source of the investment. Position should be verified against the framework in force at the time of the investment.

What happens if the Reserve Bank of India issues a show-cause notice?

A show-cause notice requires the entity to explain why action should not be taken in respect of the matters set out in it. The response forms part of the record and may be relied upon in subsequent proceedings, including in any appeal or writ petition. Penalty and supervisory action may follow, and the notice may also have consequences under other statutes depending on the subject matter.

NBFC, FinTech & Financial Regulatory Advisory

NBFC and fintech regulatory advisory concerns the licensing, structuring and ongoing compliance of entities carrying on financial activity under the supervision of the Reserve Bank of India, and the regulatory treatment of technology-enabled financial products. Sagar & Sagar Law Offices advises on registration of non-banking financial companies under the Reserve Bank of India Act, 1934, compliance under the applicable Master Directions, digital lending and payment system arrangements, and represents entities in regulatory correspondence, inspection follow-up and enforcement proceedings. The practice covers both the entity's regulatory perimeter and the documentation through which its products are delivered.

Financial activity in India is regulated by activity as much as by entity. Whether a business requires registration, which framework applies to it, and what obligations follow depend on what it actually does rather than what it calls itself. A lending platform may be regulated as a non-banking financial company, or may fall outside registration but be treated as a lending service provider subject to the digital lending framework; a payments product may require authorisation under the Payment and Settlement Systems Act, 2007, or may sit within an existing licensee's arrangement. Characterisation at the outset determines the entire compliance position.

The practice at Sagar & Sagar Law Offices addresses that question first and then works outward from it. Work covers registration and change-in-control approvals, the structuring of lending and payments arrangements between regulated and unregulated participants, product and customer documentation, ongoing compliance under the applicable Master Directions, and representation where a regulator raises questions. Where regulatory issues develop into enforcement, the position is coordinated with the firm's white collar and litigation practices.

Scope of work

NBFC registration, licensing and structural approvals

Approvals required to commence and to continue regulated financial activity.

Advice on whether a proposed business requires registration as a non-banking financial company
Applications for a certificate of registration under Section 45-IA of the Reserve Bank of India Act, 1934
Advice on categorisation of the entity and the layer applicable under the scale based regulation framework
Advice on net owned fund and other eligibility requirements
Applications for prior approval in respect of change in control, change in shareholding and change in management
Advice on amalgamation, transfer of business and restructuring involving regulated entities
Advice on principal business criteria and the consequences of falling outside them
Advice on registration requirements for specialised categories, including account aggregators, peer-to-peer lending platforms and factoring entities

Digital lending and technology-enabled credit

Regulatory treatment of lending conducted through digital channels and third-party platforms.

Advice on the application of the Reserve Bank of India's digital lending framework to a proposed business model
Structuring of arrangements between regulated entities and lending service providers
Advice on flow of funds requirements, including disbursal and repayment between the borrower and the regulated entity
Drafting and review of key fact statements and borrower-facing disclosures
Advice on default loss guarantee arrangements and the applicable limits
Advice on co-lending arrangements between banks and non-banking financial companies
Drafting and review of platform, sourcing, servicing and collection agreements
Advice on recovery conduct requirements and fair practices obligations in digital collections
Advice on data collection, storage and consent requirements in lending applications

Payments, prepaid instruments and payment intermediaries

Regulatory work in respect of payment products and their operators.

Advice on authorisation requirements under the Payment and Settlement Systems Act, 2007
Advice and applications in respect of payment aggregator and payment gateway activity
Advice on prepaid payment instruments and the applicable Master Directions
Advice on escrow and nodal account arrangements
Structuring and documentation of merchant onboarding and settlement arrangements
Advice on cross-border payment arrangements and their interaction with foreign exchange requirements
Advice on outsourcing arrangements involving payment and technology service providers

Ongoing compliance for regulated entities

Recurring obligations applicable once an entity is registered or authorised.

Advice on obligations under the applicable Reserve Bank of India Master Directions
Advice on income recognition, asset classification and provisioning requirements
Advice on know your customer and anti-money laundering obligations, including under the Prevention of Money Laundering Act, 2002 and the applicable Master Direction
Advice on fair practices code requirements and customer grievance mechanisms
Advice on credit information reporting obligations under the Credit Information Companies (Regulation) Act, 2005
Advice on corporate governance, board composition and internal policy requirements
Advice on outsourcing, information technology and cyber security requirements applicable to regulated entities
Preparation and review of internal policies, codes and compliance manuals
Advice on regulatory reporting and returns

Product, transaction and customer documentation

The documents through which regulated products are actually delivered.

Drafting and vetting of loan agreements, sanction letters and facility documentation
Drafting and vetting of guarantees, hypothecation deeds and security documents
Drafting and review of terms of use, privacy notices and consent architecture for digital products
Drafting of co-lending, business correspondent and direct selling agent agreements
Drafting of assignment and securitisation documentation for transfer of loan exposures
Review of marketing and customer communication material for regulatory consistency
Advice on documentation for insurance and investment product distribution by regulated entities

Regulatory engagement, inspection and enforcement

Representation where the regulator makes contact.

Advice on and drafting of responses to regulatory queries and correspondence
Assistance with inspection preparedness and response to inspection findings
Advice on and drafting of responses to show-cause notices
Representation in penalty and adjudication proceedings before regulatory authorities
Advice on supervisory action, including restrictions on business and directions to cease activity
Appeals and writ proceedings arising from regulatory action
Advice on voluntary disclosure and remediation
Coordination where a regulatory matter gives rise to parallel enforcement under the Prevention of Money Laundering Act, 2002 or the Foreign Exchange Management Act, 1999

Foreign investment and cross-border structuring

Regulatory work where the capital or the counterparty is foreign.

Advice on foreign direct investment in financial services entities under the Foreign Exchange Management Act, 1999 and the rules made under it
Advice on sectoral conditions applicable to investment in regulated financial entities
Advice on reporting requirements in respect of foreign investment
Advice on external commercial borrowing and its application to non-banking financial companies
Advice on cross-border arrangements involving offshore technology and service providers

Forums and authorities

Reserve Bank of India
Ministry of Finance and Department of Financial Services, in policy and approval matters
Ministry of Corporate Affairs and the Registrar of Companies
Financial Intelligence Unit — India, in respect of reporting obligations
Enforcement Directorate, in matters under the Prevention of Money Laundering Act, 2002 and the Foreign Exchange Management Act, 1999
National Company Law Tribunal and National Company Law Appellate Tribunal
Debts Recovery Tribunals and the Debts Recovery Appellate Tribunal
Consumer Disputes Redressal Commissions, in customer disputes
High Courts, in writ jurisdiction against regulatory action
Supreme Court of India

Who we act for

Non-banking financial companies across categories
Housing finance companies
Banks, in respect of partnership and co-lending arrangements
Financial technology companies and lending platforms
Payment aggregators, payment gateways and prepaid instrument issuers
Account aggregators and technology service providers to regulated entities
Asset reconstruction companies
Investors in regulated financial entities
Promoters and boards of regulated entities

How we approach this work

Characterisation before compliance.

The first question in this practice is what framework applies. Advice proceeds from the activity actually carried on, not from the label attached to it.

Structure and documentation treated together.

A permissible structure delivered through non-compliant documentation is not a compliant business. Arrangement, flow of funds and customer documents are reviewed as one.

Regulatory correspondence prepared with the record in view.

Responses to queries, inspections and notices are drafted on the footing that they will form part of the record in any subsequent supervisory or enforcement proceeding.

Awareness of parallel exposure.

Regulatory shortfalls in financial services frequently attract attention under other statutes. The wider exposure is considered when advising on any single regulatory issue.

Frequently asked questions

When does a business need to register as an NBFC?: Registration under Section 45-IA of the Reserve Bank of India Act, 1934 is required where a company carries on the business of a non-banking financial institution, subject to the exemptions provided. Whether an entity falls within that description depends on the nature of its activity and on the principal business criteria applied by the Reserve Bank of India. Certain categories of financial activity regulated by other regulators are treated separately.
What is the scale based regulation framework?: The Reserve Bank of India applies a layered regulatory framework to non-banking financial companies, under which entities are placed in different layers according to size, activity and perceived risk, with regulatory requirements calibrated accordingly. The layer applicable to an entity determines aspects of its governance, capital and compliance obligations. Categorisation is reviewed periodically by the regulator.
Does a lending app need its own RBI licence?: Not necessarily. Lending must be carried on by a regulated entity, but a digital platform may operate as a lending service provider to a regulated entity rather than lending on its own account. The digital lending framework governs how such arrangements must be structured, including in relation to flow of funds, disclosure and customer protection. Whether a licence is required depends on who is lending and on whose balance sheet.
Is prior RBI approval needed to change control of an NBFC?: The applicable Reserve Bank of India directions require prior written approval for change in control or management of a non-banking financial company, and for changes in shareholding beyond specified thresholds, subject to the conditions in those directions. Public notice requirements may also apply. The requirement should be assessed before a transaction is signed, not after.
What is a default loss guarantee arrangement?: A default loss guarantee is an arrangement under which a third party, typically a lending service provider, guarantees to compensate a regulated lender for losses on a defined loan portfolio up to a specified extent. The Reserve Bank of India has prescribed conditions and a cap on such arrangements. Structures that transfer credit risk beyond what is permitted are treated as outside the framework.
What is a payment aggregator and does it require authorisation?: A payment aggregator facilitates the collection of payments from customers on behalf of merchants and settles funds to those merchants. Such activity is regulated under the Payment and Settlement Systems Act, 2007 and the directions issued under it, and requires authorisation from the Reserve Bank of India subject to the eligibility conditions prescribed. Related activity may be permitted within an authorised entity's arrangement.
Can foreign investment be made in an NBFC?: Foreign investment in financial services entities is permitted subject to the Foreign Exchange Management Act, 1999 and the rules made under it, including the sectoral conditions applicable to activities regulated by a financial sector regulator. Approval requirements, entry routes and reporting obligations vary with the activity and with the source of the investment. Position should be verified against the framework in force at the time of the investment.
What happens if the Reserve Bank of India issues a show-cause notice?: A show-cause notice requires the entity to explain why action should not be taken in respect of the matters set out in it. The response forms part of the record and may be relied upon in subsequent proceedings, including in any appeal or writ petition. Penalty and supervisory action may follow, and the notice may also have consequences under other statutes depending on the subject matter.

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Overview