How to Appeal Against NBFC License Cancellation?

NBFCs (Non-Banking Financial Companies) are the type of companies which provide banking services like loans and advances, acquisition of stocks/bonds/shares/securities/debentures. They are incorporated as per Companies Act 2013 and regulated by the RBI. NBFC’s operations are similar to that of banks, yet they differ in some aspects such as the NBFCs cannot issue cheques while the banks can. Moreover, the NBFCs depositors don’t have the facility of Credit Guarantee Corporation and Deposit Insurance. NBFCs play an essential part in improving the state of the Indian economy as they have a sound source for funding. RBI and the Ministry Of Corporate Affairs regulate all the activities of NBFCs for sustaining a healthy financial system. So, only RBI has the power to carry out NBFC license cancellation.

What are the reasons for NBFC License Cancellation?

The Reserve Bank of India (RBI) always gives a chance to the liable NBFC for its clarification before canceling its registration. However, the license gets instantly revoked only on the occasions when RBI feels a delay might result in public interest or depositors. If a Non-Banking Financial Company is guilty of the following conditions, then RBI can cancel its license:

• Shortfall in Net Owned Fund
  As per Section 45 IC of RBI Act, no NBFC can commence the business of a financial institution without having the Net Owned Fund of less than twenty-five lakhs rupees. It further got increased after RBI issued a notification on 27 March 2015, which entails that the NBFCs have to maintain a NOF of 2 crore rupees to carry on their business. The notification enables NBFC with time duration from 1 April 2016 to 1 April 2017 for raising one crore of their NOF each year. In case a company fails to maintain the required NOF, RBI can cancel its license. The Act also states that before making the cancellation order, the concerned company would have a reasonable opportunity of being heard.

• Fails to Re-pay Deposits
  When a Non-Banking Financial Company is inefficient in deposits repayment, the depositor can approach the authorities of Consumer Forum or Company Law Board to recover their deposits. Despite that, if RBI assesses the poor financial condition of an NBFC to re-pay the deposits, then it shall provide an opportunity to the concerned NBFC for clarification before applying NBFC license cancellation.

• Not operating in the Public Interest
  Every NBFC must carry its business in the public interest. NBFCs have a board-approved Recovery Policy, Grievance Redressal Policy, and Fair Practice Code Policy; moreover, it’s mandatory to place all these policies at Company’s Premises on the website. The objective which gets sufficed by doing it is that the customers are acquainted with practices of a particular NBFC. The Policies must align with the Circulars, Notifications, and Master Directions issued by RBI.

• Not carrying NBFC Activities
  All NBFCs ought to perform Financial activities as stipulated in the Principal Business wherein, Financial activity as Principal Business refers to the situation when a company’s financial assets constitute more than 50% of its total assets and income from financial assets adds up to more than 50% of its gross income.  A company that successfully meets both criteria will be continuing as NBFC by RBI. RBI undertakes this 50-50 test from time to time; therefore, every NBFC has to pass it to remain an NBFC company.

• Disobeying of prohibitory orders of RBI
  Any sort of disobedience in regards to prohibitory order may become the reason for NBFC license cancellation. After issuing prohibitory orders for the directors or promoters of the NBFCs, RBI makes an inspection to check whether they are following the rules or not.

Based on the conditions mentioned above, RBI cancels the license of NBFCs. In case companies get involved in such activities, then they might lose their NBFC license.   

Impact of not complying to RBI Rules on NBFCs

RBI has cancelled several Online NBFC license in India in the year 2016 which were fraudulently pretending to be as NBFC. Many entities promise loans to the needy people at lower rates and collect money from them when the process charges for the loans/advances they vanish along with the collected money. Reportedly, RBI cancelled the license of nearly 26 Non-Banking Financial Companies who were involved in such activities.

Where to file an appeal against NBFC License Cancellation?

NBFCs can file an appeal under sub-section (7) of Section 45-IA of RBI Act^[1], 1934 to the Department of Financial Services, that is to the Appellate authorities. The request has to be filed within 30 days from the receipt of the order, and to file a Writ Petition for the same under Article 226, NBFCs can reach the High Court.

Steps taken before filing an appeal

Following are the steps you need to ensure before filing an appeal against the cancellation of NBFC license:

• Checkup on the ROC compliances
• Recheck the RBI Returns
• Quality tests of liabilities and assets
• Assure minimum NOF of Rs. 2 Cr.
• Keep a record of the tax audit reports

Appeal against cancellation

Before passing an order of cancellation, RBI grants the last chance of being heard to the concerned company unless it hold-up in canceling the certificate of enrollment will prejudicial to the interest of the depositors or the non-banking monetary business. The Aggrieved party can appeal against the order to the Central Government within 30 days from the date of the order of registration cancellation.

Final Thoughts

Since Non-Banking Financial Companies contribute a large part in the Indian economy, the Reserve Bank of India takes rigorous actions towards the operations of NBFCs.