NBFC

 Asset Finance Company (AFC) : An AFC is a company which is a financial institution carrying on as its principal business the financing of physical assets supporting productive/economic activity, such as automobiles, tractors, lathe machines, generator sets, earth moving and material handling equipments, moving on own power and general purpose industrial machines. Principal business for this purpose is defined as aggregate of financing real/physical assets supporting economic activity and income arising therefrom is not less than 60% of its total assets and total income respectively.

 

Documents required for registration as Type I – NBFC-ND

An indicative list of basic documents/information to be furnished along with the application form:

Sr. No.	Requirements to be complied with and documents to be submitted to RBI by Companies for obtaining certificate and Registration from RBI as NBFC	Page no. in  file
1	Certified copies of Certificate of Incorporation and Certificate of Commencement of Business in case of public limited companies.
2	Certified copies of extract of only the main object clause in the MOA relating to the financial business.
3	Board resolution stating that: a)        the company is not carrying on any NBFC activity/stopped NBFC activity and will not carry on/commence the same before getting registration from RBI b)       the UIBs in the group where the director holds substantial interest or otherwise has not accepted any public deposit in the past /does not hold any public deposit as on the date and will not accept the same in future c)        the company has formulated  “Fair Practices Code” as per RBI Guidelines d)       the company has not accepted public funds in the past/does not hold any public fund as on the date and will not accept the same in the future without the approval of Reserve Bank of India e)        the company does not have any customer interface as on date and will not have any customer interface in the future without the approval of Reserve Bank of India
4	Copy of Fixed Deposit receipt & bankers certificate of no lien indicating balances in support of NOF
5	For companies already in existence, the Audited balance sheet and Profit & Loss account along with directors & auditors report or for the entire period the company is in existence, or for last three years , whichever is less, should be submitted
6	Banker’s report in respect of applicant company, its group/subsidiary/associate/holding company/related parties,  directors of the applicant company having substantial interest in other companies  The Banker’s report should be about the dealings of these entities with these bankers as a depositing entity or a borrowing entity. Note: Please provide bankers report from all the bankers of each of these entities and provide the report for all the entities. The details of deposits and loans balances as on the date of application and the conduct of the account should be specified.

 

 

 

DETAILS ABOUT NBFC

 A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 and is engaged in the business of loans and advances, acquisition of shares/stock/bonds/debentures/securities issued by Government or local authority or other securities of like marketable nature, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, sale/purchase/construction of immovable property. A non-banking institution which is a company and which has its principal business of receiving deposits under any scheme or arrangement or any other manner, or lending in any manner is also a non-banking financial company (Residuary non-banking company). Section 45-IA provides that no NBFC shall commence or carry on the business of Non- Banking Financial Institution without obtaining a Certificate of Registration issued under this Chapter (Chapter –IIIB) and not having a Net Owned Fund of rupees two hundred lakhs. Steps Required For

Formation Of New NBFC:

Step-1

Formation of Company: The first step is to form a new Company registered under the Companies Act, 1956. The name must reflect the character of an NBFC. Words such as Investment, Finvest, Finstock, Finance etc. may be used as part of the name. In general, RBI does not allow names which are not reflecting the characteristics of NBFC.

 Step-2

Minimum Net Owned Fund: After the incorporation of a new company the Paid up Equity Capital of the Company should suitably rose either at par or premium so as to attain a minimum Net Owned Fund of Rs. 2 crores. The Capital to be raised here should be Equity Share Capital and not Preference Share Capital.

Step-3

Opening of a Bank Account: The entire sum of Rs. 2 crores should be kept in a bank in a Deposit Account free from all liens. Normally funds are kept in Fixed Deposit. The RBI at the time of considering the application for the grant of Certificate of Registration verifies the deposits held by the Company with the Bankers.

Step-4

Apply for Certificate of Registration to RBI alongwith Required Documents: The NBFC Company is required to submit its application online for registration by accessing RBI’s secured website. The company can then download suitable application form (i.e. NBFC or SC/RC) from the above website, key in the data and upload the application form. The company would then get a Company Application Reference Number for the CoR application filed on-line. Thereafter, the company has to submit the hard copy of the application form (indicating the Company Application Reference Number of its on-line application) in duplicate, along with the supporting documents as prescribed in the form, to the concerned Regional Office. The company can then check the status of the application based on the acknowledgement number. The Bank would issue Certificate of Registration after satisfying itself that the conditions as enumerated in Section 45-IA of the RBI Act, 1934 are satisfied. The following documents are required to be filed alongwith the application form: Annexure-I, Annexure-II and Annexure-III to the application. Annexure-III is submitted in respect of all the the company. The Memorandum of Association of the applicant company should have enabling clause/s for conducting of NBFI business by the company Certified copy of Certificate of Incorporation (bearing the signature of the Registrar of Companies) Banker’s Report in a sealed cover. A copy of the same should be send to the General Manager, RBI, DNBS, Kolkata by the bank at the request of the company Banker’s Reports in respect of companies in which the directors have substantial interest as indicated against items Nos. 14 & 15 of Annexures-III. Registration number and nature of business activities of the companies in which the Directors have substantial interest should also be furnished Banker’s Report in respect of group/subsidiary/holding companies if any, of the applicant company. Details of the interest held by Directors in such companies are to be furnished Certified copy of Board Resolution approving the submission of application for COR Certified copy of the audited balance sheet and profit & loss account of the company for the last three years (in case of existing companies intending to commence NBFI business) and proforma balance sheet and profit & loss account as on the date on which the statement of capital funds and risk assets is furnished in Annexure-II to the application is submitted. Brief history of Company along with summary of financial for last five years Business Plan of the company for the next three years giving details of its thrust of business, market segment and projection of investments and income together with projected Balance Sheet and Profit & Loss Account for the next three years. Auditors’ Certificate and extracts of Bank statement regarding receipt of share premium, if any. Certified copy of Board Resolution that the company has not accepted any public deposits in the past/does not hold any public deposits as on date and will not accept the deposits in future without prior approval of the Bank Certified copy of Board Resolution that the company has not conducted/commenced NBFI business and also shall not conduct/commence NBFI business without obtaining Certificate of Registration from the Bank Auditors’ Certificate to the effect that the Auditors’ Certificate to the effect that the Company has not accepted/is not holding any public deposits as on date and will not accept such deposits in future without prior approval of the Bank Company is not carrying on any NBFI activity as on date Company has an NOF of Rs.200 lakh as on date 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 Details of Book Value of bonds/debentures/outstanding loans and advances (including hire purchase & lease finance) made to and deposits with § Subsidiaries § Group companies as on the Proforma Balance Sheet (Annexure-II) duly certified by the Auditor Details of cost and market/Break Up Value of Quoted/unquoted investments including current investments as on the Proforma Balance Sheet (Annexure-II) duly certified by the Auditor The details of experience of directors in NBFI business as indicated against Item No. 12 of Annexure-III are to be submitted Name of the companies indicated against Item No. 9 of Annexure-III, in which the directors of the applicant company are the directors, are NBFC registered with the Reserve Bank The Declarations of the directors regarding their non-association with the unincorporated bodies under Section 45S of the Reserve Bank of India Act, 1934 are submitted The particulars of approval of Foreign Exchange Department (FED) if any obtained/copies of Foreign Inward Remittance Certificates in respect of Foreign Direct Investment if any, received by the applicant company are to be furnished A Board Resolution to the effect that the company has formulated a Fair Practise Code and copy whereof should be enclosed and the same would be implemented on grant of COR If Company does not have a website it can submit information through e-mail or any other mode through internet – a statement in this regard Documentary

evidence like certified Xerox copy of electric bill/telephone bill in the name of the applicant company. Whether the Company is regulated by other regulators like SEBI, IRDA etc Income Tax PAN in respect of the company as well as all the directors. Copies of Form 2,5,18,23,29 & 32 and Annual Return filed with Registrar of Companies, West Bengal with Registrar of Companies money receipt. In case of amalgamation with other companies, copy of High Court Order allowing the above amalgamation together with copies of Form No 21 filed with Registrar of Companies, West Bengal including Registrar of Companies money receipt Reason for setting up NBFC. The current Net Owned Fund (NOF) of all the NBFCs subscribing to the capital of the applicant company, the computation being duly certified by the Statutory Auditor Documents called by this Deptt. In respect of § NBFCs having common Directors with the applicant company and § subscriber/investor NBFCs, must be submitted to the satisfaction of Company Monitoring Division

Step-5

Filing of some additional Documents: In addition to the documents required to be enclosed along with Application Form the following should also be enclosed: Copy of Form-32 of all present directors with receipt Copy of Form-18 of present situation of Registered Office, with receipt. Copy of Form-2 Return of allotment of Shares, with receipt. Experience Certificate or Details of Experience of Directors, if any, in NBFC Business. Bankers Report in the format prescribed by RBI with the request to Bank that original should be directly sent to RBI. Bankers Report of all the Firms/Company/ Proprietorship Concern in which director holds substantial interest Board Resolutions in the matter of Application for granting Certificate of Registration, Non- Acceptance of Public Deposits and Non Carrying business of Non-Banking Financial Institution without Certificate of Registration. Board Resolution adopting a Fair Practices Code and a copy of the said Code. Declaration from Directors to give affect that they are not associated with unincorporated bodies U/s 45-S of RBI Act, 1934 Specimen declaration is enclosed herewith marked The application is to be filed with the Regional Office of RBI whose jurisdiction, the registered office of the Company falls.

Step-6

Granting of Certificate: After the application is filed, the same is examined by RBI and further documents and clarifications may be sought from time to time. Finally if RBI considers that the application is complete in all respects and all required documents and information is furnished to its satisfaction , it may grant Certificate of Registration to carry on the business of NBFC not accepting public deposits or else the application is returned. It may be noted that when applications are filed at the Regional Office, they vet the application and if everything is found by them in order they send the same to Central Office for further examination and approval. However if the application is not in order they send back the application and pointing out the defects. At this stage ,defects should be cured and the application should again be filed. Finally if Central Office approves the Application, the Regional Office will issue certificate of Registration.

OTHER FACTS

 

 

NBFCs are categorized a) in terms of the type of liabilities into Deposit and Non-Deposit accepting NBFCs, b) non deposit taking NBFCs by their size into systemically important and other non-deposit holding companies (NBFC-NDSI and NBFC-ND) and c) by the kind of activity they conduct. Within this broad categorization the different types of NBFCs are as follows:

1. Asset Finance Company (AFC) : An AFC is a company which is a financial institution carrying on as its principal business the financing of physical assets supporting productive/economic activity, such as automobiles, tractors, lathe machines, generator sets, earth moving and material handling equipments, moving on own power and general purpose industrial machines. Principal business for this purpose is defined as aggregate of financing real/physical assets supporting economic activity and income arising therefrom is not less than 60% of its total assets and total income respectively.
2. Investment Company (IC) : IC means any company which is a financial institution carrying on as its principal business the acquisition of securities,
3. Loan Company (LC): LC means any company which is a financial institution carrying on as its principal business the providing of finance whether by making loans or advances or otherwise for any activity other than its own but does not include an Asset Finance Company.
4. Infrastructure Finance Company (IFC): IFC is a non-banking finance company a) which deploys at least 75 per cent of its total assets in infrastructure loans, b) has a minimum Net Owned Funds of ₹ 300 crore, c) has a minimum credit rating of ‘A ‘or equivalent d) and a CRAR of 15%.
5. Systemically Important Core Investment Company (CIC-ND-SI): CIC-ND-SI is an NBFC carrying on the business of acquisition of shares and securities which satisfies the following conditions:-

(a) it holds not less than 90% of its Total Assets in the form of investment in equity shares, preference shares, debt or loans in group companies;

(b) its investments in the equity shares (including instruments compulsorily convertible into equity shares within a period not exceeding 10 years from the date of issue) in group companies constitutes not less than 60% of its Total Assets;

(c) it does not trade in its investments in shares, debt or loans in group companies except through block sale for the purpose of dilution or disinvestment;

(d) it does not carry on any other financial activity referred to in Section 45I(c) and 45I(f) of the RBI act, 1934 except investment in bank deposits, money market instruments, government securities, loans to and investments in debt issuances of group companies or guarantees issued on behalf of group companies.

(e) Its asset size is ₹ 100 crore or above and

(f) It accepts public funds

Infrastructure Debt Fund: Non- Banking Financial Company (IDF-NBFC) : IDF-NBFC is a company registered as NBFC to facilitate the flow of long term debt into infrastructure projects. IDF-NBFC raise resources through issue of Rupee or Dollar denominated bonds of minimum 5 year maturity. Only Infrastructure Finance Companies (IFC) can sponsor IDF-NBFCs.

Non-Banking Financial Company – Micro Finance Institution (NBFC-MFI): NBFC-MFI is a non-deposit taking NBFC having not less than 85% of its assets in the nature of qualifying assets which satisfy the following criteria:

1. loan disbursed by an NBFC-MFI to a borrower with a rural household annual income not exceeding ₹ 1,00,000 or urban and semi-urban household income not exceeding ₹ 1,60,000;
2. loan amount does not exceed ₹ 50,000 in the first cycle and ₹ 1,00,000 in subsequent cycles;
3. total indebtedness of the borrower does not exceed ₹ 1,00,000;
4. tenure of the loan not to be less than 24 months for loan amount in excess of ₹ 15,000 with prepayment without penalty;
5. loan to be extended without collateral;
6. aggregate amount of loans, given for income generation, is not less than 50 per cent of the total loans given by the MFIs;
7. loan is repayable on weekly, fortnightly or monthly instalments at the choice of the borrower

 Non-Banking Financial Company – Factors (NBFC-Factors): NBFC-Factor is a non-deposit taking NBFC engaged in the principal business of factoring. The financial assets in the factoring business should constitute at least 50 percent of its total assets and its income derived from factoring business should not be less than 50 percent of its gross income.

1. Mortgage Guarantee Companies (MGC) – MGC are financial institutions for which at least 90% of the business turnover is mortgage guarantee business or at least 90% of the gross income is from mortgage guarantee business and net owned fund is ₹ 100 crore.
2. NBFC- Non-Operative Financial Holding Company (NOFHC) is 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.

50-50 Principal Business Criteria:

It lays down that

1. There should be at least 50% or more revenue out of total revenue from financial assets and
2. There should be at leat 50% or more financial assets of total assets of the company

A company which does not have financial assets which is more than 50% of its total assets and does not derive at least 50% of its gross income from such assets is not an NBFC. Its principal business would be non-financial activity like agricultural operations, industrial activity, purchase or sale of goods or purchase/construction of immoveable property, and will be a non-banking non-financial company. Acceptance of deposits by a Non-Banking Non-Financial Company are governed by the rules and regulations issued by the Ministry of Corporate Affairs

 What does the term public funds include? Is it the same as public deposits?

Public funds are not the same as public deposits. Public funds include public deposits, inter-corporate deposits, bank finance and all funds received whether directly or indirectly from outside sources such as funds raised by issue of Commercial Papers, debentures etc. However, even though public funds include public deposits in the general course, it may be noted that CICs/CICs-ND-SI cannot accept public deposits.

Further, indirect receipt of public funds means funds received not directly but through associates and group entities which have access to public funds.

‘owned fund’ and ‘net owned fund’ in relation to NBFCs:

‘Owned Fund’ means aggregate of the paid-up equity capital, preference shares which are compulsorily convertible into equity, free reserves, balance in share premium account and capital reserves representing surplus arising out of sale proceeds of asset, excluding reserves created by revaluation of asset, after deducting therefrom accumulated balance of loss, deferred revenue expenditure and other intangible assets. ‘Net Owned Fund’ is the amount as arrived at above, minus the amount of investments of such company in shares of its subsidiaries, companies in the same group and all other NBFCs and the book value of debentures, bonds, outstanding loans and advances including hire purchase and lease finance made to and deposits with subsidiaries and companies in the same group, to the extent it exceeds 10% of the owned fund.

Responsibilities of the NBFCs registered with Reserve Bank, with regard to submission on compliances:

1. Returns to be submitted by deposit taking NBFCs
2. NBS-1Quarterly Returns on deposits in First Schedule.
3. NBS-2Quarterly return on Prudential Norms is required to be submitted by NBFC accepting public deposits.
4. NBS-3Quarterly return on Liquid Assets by deposit taking NBFC.
5. NBS-4Annual return of critical parameters by a rejected company holding public deposits. (NBS-5 stands withdrawn as submission of NBS 1 has been made quarterly.)
6. NBS-6Monthly return on exposure to capital market by deposit taking NBFC with total assets of ₹ 100 crore and above.
7. Half-yearly ALM returnby NBFC holding public deposits of more than ₹ 20 crore or asset size of more than ₹ 100 crore
8. Audited Balance sheet and Auditor’s Report by NBFC accepting public deposits.
9. Branch Info Return.
10. Returns to be submitted by NBFCs-ND-SI
11. NBS-7A Quarterly statement of capital funds, risk weighted assets, risk asset ratio etc., for NBFC-ND-SI.
12. Monthly Return on Important Financial Parameters of NBFCs-ND-SI.
13. ALM returns:
    (i) Statement of short term dynamic liquidity in format ALM [NBS-ALM1] -Monthly,
    (ii) Statement of structural liquidity in format ALM [NBS-ALM2] Half yearly,
    (iii) Statement of Interest Rate Sensitivity in format ALM -[NBS-ALM3], Half yearly
14. Branch Info return
15. Quarterly return on important financial parameters of non deposit taking NBFCs having assets of more than ₹ 50 crore and above but less than ₹ 100 crore

Basic information like name of the company, address, NOF, profit / loss during the last three years has to be submitted quarterly by non-deposit taking NBFCs with asset size between ₹ 50 crore and ₹ 100 crore.

NBFCs are charging high interest rates from their borrowers. Is there any ceiling on interest rate charged by the NBFCs to their borrowers:

Reserve Bank of India has deregulated interest rates to be charged to borrowers by financial institutions (other than NBFC- Micro Finance Institution). The rate of interest to be charged by the company is governed by the terms and conditions of the loan agreement entered into between the borrower and the NBFCs. However, the NBFCs have to be transparent and the rate of interest and manner of arriving at the rate of interest to different categories of borrowers should be disclosed to the borrower or customer in the application form and communicated explicitly in the sanction letter etc.

Residuary Non-Banking Companies (RNBCs):

Residuary Non-Banking Company is a class of NBFC which is a company and has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner and not being Investment, Asset Financing, Loan Company. These companies are required to maintain investments as per directions of RBI, in addition to liquid assets. The functioning of these companies is different from those of NBFCs in terms of method of mobilization of deposits and requirement of deployment of depositors’ funds as per Directions. Besides, Prudential Norms Directions are applicable to these companies also.

What is ‘deposit’ and ‘public deposit’:

The term ‘deposit’ is defined under Section 45 I(bb) of the RBI Act, 1934. ‘Deposit’ includes and shall be deemed always to have included any receipt of money by way of deposit or loan or in any other form but does not include:

1. amount raised by way of share capital, or contributed as capital by partners of a firm;
2. amount received from a scheduled bank, a co-operative bank, a banking company, Development bank, State Financial Corporation, IDBI or any other institution specified by RBI;

iii. amount received in ordinary course of business by way of security deposit, dealership deposit, earnest money, advance against orders for goods, properties or services;

1. amount received by a registered money lender other than a body corporate;
2. amount received by way of subscriptions in respect of a ‘Chit’.

Paragraph 2(1)(xii) of the Non-Banking Financial Companies Acceptance of Public Deposits ( Reserve Bank) Directions, 1998 defines a ‘ public deposit’ as a ‘deposit’ as defined under Section 45 I(bb) of the RBI Act, 1934 and further excludes the following:

1. amount received from the Central/ State Government or any other source where repayment is guaranteed by Central/ State Government or any amount received from local authority or foreign government or any foreign citizen/ authority/ person;
2. any amount received from financial institutions specified by RBI for this purpose;
3. any amount received by a company from any other company;
4. amount received by way of subscriptions to shares, stock, bonds or debentures pending allotment or by way of calls in advance if such amount is not repayable to the members under the articles of association of the company;
5. amount received from directors of a company or from its shareholders by private company or by a private company which has become a public company;
6. amount raised by issue of bonds or debentures secured by mortgage of any immovable property or other asset of the company subject to conditions;
7. any amount raised by issuance of non-convertible debentures with a maturity more than one year and having the minimum subscription per investor at ₹ 1 crore and above, provided it is in accordance with the guidelines issued by the Bank.
8. the amount brought in by the promoters by way of unsecured loan;
9. amount received from a mutual fund;
10. any amount received as hybrid debt or subordinated debt;
11. amount received from a relative of the director of an NBFC;
12. any amount received by issuance of Commercial Paper.
13. any amount received by a systemically important non-deposit taking non-banking financial company by issuance of ‘perpetual debt instruments’
14. any amount raised by the issue of infrastructure bonds by an Infrastructure Finance Company

Thus, the directions exclude from the definition of public deposit, amount raised from certain set of informed lenders who can make independent decision.

Which entities can legally accept deposits from public?

Banks, including co-operative banks, can accept deposits. Non-bank finance companies, which have been issued Certificate of Registration by RBI with a specific licence to accept deposits, are entitled to accept public deposit. In other words, not all NBFCs registered with the Reserve Bank are entitled to accept deposits but only those that hold a deposit accepting Certificate of Registration can accept deposits. They can, however, accept deposits, only to the extent permissible. Housing Finance Companies, which are again specifically authorized to collect deposits and companies authorized by Ministry of Corporate Affairs under the Companies Acceptance of Deposits Rules framed by Central Government under the Companies Act can also accept deposits also upto a certain limit. Cooperative Credit Societies can accept deposits from their members but not from the general public. The Reserve Bank regulates the deposit acceptance only of banks, cooperative banks and NBFCs.

It is not legally permissible for other entities to accept public deposits. Unincorporated bodies like individuals, partnership firms, and other association of individuals are prohibited from carrying on the business of acceptance of deposits as their principal business. Such unincorporated bodies are prohibited from even accepting deposits if they are carrying on financial business.

What is the rate of interest and period of deposit which NBFCs can accept?

Presently, the maximum rate of interest an NBFC can offer is 12.5%. The interest may be paid or compounded at rests not shorter than monthly rests. The NBFCs are allowed to accept/renew public deposits for a minimum period of 12 months and maximum period of 60 months. They cannot accept deposits repayable on demand.

Can a Co-operative Credit Society accept deposits from the public?

No. Co-operative Credit Societies cannot accept deposits from general public. They can accept deposits only from their members within the limit specified in their bye laws.

What is the difference between acceptance of money by Chit Funds and acceptance of deposits?

Deposits are defined under the RBI Act 1934 as acceptance of money other than that raised by way of share capital, money received from banks and other financial institutions, money received as security deposit, earnest money and advance against goods or services and subscriptions to chits. All other amounts, received as loan or in any form are treated as deposits. Chit Funds activity involves contributions by members in instalments by way of subscription to the Chit and by rotation each member of the Chit receives the chit amount. The subscriptions are specifically excluded from the definition of deposits and cannot be termed as deposits. While Chit funds may collect subscriptions as above, they are prohibited by RBI from accepting deposits with effect from August 2009.

What is the role of Company Law Board in protecting the interest of depositors? How can one approach it?

When an NBFC fails to repay any deposit or part thereof in accordance with the terms and conditions of such deposit, the Company Law Board (CLB) either on its own motion or on an application from the depositor, directs by order the Non-Banking Financial Company to make repayment of such deposit or part thereof forthwith or within such time and subject to such conditions as may be specified in the order. After making the payment, the company will need to file the compliance with the local office of the Reserve Bank of India.

As explained above, the depositor can approach CLB by mailing an application in prescribed form to the appropriate bench of the Company Law Board according to its territorial jurisdiction along with the prescribed fee.

The Consumer Court:

Yes, a depositor can approach any or all of the redressal authorities i.e consumer forum, court or CLB.

Liquid assets:

 liquid assets may consist of Government securities, Government guaranteed bonds and term deposits with any scheduled commercial bank.

Collective Investment Schemes (CIS) and Chit Funds

No. CIS are schemes where money is exchanged for units, be it time share in resorts, profit from sale of wood or profits from the developed commercial plots and buildings and so on. Collective Investment Schemes (CIS) do not fall under the regulatory purview of the Reserve Bank.

Which is the authority that regulates Collective Investment Schemes (CIS)?

SEBI is the regulator of CIS. Information on such schemes and grievances against the promoters may be immediately forwarded to SEBI as well as to the EOW/Police Department of the State Government.

Is the conducting of Chit Fund business permissible under law?

The chit funds are governed by Chit Funds Act, 1982 which is a Central Act administered by state governments. Those chit funds which are registered under this Act can legally carry on chit fund business.

If Chit Fund companies are financial entities, why are they not regulated by RBI?

Chit Fund companies are regulated under the Chit Fund Act, 1982, which is a Central Act, and is implemented by the State Governments. RBI has prohibited chit fund companies from accepting deposits from the public in 2009. In case any Chit Fund is accepting public deposits, RBI can prosecute such chit funds.

Money Circulation/Multi-Level Marketing (MLM)/ Ponzi Schemes/ Unincorporated Bodies (UIBs)

What are money circulation/Ponzi/multi-level marketing schemes?

Money circulation, multi level marketing / Chain Marketing or Ponzi schemes are schemes promising easy or quick money upon enrollment of members. Income under Multi level marketing or pyramid structured schemes do not come from the sale of products they offer as much as from enrolling more and more members from whom hefty subscription fees are taken. It is incumbent upon all members to enroll more members, as a portion of the subscription amounts so collected are distributed among the members at the top of the pyramid. Any break in the chain leads to the collapse of the pyramid, and the members lower in the pyramid are the ones that are affected the most. Ponzi schemes are those schemes that collect money from the public on promises of high returns. As there is no asset creation, money collected from one depositor is paid as returns to the other. Since there is no other activity generating returns, the scheme becomes unviable and impossible for the people running the scheme to meet the promised return or even return the principal amounts collected. The scheme inevitably fails and the perpetrators disappear with the money.

Is acceptance of money under Money Circulation/Multi-level Marketing/Pyramid structured schemes allowed? Does RBI regulates such schemes?

No. Acceptance of money under Money Circulation/Multi-level Marketing/Pyramid structured schemes and Ponzi schemes is not allowed as acceptance of money under those schemes is a cognizable offence under the Prize Chit and Money Circulation (Banning) Act 1978 and are hence banned. The Reserve Bank has no role in implementation of this Act, except advising and assisting the Central Government in framing the Rules under this Act.

Who regulates entities that run such schemes?

Money Circulation/Multi-level Marketing /Pyramid structured schemes are an offence under the Prize Chits and Money Circulation Schemes (Banning) Act, 1978. The Act prohibits any person or individual to promote or conduct any prize chit or money circulation scheme or enrol as member to its schemes or anyone to participate in it by either receiving or remitting any money in pursuance of such chit or scheme. Contravention of the provisions of this Act, is monitored and dealt with by the State Governments.