Conversion of Section 8 Microfinance into NBFC

Conversion of Section 8 Microfinance into NBFC

Microfinance institutions play a crucial role in promoting financial inclusion, especially in developing economies. In India, Section 8 companies operate as non-profit organizations under the Companies Act, providing microloans and related financial services. However, as the financial landscape evolves, many Section 8 microfinance companies are exploring the conversion into Non-Banking Financial Companies (NBFCs) to operate with greater flexibility and facilitate a broader range of financial activities. This article delves into the process, implications, and important considerations for converting a Section 8 microfinance company into an NBFC.

Understanding the Regulatory Framework

A Section 8 company is formed for promoting commerce, art, science, religion, charity, or any other useful object. It operates on a non-profit basis and is regulated under the Companies Act, 2013. In contrast, an NBFC is a company engaged in the business of financial services, including loans, advances, and investments, and is regulated by the Reserve Bank of India (RBI).

The shift from a Section 8 company to an NBFC allows the organization to operate for profit while engaging in a range of financial activities, including mobilization of deposits, offering loans, and participating in capital markets. This transition enables greater operational flexibility and the potential for higher capital mobilization.

Steps to Convert Section 8 Microfinance into an NBFC

Converting a Section 8 microfinance institution into an NBFC involves a systematic approach, detailed in the following steps:

1. Pass a Resolution

The first step in the conversion process is for the board of directors to pass a resolution regarding the intent to convert the company into an NBFC. Additionally, the company must hold a general meeting to obtain the approval of its members through a special resolution.

2. File Forms with Authorities

Once the resolutions are passed, the company must file Form MGT-14 with the Registrar of Companies (ROC) to register the special resolution. Simultaneously, an application for conversion must be submitted to the Regional Director (RD), addressing all necessary documentation that demonstrates compliance with the conversion requirements.

3. Obtain Approval from the Regional Director

After the application is submitted, the RD will review the documentation and may request additional information or clarification. The RD's approval is crucial as it validates the intention of the company to convert and ensures that it complies with all relevant regulations.

4. File Additional Forms

Post approval from the RD, the company is required to file Form INC-20 with the ROC. This form covers the particulars regarding the conversion and necessitates payment of the applicable fees as per the regulatory guidelines.

5. Acquire New Certificate of Incorporation

Upon successful submission of the forms and payment of required fees, the Registrar will process the application and issue a new certificate of incorporation. This certificate will reflect the new status of the company as an NBFC.

6. Cancel Section 8 License

Finally, it is essential to cancel the Section 8 license under the Companies Act, 2013, as the company will no longer operate as a non-profit entity. This step is important to ensure compliance and avoid regulatory discrepancies.

Regulatory Considerations and Compliance

After conversion, the entity will be governed by the regulatory framework applicable to NBFCs, which includes additional compliance requirements such as:

ü  Registration with the RBI: The converted NBFC must apply for registration with the RBI, adhering to the guidelines and standards set forth for NBFC operations.

ü  Maintain Core Capital Requirement: The RBI mandates a minimum net owned fund requirement, which ensures financial stability and operational competence.

ü  Adherence to Prudential Norms: NBFCs are required to comply with various prudential norms concerning capital adequacy, asset classification, and provisioning norms, as prescribed by the RBI.

ü  Periodic Reporting: The company must submit periodic reports related to its financial position and adherence to lending norms to the RBI and other relevant authorities.

Conclusion

The conversion of a Section 8 microfinance company into an NBFC can provide substantial benefits, including operational flexibility, access to a larger capital base, and the ability to engage in a wider range of financial services. However, the process requires careful planning, strict adherence to regulatory requirements, and a clear understanding of the implications involved. This transformation allows such institutions to continue their mission of financial inclusion while leveraging the advantages of operating as a for-profit entity. As this sector evolves, it remains critical for these organizations to stay compliant and adaptable to the changing financial landscape, ultimately contributing to enhanced economic stability and growth.

 

How to do Microfinance Company Registration under Section 8: A Complete Guide

The growing demand for financial inclusion and the need for affordable credit solutions have led to the emergence of microfinance companies in India. Microfinance Company Registration under Section 8 of the Companies Act, 2013, provides a legal framework for organizations intending to promote charitable objectives related to microfinance while operating as a non-profit entity. This article explores the process and criteria for microfinance company registration under Section 8.

Understanding Section 8 Companies

Section 8 of the Companies Act, 2013, pertains to companies that operate with charitable, social, or educational objectives. Such companies aim to promote commerce, arts, science, religion, charity, or any other useful objective without the intention of making profits. Microfinance company registration under this section primarily focuses on providing credit and financial services to underserved populations, especially in rural areas.

Key Steps for Microfinance Company Registration

The microfinance company registration process under Section 8 involves several key steps:

1. Obtain Digital Signature Certificate (DSC) and Director Identification Number (DIN)

Before initiating the microfinance company registration process, the proposed directors of the company must obtain:

ü  Digital Signature Certificate (DSC): This is necessary to sign electronic documents while filing with the Ministry of Corporate Affairs (MCA).

ü  Director Identification Number (DIN): Each director of the company must have a unique DIN, which is required for incorporation and filing purposes.

2. Name Approval

Once the DSC and DIN are secured, the next step in the microfinance company registration process is to apply for the company name approval through Form INC-1. It is crucial to ensure that the proposed name reflects its Section 8 status. The name should incorporate words such as "Sanstha," "Foundation," or "Micro Credit" to embody its objectives.

3. Drafting Memorandum of Association (MoA) & Articles of Association (AoA)

The Memorandum of Association (MoA) and Articles of Association (AoA) are vital documents that outline the company’s objectives, governance structure, and operational guidelines. The MoA must clearly describe the charitable objectives for which the company is formed, while the AoA defines the rules for managing the company and is a necessary component for microfinance company registration.

4. File Incorporation Documents

After preparing the MoA and AoA, the following documents must be filed with the MCA portal for microfinance company registration:

• ü  Memorandum of Association (MoA)
• ü  Articles of Association (AoA)
• ü  Identity proof of all directors (such as PAN and Aadhaar cards)
• ü  Address proof of directors (utility bills or rental agreements)
• ü  Passport-sized photographs of directors
• ü  Proof of registered office ownership or rental agreement
• ü  No Objection Certificate (NOC) from the property owner if the property is rented.

These documents are crucial for establishing the company’s legitimacy and its compliance with legal requirements.

5. Obtain a Certificate of Incorporation

Upon successful submission of all the required documents, the MCA processes the application. After verification, the MCA issues a Certificate of Incorporation, signifying the legal existence of the microfinance company. This certificate is a significant milestone in the microfinance company registration process and also includes the company's unique registration number.

Important Points to Consider

1. Section 8 Objectives

The organization must operate with objectives consistent with Section 8, primarily object should be lending activities to poor people. Profit-making should not be the core intention, and any surplus generated must be reinvested back into the company to further its objectives.

2. Business Plan

A detailed business plan is essential for outlining the microfinance activities. This plan should include:

• Target audience
• Loan terms and conditions
• Financial projections
• Strategies for outreach and impact measurement

This plan will guide the organization’s operations post-microfinance company registration and attract potential investors or donors.

3. RBI Guidelines

Although Section 8 companies do not require prior approval from the Reserve Bank of India (RBI) to commence operations, they must comply with the guidelines laid down by the RBI for microfinance institutions. This includes adhering to lending norms, customer service standards, and reporting requirements to ensure responsible lending practices.

4. Compliance with MCA Regulations

It is vital for the company to maintain compliance with MCA regulations in terms of financial reporting, holding board meetings, and adhering to rules governing company members following microfinance company registration. Regular filings and documentation must be maintained to ensure transparency and accountability.

 

 

Time taken for Microfinance Company Registration

The time taken for microfinance company registration typically ranges from 2 to 3 months. This duration includes obtaining the necessary Digital Signature Certificate (DSC) and Director Identification Number (DIN), securing name approval, drafting and filing the Memorandum of Association (MoA) and Articles of Association (AoA), and receiving the Certificate of Incorporation from the Ministry of Corporate Affairs (MCA). Delays can occur due to pending documentation or compliance issues, but with proper preparation, the process can be streamlined effectively.

 

Cost for Microfinance Company Registration

The cost of microfinance company registration in India is approximately ₹1,20,000 by Vakilkaro, most expert in microfinance company registration. This amount includes various fees such as government registration charges, legal documentation costs, and professional fees for services related to the incorporation process. Additional expenses may arise based on the complexity of the business structure or any specific requirements during registration. It's essential to budget accordingly for these costs to ensure a smooth registration process.

 

Is it mandatory to complete Net Owned Fund of Rs. 5 Crore for RBI License after Conversion?

Yes, it is mandatory for a microfinance company to have a minimum Net Owned Fund (NOF) of ₹5 crores to obtain a license from the Reserve Bank of India (RBI) after conversion into a Non-Banking Financial Company (NBFC). This requirement is part of the regulatory framework established by the RBI to ensure that microfinance institutions are financially stable and capable of conducting their business effectively. Compliance with this capital requirement is crucial for maintaining the license and operating legally in the financial sector.

Can I earn profit after conversion of Section 8 Microfinance to NBFC?

Yes, after converting a Section 8 microfinance company into a Non-Banking Financial Company (NBFC), you can earn profits. Unlike Section 8 companies, which operate on a non-profit basis and reinvest any surplus back into the organization to promote charitable objectives, NBFCs are allowed to operate for profit. This means you can offer financial services, collect interest on loans, and engage in other profit-generating activities, aiming to generate returns for shareholders and reinvest in the business for growth and expansion. However, it is important to manage your profits responsibly and comply with the regulatory requirements set by the Reserve Bank of India (RBI) for NBFCs.

 

Can I give big loans after microfinance company registration under NBFC-MFI?

Under the framework of Microfinance Company Registration as a Non-Banking Financial Company - Micro Finance Institution (NBFC-MFI), there are specific regulations regarding the loans that can be provided.

1. Loan Size Limit: The Reserve Bank of India (RBI) has set guidelines that generally cap the maximum loan amount for microfinance at ₹1,50,000 per borrower. However, this limit can vary based on the borrower's creditworthiness and existing financial conditions.
2. Target Borrower Segment: NBFC-MFIs primarily focus on providing microloans to underserved and low-income individuals, typically in the range of ₹10,000 to ₹1,50,000. These loans are intended to address the financial needs of borrowers for income-generating activities, personal consumption, or emergency expenses.
3. Purpose of Lending: Loans should be primarily for productive purposes, such as starting a small business or addressing specific financial needs, rather than for larger capital-heavy projects or ventures.

4.       Regulatory Restrictions: The RBI closely monitors NBFC-MFIs and has strict guidelines on the maximum loan amount that can be provided, ensuring they stay focused on microfinance activities. 

5.       Alternative for Large Loans: If you want to provide larger loans, you would need to register as a regular NBFC (Non-Banking Financial Company) which has less restrictions on loan sizes.

 

In summary, while you can provide loans under the NBFC-MFI framework, the loans must align with RBI guidelines, focusing on smaller amounts suited for microfinance purposes and catering to low-income borrowers. It's essential to adhere to these regulations to maintain compliance and ensure the sustainability of your microfinance operations.

What should be the director's qualifications and other requirements, for an RBI License, after converting it in to NBFC?

To obtain an RBI license after converting a Section 8 microfinance company into a Non-Banking Financial Company (NBFC), there are specific qualifications and requirements that the directors and the company must meet:

Qualifications of Directors

1. Educational Background: Directors should ideally have a strong educational background, preferably in fields such as finance, economics, business administration, or related areas. A higher qualification like an MBA or a degree in finance is often preferred.
2. Experience:

ü  At least one of the directors should have relevant experience in the financial sector, demonstrating an understanding of banking, finance, or financial services.

ü  Experience in managing an NBFC or similar financial institution is highly advantageous.

3. Integrity and Reputation:

ü  Directors must have a good reputation and be of sound moral character.

ü  Any past involvement in fraud, financial misconduct, or serious criminal offenses can disqualify an individual from being appointed as a director.

4. Professional Skills:

ü  Directors should possess essential skills such as risk management, compliance, financial management, and operational knowledge of the microfinance sector.

Other Requirements for RBI License

1. Net Owned Fund (NOF):

ü  The company must maintain a minimum Net Owned Fund of ₹5 crores to qualify for the RBI license as an NBFC-MFI.

2. Corporate Governance:

ü  The company should establish a transparent corporate governance structure that includes clear roles and responsibilities for its directors and management.

3. Business Plan:

ü  A detailed business plan outlining the company's operational framework, target clientele, loan products, risk management, and growth strategy is necessary for RBI assessment.

4. Compliance with Regulatory Norms:

ü  The company must comply with all the applicable regulations under the Reserve Bank of India (NBFC) guidelines and maintain the required financial ratios and disclosures.

5. Fit and Proper Criteria:

ü  Directors must meet the "fit and proper" criteria as defined by the RBI, which involves assessments of their financial track records, ethical practices, and experience.

6. Background Checks:

ü  The RBI may conduct background checks before granting a license to ensure the suitability and competence of the directors.

7. Documentation:

ü  The application for RBI licensing should be accompanied by all requisite documents, including proof of educational qualifications, experience certificates, a compliance report, and details of corporate governance practices.

Directors of a converted NBFC must bring educational qualifications and relevant experience in finance to navigate the regulatory landscape effectively. Meeting these qualifications and requirements is crucial for obtaining an RBI license and ensuring the sustainable operation of the microfinance institution. Adhering to RBI regulations and maintaining a focus on good governance practices will help foster trust and stability in the sector.

How Vakilkaro helps in conversion of Section 8 Microfinance in to NBFC?

Vakilkaro assists in the conversion of a Section 8 microfinance company into an NBFC by providing expert guidance throughout the process. Our services include helping with documentation, filing necessary forms, and ensuring compliance with regulatory requirements set by the RBI.  Our team of legal and financial experts streamlines the transition, making it easier for clients to navigate the complexities of the conversion. Additionally, we offer advisory support on meeting capital requirements and corporate governance standards for successful licensing.