Table of Contents
1. Introduction
2. What Is the RBI’s 50% Rule?
3. What Qualifies as Financial Assets and Financial Income?
4. Who Needs to Check This Before March?
5. Core Investment Companies (CICs) and Their Exemption
6. What Happens If Your Company Crosses the 50% Threshold?
7. How to Manage NBFC Classification Risks
8. Conclusion
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Introduction
As the financial year ends on March 31, companies must evaluate whether they are at risk of being classified as an NBFC (Non-Banking Financial Company). Under RBI’s 50% rule, companies engaged in financial activities like investments, lending, or asset financing must register as an NBFC if they meet specific criteria.
For investment holding companies, the rule creates additional challenges, as they may unintentionally cross the threshold. However, some entities, such as Core Investment Companies (CICs), may qualify for exemptions from NBFC registration.
This article will help you understand whether your company needs NBFC registration, the role of CICs, risks of non-compliance, and strategies to stay within limits.
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What Is the RBI’s 50% Rule?
A company is classified as an NBFC if it meets both of the following conditions:
1. Financial Assets Test
More than 50% of the company’s total assets must be in the form of financial assets (such as loans, investments, debentures, or receivables).
2. Financial Income Test
More than 50% of the company’s total revenue must come from financial activities (such as interest, dividends, or capital gains from investments).
If a company crosses both 50% thresholds, it must register as an NBFC with RBI and comply with regulations.
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What Qualifies as Financial Assets and Financial Income?
Financial Assets Include:
Loans and advances
Investments in equity shares, preference shares, bonds, and mutual funds
Trade receivables and bill discounting assets
Leasing and hire purchase financing
Factoring and securitized assets
Financial Income Includes:
Interest income from loans or deposits
Dividend income from investments in shares and mutual funds
Profit from the sale of securities (capital gains)
Lease and hire purchase rental income
Earnings from chit funds, factoring, or securitization
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Who Needs to Check This Before March?
Companies that should evaluate their financials before March 31 include:
1. Investment Holding Companies: If your company primarily invests in group companies and earns from dividends or capital gains, it may exceed the 50% limit.
2. Leasing or Asset Management Firms: If your company primarily earns leasing income, it may qualify as an NBFC.
3. FinTech Startups and Lending Businesses: Any startup involved in lending, credit facilitation, or digital finance should check its classification.
4. Real Estate or Infrastructure Companies: If your company earns more from investments than from property sales, it could be classified as an NBFC.
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Core Investment Companies (CICs) and Their Exemption
A Core Investment Company (CIC) is a holding company that primarily invests in its subsidiaries or group businesses. While CICs hold financial assets, they are not classified as NBFCs if they meet certain criteria.
Eligibility Criteria for CIC Exemption:
At least 90% of total assets must be in investments in group companies.
At least 60% of these investments must be in equity shares (not just bonds or debt instruments).
The company should not engage in lending outside the group.
No trading of investments for profit (CICs should hold investments for long-term purposes).
When Is RBI Registration Required for CICs?
If the total assets of a CIC exceed ₹100 crore, it must register as a Systemically Important Core Investment Company (CIC-SI) and comply with RBI norms.
If a CIC does not meet the 90% asset condition, it may still need NBFC registration, depending on its revenue and asset structure.
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What Happens If Your Company Crosses the 50% Threshold?
1. RBI Registration Becomes Mandatory
If a company exceeds the 50% limit for financial assets and income, it must apply for an NBFC license under Section 45-IA of the RBI Act, 1934.
2. Compliance Requirements
Registered NBFCs must:
Maintain a minimum net owned fund (NOF) of ₹2 crore (₹10 crore for deposit-taking NBFCs).
Follow Capital Adequacy Ratio (CRAR) norms (minimum of 15%).
Classify and provision for Non-Performing Assets (NPAs).
3. Risk of Non-Compliance
If a company does not register as an NBFC despite crossing the threshold, it faces:
Hefty RBI penalties for unregistered NBFC operations.
Legal action against the company and its directors.
Restrictions on financial transactions.
Loss of investor and banking credibility.
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How to Manage NBFC Classification Risks
1. Restructure Revenue Streams
Increase non-financial business income (e.g., operating revenues from services or manufacturing).
Reduce reliance on interest, dividends, and investment gains.
2. Adjust Asset Allocation
Shift investments to non-financial assets (e.g., real estate, physical assets, or infrastructure).
Reduce financial asset holdings below the 50% threshold.
3. Convert to a Core Investment Company (CIC)
Ensure 90% of total assets are investments in group companies.
Maintain 60% of holdings in equity shares to qualify for CIC status.
4. Obtain NBFC Registration If Necessary
If NBFC classification is unavoidable, apply for an RBI NBFC license and ensure compliance with capital adequacy, risk management, and reporting norms.
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Conclusion
With the financial year closing on March 31, businesses must assess whether they meet RBI’s 50% rule for NBFC classification.
Key Takeaways:
If more than 50% of assets and 50% of income come from financial activities, NBFC registration is required.
Core Investment Companies (CICs) can qualify for exemptions if they invest primarily in group businesses.
Non-compliance can lead to penalties, legal action, and business disruptions.
Companies must review financial statements and restructure their asset mix before the deadline.
Act Now! Evaluate Your Company’s NBFC Status Before March 31
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