Hi, I ,Had a company dealing with Principal Business of sale / purchase / construction of Real estate, In our Companies "MOA" we also mentioned in our Business object as " Hire purchase", So I want to know weather we can do "Hire purchase "Business " In same company with out obtaining NBFC permission from "RBI" , As long as i come under " RBI" 50-50 test Rule. FROM RBI WEB SITE: What does conducting financial activity as “principal business” mean? Financial activity as principal business is when a company’s financial assets constitute more than 50 per cent of the total assets and income from financial assets constitute more than 50 per cent of the gross income. A company which fulfils both these criteria will be registered as NBFC by RBI. The term 'principal business' is not defined by the Reserve Bank of India Act. The Reserve Bank has defined it so as to ensure that only companies predominantly engaged in financial activity get registered with it and are regulated and supervised by it. Hence if there are companies engaged in agricultural operations, industrial activity, purchase and sale of goods, providing services or purchase, sale or construction of immovable property as their principal business and are doing some financial business in a small way, they will not be regulated by the Reserve Bank. Interestingly, this test is popularly known as 50-50 test and is applied to determine whether or not a company is into financial business.
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The Reserve Bank of India has clarified that for a company to be classified as an NBFC, to decide on its principal business, it will have to satisfy the two tests of assets and income. The financial assets should be more than 50% of the total assets (netted off by intangible assets), and the income from financial assets should be more than 50% of the gross income. These tests need to be satisfied for a company to be regarded as an NBFC.
2) you don’t need RBI permission as NBFC
The conditions described by are enabling restrictions. Only a company doing financial activity of more than 50% of assets and income as per the conditions stated is entitled to be registered as NFBC.
A hire purchase business is a business activity of a Non-Banking Financial Company (NBFC). NBFCs are companies that are registered under the Companies Act, 1956 and are regulated by the Reserve Bank of India (RBI).
A real estate business can be involved in hire purchase agreements for assets other than real estate. Hire purchase agreements are a way to finance assets without transferring ownership.
A real estate business can consider hire purchase as a financing option, but it should evaluate the financial viability of the proposal. The option with the lower present value of cash outflows is usually the better choice.
The 50-50 rule, or 50-50 test, is a test used by the Reserve Bank of India (RBI) to determine if a company is a Non-Banking Financial Company (NBFC). The test is based on whether a company's financial assets and income from financial assets make up more than half of its total assets and income.
If a company's financial assets are more than 50% of its total assets, it passes the first part of the test
If the income from those financial assets is more than 50% of its gross income, it passes the second part of the test
If a company passes both parts of the test, it is registered as an NBFC by the RBI.
Yes you can if your memorandum permits you to do the same
Yes
Dear Client,
Under RBI guidelines, based on the inputs provided and what is known as the 50-50 test, your company is free to engage in hire purchase action, provided certain other conditions are satisfied. The Reserve Bank of India only requires NBFC registration if the financial activity constitutes the principal business of the company. Principal business means that the financial assets should comprise more than 50% of total assets and income from financial assets is more than 50% of gross income. If your main business is real estate (sale, purchase, construction) and the hire purchase activity is very small compared to your overall business (not crossing the 50-50 threshold), then it does not call for NBFC registration under RBI regulations.
That said, ensure that your Memorandum of Association permits hire purchase activity under its business objects. You should also keep proper books of accounts that reflect the percentage of income and assets from non-financial activities to prove that hire purchase is secondary, not a principal business.
To ensure compliance, you may consult a financial expert or legal professional who can look at a detailed picture of your company’s financials per the 50-50 rule and ensure that there have been no breaches of regulations.
I hope this reply has assisted you; please feel free to ask any further legal questions.
Based on the information provided, your ability to engage in "hire purchase" business under the current structure depends on whether your company passes the 50-50 test as per RBI guidelines. Here's a breakdown:
1. Principal Business Test (50-50 Rule):
The RBI defines a company's principal business as financial activity if:
If your company does not meet both criteria, it is not considered to be engaged in financial activity as its principal business, and you will not require NBFC registration with RBI. This means you can conduct "hire purchase" business without obtaining NBFC permission as long as your primary activity remains in real estate (sale/purchase/construction).
2. Application to Your Business Model:
3. Compliance and Caution:
4. Legal Advice:
While the RBI's guidance is clear, interpreting and applying the 50-50 test can sometimes require professional judgment. Consulting with a financial or legal advisor specialising in RBI compliance is advisable to ensure your company operates within the regulatory framework.
Thanks and Regards,
Advocate Aman Verma
Legal Corridor
