Registration of Micro Finance company

At A2Z FINEDGE, we specialize in providing comprehensive taxation compliance and filing services tailored to your business needs. With a dedicated team of Chartered Accountants (CA), Company Secretaries (CS), MBAs, lawyers, and advocates, we are committed to ensuring a seamless experience for registering your Micro Finance Company. Let us guide you through every step of this critical journey.

What is a Micro Finance Company?

A Micro Finance Company (MFC) is a financial institution that provides financial services to individuals or businesses with low income, particularly in rural and semi-urban areas. These services typically include small loans (microloans), savings accounts, insurance, and financial education. Microfinance aims to empower economically weaker sections of society by promoting self-employment and entrepreneurship.

Objectives of a Micro Finance Company

1. Financial Inclusion: To provide access to financial services to unbanked or underbanked populations.
2. Poverty Alleviation: To uplift low-income groups by providing small loans and financial support.
3. Promote Entrepreneurship: To encourage small-scale businesses and self-employment opportunities.
4. Economic Development: To contribute to the overall economic development of rural and semi-urban areas.

Role of a Micro Finance Company

• Credit Facilities: Offering collateral-free loans to individuals, small businesses, and self-help groups.
• Savings Products: Encouraging small savings to help build financial discipline.
• Insurance Services: Providing risk mitigation products to protect against unforeseen events.
• Financial Literacy: Educating clients on money management and financial planning.

Types of Micro Finance Companies

1. Micro Finance Company as an NBFC:
• Regulated by the Reserve Bank of India (RBI).
• Primarily focused on lending and deposit acceptance under specific norms.
2. Section 8 Micro Finance Company:
• Registered under the Companies Act, 2013.
• Operates as a not-for-profit organization with social welfare objectives.

What is a Section 8 Micro Finance Company?

A Section 8 Micro Finance Company is established under Section 8 of the Companies Act, 2013. Its primary objective is to promote charitable or social activities, including financial inclusion and poverty alleviation. Unlike NBFCs, these companies operate on a not-for-profit basis and reinvest profits into their stated objectives.

Eligibility Criteria for Micro Finance Company Registration

For NBFC Micro Finance Company:

1. Minimum Net-Owned Funds (NOF): ₹2 crore.
2. Directors: At least two directors with financial expertise.
3. Registration: Approval from the RBI.
4. Compliance: Must adhere to RBI’s guidelines and regulations.

For Section 8 Micro Finance Company:

1. No Minimum Capital Requirement: However, sufficient funds should be demonstrated for operations.
2. Directors: Minimum of two directors.
3. Social Objective: Should have clear objectives aligned with public welfare.
4. Approval: License from the Registrar of Companies (RoC) and Section 8 certification.

Regulatory Framework for Micro Finance Companies

1.       Reserve Bank of India (RBI):

o    The RBI regulates NBFC Micro Finance Companies under the Reserve Bank of India Act, 1934.

o    Key regulations include:

§  Net-Owned Funds (NOF): Minimum requirement of ₹2 crore.

§  Lending Guidelines: Restrictions on maximum loan size, interest rates, and repayment terms.

§  Compliance Reporting: Submission of periodic financial statements and regulatory filings.

§  Customer Protection: Implementation of fair practices for borrowers.

2.      Companies Act, 2013:

o    Section 8 Micro Finance Companies operate under the Companies Act, 2013.

o    Regulatory requirements include:

§  License Acquisition: Obtaining a Section 8 license from the Registrar of Companies (RoC).

§  Profit Reinvestment: Ensuring all profits are utilized for social objectives.

§  Annual Compliance: Filing of annual returns, financial statements, and tax returns.

3.      Microfinance Institutions (Development and Regulation) Bill:

o    Enacted to oversee the functioning of microfinance institutions and ensure transparency.

o    Key provisions:

§  Interest Rate Caps: Prevents exploitative lending practices.

§  Borrower Rights: Establishes grievance redressal mechanisms.

4.      Taxation Regulations:

o    Section 8 companies enjoy significant tax benefits under the Income Tax Act, 1961.

o    NBFCs must comply with corporate tax regulations, including GST, TDS, and income tax.

5.      State-Level Regulations:

o    Some states impose additional laws and guidelines for microfinance activities.

o    Companies must comply with local rules, such as money-lending laws and state-specific financial norms.

Advantages of Registering a Micro Finance Company

1. Financial Empowerment: Provides essential financial services to underserved communities.
2. Tax Benefits: Section 8 companies enjoy various tax exemptions.
3. Regulatory Recognition: Enhances credibility and trust among stakeholders.
4. Business Expansion: Opportunity to scale operations across regions.
5. Contribute to Social Welfare: Actively participate in national economic growth and poverty reduction.

Detailed List of Documents Required

For NBFC Registration:

1. Memorandum of Association (MOA) and Articles of Association (AOA).
2. Detailed Business Plan.
3. Net-Worth Certificate of Promoters.
4. KYC of Directors and Shareholders.
5. RBI Approval Application.
6. Board Resolution authorizing registration.

For Section 8 Registration:

1. MOA and AOA.
2. Income-Tax PAN of Directors.
3. Proof of Address and Identity of Directors.
4. Declaration of Social Objectives.
5. License Application under Section 8.

Registration Process

For NBFC Micro Finance Company:

1.       Name Reservation: Secure company name via the RUN (Reserve Unique Name) application through the Ministry of Corporate Affairs (MCA) portal.

o    Timeline: Typically takes 1-2 working days.

o    Tip: Choose a unique and meaningful name to avoid rejection.

2.      MOA and AOA Drafting: Draft the Memorandum and Articles of Association, highlighting the objectives and structure of the company.

o    Timeline: Around 5-7 working days.

o    Common Challenge: Misalignment of objectives with NBFC guidelines. Ensure thorough review.

3.      Capital Requirement: Deposit the minimum Net-Owned Fund (NOF) of ₹2 crore in a bank account.

o    Tip: Obtain a bank certificate to substantiate the capital requirement.

4.      RBI Application: File an online application with the Reserve Bank of India through its official portal.

o    Required Documents: Business plan, MOA, AOA, promoter’s details, and compliance forms.

o    Timeline: Approximately 90-120 days for approval.

o    Challenge: Ensure strict adherence to RBI’s checklist to avoid delays.

5.      Certificate of Incorporation: Upon approval from both the RBI and RoC, receive the Certificate of Incorporation and commence operations.

For Section 8 Micro Finance Company:

1.       Name Approval: Obtain name approval through the RUN application on the MCA portal.

o    Timeline: Typically completed within 1-2 working days.

2.      Draft MOA and AOA: Clearly define the social objectives in these documents.

o    Tip: Emphasize public welfare objectives to align with Section 8 criteria.

3.      License Application: Submit Form INC-12 along with necessary attachments to obtain a Section 8 license.

o    Required Documents: Declaration in Form INC-15, financial statements, and affidavits from directors.

o    Timeline: Generally takes 10-15 working days.

o    Challenge: Provide detailed and precise social objectives to avoid rejection.

4.      Registration: Once the license is granted, proceed with filing incorporation forms with the RoC to obtain the Certificate of Incorporation.

o    Tip: Verify all documentation thoroughly to ensure smooth processing.

Difference Between NBFC and Section 8 Micro Finance Companies

Frequently Asked Questions (FAQs)

1. Can an NBFC Micro Finance Company accept deposits?
• Yes, subject to RBI’s guidelines.
2. What is the timeline for registration?
• Typically, NBFC registration takes 4-6 months, while Section 8 registration takes 1-2 months.
3. Are there penalties for non-compliance?
• Yes, both types of companies are subject to strict regulatory compliance. Non-compliance can lead to fines or cancellation of licenses.
4. Do Section 8 companies need RBI approval?
• No, they operate under the Companies Act, 2013, and do not require RBI approval.

5.      What is the difference between NBFC and Section 8 Micro Finance Companies?

o    NBFC Micro Finance Companies are profit-oriented and regulated by the RBI, while Section 8 companies are non-profit entities governed by the Companies Act, 2013.

6.      What is the minimum capital requirement for starting a Micro Finance Company?

o    For an NBFC, a minimum Net-Owned Fund (NOF) of ₹2 crore is required. For a Section 8 company, there is no specific minimum capital requirement.

7.      How long does the registration process take?

o    NBFC registration usually takes 4-6 months, while Section 8 company registration can be completed in 1-2 months.

8.     Can Section 8 Micro Finance Companies distribute profits?

o    No, Section 8 companies must reinvest their profits into achieving their stated objectives.

9.      Are there any tax benefits for Micro Finance Companies?

o    Section 8 companies enjoy significant tax exemptions, whereas NBFCs have limited tax benefits.

10.  What is the role of RBI in NBFC Micro Finance Company registration?

o    The RBI provides regulatory oversight, approves applications, and ensures compliance with financial guidelines for NBFCs.

11.   Can an NBFC Micro Finance Company accept deposits?

o    Yes, but only with prior approval from the RBI and adherence to specific guidelines.

12.  What are the common challenges faced during registration?

o    Common challenges include aligning objectives with regulatory requirements, preparing accurate documentation, and obtaining timely approvals from authorities.

13.  Do I need a business plan for registration?

o    Yes, a detailed business plan is required, especially for NBFC registration, to demonstrate the company’s financial viability and objectives.

14.  Why should I choose professional assistance for registration?

o    Professional assistance ensures accurate documentation, timely submission, and smooth handling of regulatory compliance, minimizing delays and rejections.

Why Choose A2Z FINEDGE?

• Expert Team: Experienced professionals from diverse fields.
• End-to-End Assistance: From documentation to regulatory approvals.
• Customized Solutions: Tailored services for your unique requirements.
• Timely Service: Efficient and hassle-free processes.

Contact A2Z FINEDGE today and take the first step toward establishing your Micro Finance Company!