The Reserve Bank has been empowered under the RBI Act 1934 to register, determine policy, issue directions, inspect, regulate, supervise and exercise surveillance over NBFCs that fulfil the principal business criteria or 50-50 criteria of principal business. The Reserve Bank can penalize NBFCs for violating the provisions of the RBI Act or the directions or orders issued by the Reserve Bank under RBI Act. The penal action may also include cancellation of the Certificate of Registration issued to the NBFC.

It is illegal for any person/ entity/ financial company to make a false claim of being regulated by the Reserve Bank to mislead the public to collect deposits and is liable for penal action under the Law. Information in this regard may be forwarded to the nearest office of the Reserve Bank and the Police.

If companies that are required to be registered with the Reserve Bank as NBFCs, are found to be conducting non-banking financial activity, such as, lending, investment or deposit acceptance as their principal business, without obtaining Certificate of Registration from the Reserve Bank, the same would be treated as contravention of the provisions of the RBI Act, 1934 and would invite penal action viz., penalty or fine or even prosecution in a Court of Law. If members of public come across any entity which undertakes non-banking financial activity but does not figure in the list of authorized NBFCs on the Reserve Bank’s website, they should inform the nearest Regional Office of the Reserve Bank, for appropriate action to be taken for contravention of the provisions of the RBI Act, 1934.

The list of registered NBFCs is available on the web site of Reserve Bank (www.rbi.org.in) under ‘Regulation → Non-Banking’. Further, the instructions issued to NBFCs from time to time through circulars and/ or master directions are hosted on the Reserve Bank’s website under ‘Notifications’, and some instructions are issued through Official Gazette notifications and press releases as well.

As part of regulatory framework prescribed by the Reserve Bank for NBFCs, the Reserve Bank prescribes prudential regulations viz., capital adequacy/ leverage, provisioning, corporate governance framework, etc.; conduct of business regulations viz., KYC/ AML regulations, fair practices code, etc.; and other miscellaneous regulations to ensure that NBFCs are financially sound and follow transparency in their operations. The regulations for NBFCs are contained in various master directions and notifications/ circulars issued from time to time, and are available on the website of the Reserve Bank (www.rbi.org.in) under ‘notifications’.

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. Even though public funds include public deposits in the general course, it may be noted that CICs as also non-deposit taking NBFCs are not allowed to 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.

The Reserve Bank has issued detailed directions on prudential norms, vide Master Direction – Reserve Bank of India (Non-Banking Financial Company – Scale Based Regulation) 2023 (as amended from time to time). Applicable regulations vary based on the layer of the NBFC under Scale Based Regulatory Framework for NBFCs. Further, specialised categories of NBFCs viz., NBFC-P2P, NBFC-AA, CICs, SPDs, MGCs and HFCs shall be subject to respective master directions governing them.

The directions, inter alia, prescribe guidelines on income recognition, asset classification and provisioning requirements applicable to NBFCs, exposure norms, disclosures in the balance sheet, requirement of capital adequacy, loan to value (LTV) ratio for NBFCs predominantly engaged in business of lending against gold jewellery, besides others.

Para 5.1.25 of Master Direction – Reserve Bank of India (Non-Banking Financial Company – Scale Based Regulation) 2023 (as amended from time to time) defines ‘Owned Fund’ as 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; as reduced by accumulated balance of loss, book value of intangible assets and deferred revenue expenditure, if any.
'Net Owned Fund' is defined under Section 45-IA(7) of the RBI Act, 1934. As per this definition, the Net Owned Fund means–
(a) aggregate of the paid-up equity capital and free reserves as disclosed in the latest balance-sheet of the company after deducting there from, accumulated balance of loss, deferred revenue expenditure, and other intangible assets; and

(b) further reduced by the amounts representing investments of such company in shares of its subsidiaries, companies in the same group, all other NBFCs, and the book value of debentures, bonds, outstanding loans & advances (including hire purchase and lease finance) made to, and deposits with subsidiaries of such company and companies in the same group, to the extent such book value exceeds 10% of (a) above.

NBFCs shall comply with the provisions of the Master Direction – Reserve Bank of India (Filing of Supervisory Returns) Directions – 2024 (as amended from time to time) for submission of various supervisory returns to the Reserve Bank.

NBFCs shall comply with the regulations contained in para 36 of the Master Direction – Reserve Bank of India (Non-Banking Financial Company – Scale Based Regulation) 2023 (as amended from time to time) while granting loans against security of shares. The regulations include, inter alia, maintaining a Loan to Value (LTV) ratio of 50% at all times, accept only Group 1 securities as collateral for loans of value more than ₹5 lakh where lending is done for investment in capital markets, undertake necessary reporting to stock exchanges on shares pledged in their favour, etc.
In addition to the above, there are other related regulations on NBFCs viz., there shall be ceiling of ₹1 crore per borrower for financing subscription to Initial Public Offer (IPO) and NBFCs can fix more conservative limits. Further, NBFCs are prohibited from lending against security of their own shares and debentures.