RBI plugs tax flaw in NBFC guidelines

MUMBAI: The Reserve Bank of India (RBI) has shut a loophole in the non-banking finance company ( NBFC) regulations which individuals exploited to escape taxes. This may now result in hundreds of NBFCs losing their licence.

Finance companies that do not begin lending within six months of getting the licence will see their permission terminated, the central bank said in a notification.

"If the business of NBFC is not commenced by the company within the period of six months from the date of issue of certificate of registration, the CoR will stand withdrawn automatically," it said.

The RBI found individuals getting licence and investing their personal funds in banks' fixed deposits, giving them a tax advantage, instead of investing those funds in their individual accounts, a banker said. This is the regulatory arbitrage the central bank aims to block now. Ownership transfer will also be restricted.

"There can be no change in ownership of the NBFC prior to commencement of business and regularisation of its certificate of registration," it said.