Can a section-8 company do micro-finance?

MICRO FINANCE ACTIVITES BY SECTION 8 COMPANIES PRIOR TO THE MINISTRY’S DIRECTION LETTER NO. 05/33/2017-CL.V DATED 10-02-2020

• Section 8 companies carrying Micro Finance Activities with an objective to Micro Finance to the poor section that can be individually or as self-help groups for their betterment or for their upliftment without profit motive can give personal, business, education loan as limit specified.

Limits: - Section 8 Micro Finance Company can give unsecured loan to small businesses upto Rs. 50,000/- and can give loan for dwelling residence up to Rs.1.25 lakhs

MAIN FEATURES OF SECTION-8 MICRO FINANCE COMPANY

1. RBI approval is not required.
2. No need of minimum Net Owned Funds (NOF) of Rs. 5 Crores (Rs. 2 Crores in the North Eastern States).
3. Minimum Compliances.
4. Can give unsecured loan to small business of Rs. 50,000.
5. Can give loan for dwelling residence up to Rs.1.25 lakhs.
6. Section 8 microfinance company may offer an attractive rate of interest on a loan provided, which can be up to 26 % p.a. on reducing value.
7. Sections 45-IA, 45-IB and 45-IC of the Reserve Bank of India Act, 1934 shall not apply to any non-banking financial company which is engaged in below mentioned activities:
8. Engaged in micro financing activities, providing credit not exceeding Rs. 50,000 for a business enterprise and Rs. 1,25,000 for meeting the cost of a dwelling unit to any poor person for enabling him to raise his level of income and standard of living; and.
9. Companies Registered under Section 8 of The Companies Act 2013.

AS PER MINISTRY’S DIRECTION LETTER NO. 05/33/2017-CL.V DATED 10-02-2020,

MCA has imposed restrictions on carrying Micro Finance Activities by Section 8 Companies registered under The Companies Act, 2013

MCA Stated that : Incorporation of Micro Finance Companies u/s 8 of The Companies Act, 2013 is not feasible as they do not comply with any stringent criteria of NET OWNED FUNDS (NOF) as laid down in RBI’s Non-Banking Financial Company – Micro Finance Institutions ( Reserve Bank) Directions of 2011.

Therefore, it is decided not to allow Name or Incorporation of Section 8 Companies containing words Micro Finance.

So, MCA prohibited the inclusion of micro finance activities in the object clause of Section-8 Company unless the Net Owned Fund (NOF) and other requirement as laid down by RBI are complied with.

NET OWNED FUNDS and OTHER REQUIREMENTS:

• Minimum Net Owned Funds of ₹ 5 crore. (For NBFC-MFIs registered in the North Eastern Region of the country, the minimum NOF requirement shall stand at ₹ 2 crore).
•  Not less than 85% of its net assets are in the nature of “qualifying assets.”

(Only the assets originated on or after January 1, 2012 shall have to comply with the Qualifying Assets criteria. As a special dispensation, the existing assets as on January 1, 2012 shall be reckoned towards meeting both the Qualifying Assets criteria as well as the Total Net Assets criteria. These assets shall be allowed to run off on maturity and shall not be renewed).

• Exemptions from Sections 45-IA , 45-IB  and 45-IC  of the RBI Act, 1934 have been withdrawn for those ‘not for profit’ companies engaged in microfinance activities that have asset size of ₹100 crore and above.

45-IA: Requirement of registration as an NBFC

45-IB: Maintenance of a certain percentage of outstanding deposits in approved securities by deposit taking NBFCs

45-IC: Transfer of 20 percent of net profit to reserve fund 

• Section-8 Micro Finance company have to follow the RBI guidelines on interest rate and processing charges.

AS PER MINISTRY’S DIRECTION LETTER NO. 05/33/2017-CL.V DATED 31-08-2020,

MCA has imposed restrictions on Section 8 companies for changing the main object to Micro Finance Activities.

MCA Observed that : Companies are being incorporated without including Micro Finance Activities in its Main Object but later the Main Object of the companies are being amended by inclusion of Micro Finance Activities by altering MOA.

Now, ROC have clear directions from MCA that not to allow any such alterations in the Main Objects by Section 8 companies for inclusion of Micro Finance or Credit Activities in main object of the Company unless requirement of NET OWNED FUNDS and other requirements are complied.

So, MCA prohibited the inclusion of micro finance activities in the object clause and Altering the Main Object by inclusion of Micro Finance Activities in its Main Object by Altering MOA of Section-8 Company unless the Net Owned Fund (NOF) and other requirement as laid down by RBI are complied with.

AS PER GENERAL CIRCULAR NO. 05/2022 DATED 30-05-2022

MCA Prohibited Section 8 Companies from carrying Micro Finance Activities.

MCA Observed that: Various Section 8 Companies are altering their Object Clause for carrying out Micro Finance Activities by way of passing SPECIAL RESOLUTION , Changing ACTIVITY CODE, and subsequently filing of e-form MGT-14 with the concerned ROC’s, even though at initial incorporation, The ROC is not allowing Section 8 Companies to get incorporated with the objects of Micro Finance Activities.

Now, MCA directed ROC’s to take immediate actions, including changing their objects, to prevent such companies from carrying out the Micro Finance Activities.

Earlier, MCA vide direction letter no. No. 05/33/20 dated 10-02-2020 prohibited the inclusion of micro finance activities in the object clause of Section-8 Company unless the Net Owned Fund (NOF) and other requirement as laid down by RBI are complied with. Now, ROCs are immediately directed to prevent such companies from carrying out micro finance activities.