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Under the RBI's “principal business” or 50-50 test, any company is treated as a non-banking financial company (“NBFC”) if more than 50% of its total assets are financial assets and more than 50% of its income comes from those assets. A typical investment holding company may cross both limits, particularly in the event of exits, as its balance sheet is dominated by shares of group companies and its income is mostly dividends, interest, or capital gains.
Once mandated as an NBFC, the holding company has to obtain a ‘Certificate of Registration’, and comply with the full set of requirements covering governance, capital adequacy, asset classification, disclosures, and periodic reporting to the RBI as applicable to NBFCs.
This created a disproportionate compliance burden on entities that were passive in nature, took no public money, and did not count the public as customers.
On April 29, 2026, the RBI issued the Reserve Bank of India (Non-Banking Financial Companies – Registration, Exemptions and Framework for Scale Based Regulation) Amendment Directions, 2026 (“Amendment Directions”). The Amendment Directions are effective from July 01, 2026, and create a lighter regime for entities with no public funds and no customer interface. This article sets out what they should do next.
NEW CATEGORIES
The Amendment Directions create three new distinctions:
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Type I NBFC is registered, takes no public funds, and has no customer interface.
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Unregistered Type I NBFC has the same low risk profile but assets below INR 10 billion. It is exempt from obtaining the Certificate of Registration to operate.
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Type II NBFC is any other registered NBFC.
NEXT STEPS
A holding company may proceed as follows:
Step 1: Understand two key terms
“Public funds” is wide. It includes inter corporate deposits, bank loans, commercial paper, and debentures. Loans from shareholders and directors are also included. Inter-corporate deposit (ICD) raised even from group entities also count. The Amendment Directions further add that funds routed through group entities that themselves access public funds are indirect public funds.
“Customer interface” means interaction with customers in business. The RBI FAQs clarify that lending to group entities, placing ICDs with them, giving guarantees in their favour, or providing other products or services to group companies, shareholders or directors, all amount to customer interface.
Step 2: Eligibility Test
Three conditions must be met against the latest audited balance sheet. First, the company takes no public funds and does not plan to. Second, it has no customer interface and does not plan to have one. Third, asset size is below INR 10 billion. If a group has multiple Unregistered Type I NBFCs, their assets are aggregated. If the total crosses INR 10 billion, every such company in the group must register as a Type I NBFC.
Step 3: Choose by December 31, 2026
Eligible NBFCs must apply for deregistration by December 31, 2026 on the PRAVAAH portal. Application must include the original Certificate of Registration, audited financials for the last three years, a statement on public funds and customer interface for those years, and a Statutory Auditor certificate.
A Board Resolution is also required. It must confirm the present position, and commit to register as a Type II NBFC if the company later seeks public funds or has customer interface, and as a Type I NBFC if assets reach INR 10 billion.
The Notes to Accounts must clearly disclose Unregistered Type I status post deregistration.
CRITICAL CAVEATS
Overseas Investment: An Unregistered Type I NBFC cannot make overseas investment in the non-financial sector. For overseas financial services investment, Type I registration and prior RBI approval are mandatory. As such, an existing NBFC already holding overseas financial sector investment cannot deregister.
Group level Aggregation: The RBI adds up the assets of all registered NBFCs in a group. If the total crosses INR 10 billion, every NBFC in the group gets pushed into the ‘Middle Layer’, which means more compliance. A registered Type I NBFC is counted in this total. However, an Unregistered Type I NBFC is left out. Accordingly, deregistering a holding company cuts compliance for the holding company itself, and it can also keep a sister operating NBFC out of the heavier Middle Layer rulebook.
CONCLUSION
Holding companies can claim a real reduction in compliance load while staying inside the regulatory contours. Eligible groups should map every entity that is a financial company. Test each against the three eligibility limbs. Look at intra group ICDs, guarantees, and service arrangements, and apply for deregistration if an entity qualifies.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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