Form MGT-8: Applicability and Format

What is a Micro Finance Company?

A Micro Finance Company is a financial institution that provides small loans and financial services to low-income individuals, self-employed persons, and small enterprises who lack access to conventional banking services.

These companies play a vital role in empowering economically weaker sections, supporting entrepreneurial initiatives, and fostering local economic development by promoting financial inclusion.

Features of Micro Finance Company

Micro Finance Companies are characterised by:

• Providing small-ticket loans, typically without the need for collateral
  
• Targeting low-income, rural, and unbanked populations
  
• Offering simplified and accessible loan approval processes
  
• Promoting financial literacy and inclusive banking
  

Objectives of Micro Finance Company

The main objectives of an MFC include:

• Promoting financial inclusion for low-income individuals
  
• Empowering women and self-employed entrepreneurs
  
• Supporting small businesses and farming communities
  
• Encouraging savings and responsible financial behaviour
  
• Driving sustainable economic growth in underserved areas
  

Need for Micro Finance Company

There is a growing need for MFCs due to the lack of access to formal credit channels among the financially marginalised. Traditional banks often require credit history and collateral, which many low-income individuals cannot provide.

MFCs bridge this gap by offering unsecured loans and financial products tailored to the needs of small businesses, farmers, and micro-entrepreneurs.

Roles of a Micro Finance Company

Micro Finance Companies perform various functions that support economic empowerment:

• Disbursing microloans to low-income individuals and small enterprises
  
• Offering savings schemes and recurring deposit products
  
• Providing insurance and risk mitigation solutions
  
• Conducting financial literacy and awareness programs
  

Prerequisites for Microfinance Company Registration

A Micro Finance Company (MFC) can be registered either as an NBFC or as a Section 8 Company. The prerequisites vary depending on the type of entity you choose.

Documents Required for Micro Finance Company Registration

Key documents include:

• Identity and address proof of directors
  
• Memorandum and Articles of Association
  
• Business plan and financial projections
  
• RBI approval (for NBFCs)
  
• Certificate of Incorporation (for Section 8 companies)
  
• Net Owned Fund certificate (for NBFCs)
  
• Copy of Auditor’s report
  
• Banker’s report copy
  
• Recent credit report of the directors
  
• Net worth certificate of the directors
  
• Proof of work experience in the financial sector
  
• Tax and statutory compliance documents
  

Micro Finance Company Registration as an NBFC

Given the two different approaches to forming a microfinance company, the registration process for an NBFC-MFI follows a specific set of steps:

1. Company Incorporation:
   The first step is to register your business as either a Public Limited or a Private Limited Company. A private company requires a minimum of 2 members and a capital of ₹1 lakh, while a public company requires at least 7 members.
   
2. Capital Requirement:Next, you must raise the minimum required Net Owned Funds (NOF)- ₹5 crore for most regions.
   
3. Capital Deposit:
   Once the capital is raised, it must be deposited in a bank as a fixed deposit, and a ‘No Lien’ certificate must be obtained from the bank to confirm the funds are unencumbered.
   
4. RBI License Application:
   The company must then apply for an NBFC license by submitting an online application through the RBI’s portal, along with all necessary certified documents. Additionally, a physical copy of the application and documents must be submitted to the RBI’s regional office.
   
5. All documents should be readily available with the company at the time of filing.
   

Micro Finance Company Registration as a Section 8 Company

Alternatively, a Micro Finance company can be registered as a Section 8 Company, which is a not-for-profit entity. The steps involved in this process are:

1. Obtain DSC:
   
2. Begin by applying for the Digital Signature Certificate (DSC) for all proposed directors. The DSC is essential for digitally signing e-forms during the registration process.
   
3. Name Approval:
   
4. Next, apply for name approval using the SPICe+ form. The chosen name should reflect the company's non-profit nature- suggested words include Foundation, Sanstha, or Micro Credit.
   
5. Draft and File MOA & AOA:
   
6. Once the name is approved, prepare the Memorandum of Association (MOA) and Articles of Association (AOA). These must be filed along with the necessary supporting documents.
   
7. Submit Incorporation Documents:
   
8. Finally, all relevant incorporation documents, including Form INC-12, must be filed to obtain the license to operate as a Section 8 company.
   

Micro Finance Company Registration Fees

Registration fees vary based on the chosen structure:

• NBFCs: Government registration charges, RBI license fee, legal and consultancy fees, and compliance setup costs.
  
• Section 8 Companies: Lower fees due to no capital requirement; includes MCA license charges, incorporation costs, and legal consultations.
  

Registration Process of the Company with the RBI

Step 1: Register the Brand Name as a Trademark

Before proceeding with the RBI registration, it’s important to secure your brand identity. Registering your brand name or logo as a trademark under the Trademarks Act, 1999, ensures legal protection and exclusive rights to use the name across India.

Step 2: Incorporate the Company and Obtain a Certificate of Incorporation

Begin by registering your business as a Private Limited or Public Limited Company under the Companies Act, 2013 via the Ministry of Corporate Affairs (MCA) portal.
You will receive a Certificate of Incorporation (CoI) upon approval, which acts as the legal foundation for your microfinance company.

Step 3: Deposit Capital and Obtain No Lien Certificate

Raise the required Net Owned Funds (NOF)—₹5 crore (₹2 crore for northeastern states)—and deposit it as a Fixed Deposit in a scheduled commercial bank. Obtain a No Lien Certificate from the bank, confirming the funds are unencumbered and reserved as per RBI norms.

Step 4: Prepare and Submit the Detailed Project Report (DPR)

Create a robust Detailed Project Report covering your business plan, financial projections, risk management policies, organisational structure, and promoter background.

Step 5: Complete RBI Formalities and Gather Certified Documents

Collect all required documents, including:

• Certificate of Incorporation
  
• MOA & AOA
  
• PAN & TAN
  
• No Lien Certificate
  
• Board resolutions
  
• Audited financials (if available)
  

Step 6: Submit Online Application via RBI's Portal

Access the portal and complete the online NBFC-MFI application. Upload all necessary documents and ensure there are no errors or omissions in the form.

Step 7: Submit a Physical Application to the RBI Regional Office

After the online submission, send a hard copy of your application, including all enclosures and supporting documents, to the Regional Office of the RBI under whose jurisdiction your company falls.

Conclusion

Registering a Micro Finance Company enables you to reach underserved communities while operating within a legal and trusted framework.

Each model has its own advantages. NBFCs are ideal for those looking to operate commercially, access capital markets, and build a for-profit lending institution with high compliance standards. On the other hand, Section 8 Companies are best suited for nonprofit or social enterprise models focused on financial literacy, community development, or charitable micro-lending.

Frequently Asked Questions

What is an LC (Letter of Credit)?

A Letter of Credit (LC) is a document issued by a bank that guarantees payment to a seller on behalf of a buyer, provided that certain conditions are met. This financial instrument ensures payment security and mitigates risks associated with cross-border transactions. The issuance of an LC involves specific conditions, like the submission of required documents, which the bank reviews before releasing funds. It provides bank guarantees and incurs fees that are essential for its operation.

Examples of Letters of Credit

International Trade Example: A U.S. company wants to buy machinery from an Indian exporter. The U.S. company requests its bank to issue an LC to the Indian exporter. Once the exporter ships the machinery and presents the required documents to their bank, they receive payment from the issuing bank, ensuring trust and mitigating payment risk.

Domestic Transaction Example: A large retail chain uses an LC to purchase inventory from a local supplier. The LC guarantees that the supplier will receive payment as soon as they fulfill the delivery conditions outlined in the agreement.

Basics of a Letter of Credit Transaction

Applicant

The buyer who requests the LC from their bank. They initiate the process by applying for the LC and specifying the terms and conditions of the trade.

Beneficiary

The seller who receives payment through the LC. They must present all required documents correctly to receive payment.

Issuing Bank

The bank that issues the LC on behalf of the applicant. They verify the buyer's creditworthiness and commit to making the payment when conditions are met.

Negotiating Bank

The negotiating bank in LC that examines documents presented by the beneficiary and facilitates payment. They ensure all paperwork matches LC requirements perfectly.

The process begins when the applicant approaches their issuing bank for an LC. The issuing bank then coordinates with the negotiating bank to establish terms and verify documents before releasing any funds.

Importance of Letters of Credit

Secure Payments

They ensure that sellers receive payments without requiring advance payments, reducing risk for both parties involved in the letter of credit.

Facilitate Cross-Border Transactions

LCs simplify complex international transactions by providing a standardised payment mechanism across different countries.

Secure Business Funding

They provide businesses with necessary funding while verifying creditworthiness, helping companies maintain healthy cash flow.

Financial Assurance

LCs offer security when buyers cannot pay, acting as a guarantee backed by reliable banking institutions.

Advantages of Letters of Credit

Ease International Trade: Simplifies complex transactions across borders by providing a structured framework for payment and documentation.

Foster Global Business Connections: Builds trust between trading partners by removing payment uncertainty and providing bank-backed guarantees.

Provide Flexibility: Customisable terms to suit various transaction needs, including payment timing, shipping requirements, and document presentation.

Parties to Documentary Credit

Commercial/Trade Parties: The buyer and seller form the core of the transaction, initiating and completing the trade deal.

Banks: Issuing and advising banks serve as intermediaries ensuring secure payment and proper documentation.

Related Entities: Shipping lines and insurers support the transaction by handling logistics and risk management aspects.

Types of a Letter of Credit

Sight Credit

A Sight Credit allows instant payment upon presenting the correct documents, providing immediate access to funds for sellers. For example, if a businessman needs quick access to cash after shipping goods, they can use this type of credit.

Acceptance Credit/Time Credit

Acceptance or Time Credit involves bills that are accepted upon presentation and paid on specified due dates. This type allows sellers to receive payments after a set period.

Revocable Letter of Credit

A Revocable Letter of Credit can be canceled or modified by the issuing bank without beneficiary consent, which limits its reliability in ensuring secure transactions.

Irrevocable Letter of Credit

An Irrevocable Letter of Credit guarantees payment once certified by the exporter’s bank. This type provides security for international transactions and is often preferred by exporters due to its reliability.

Confirmed Letter of Credit

A Confirmed Letter of Credit involves both issuing and confirming banks. The confirming bank guarantees payment to the beneficiary, holding equal liability as the issuing bank, ensuring that payments will be honored upon proper presentation.

Back-to-Back Letter of Credit

This type involves issuing a second LC based on the security provided by the first LC. It is commonly used to secure payments for suppliers in international trade transactions.

Transferable Letter of Credit

A Transferable Letter of Credit allows the primary beneficiary to transfer credit partially or fully to another beneficiary, typically a supplier. However, once transferred, the second beneficiary cannot transfer it further.

Restricted Letter of Credit

A Restricted Letter of Credit specifies a particular bank responsible for payment, limiting its scope compared to unrestricted LCs. This type is often used when specific banks are preferred due to their reliability.

Revolving Letter of Credit

A Revolving Letter of Credit allows reuse after payments or drawings are made. This flexibility is beneficial for businesses requiring multiple shipments or ongoing transactions under one credit arrangement.

Precautions to be Taken

Verify Bank Reliability: The issuing bank must be reliable and well-known to both parties of the letter of credit. This helps minimise risks and ensures the LC will be honored when presented.

Local Bank Verification: It's essential to advise through an Indian bank and confirm the authenticity of the LC. The local bank can verify the legitimacy of the foreign bank and ensure all documents meet local regulations.

Clarify Financial Terms: Make sure to clearly establish who covers all bank charges and confirm freight payment terms as specified in contract agreements. This prevents disputes and unexpected costs during the transaction process.

Import Export Code

The Import Export Code (IEC) is a mandatory document required for all businesses involved in international trade. This code streamlines customs clearance, enables duty benefits, and ensures regulatory compliance. Through platforms like Razorpay Rize, businesses can obtain their IEC within 6-7 days which makes the process efficient and straightforward.

Frequently Asked Questions

Company is a Separate Legal Entity

A company is recognised as a separate legal entity, distinct from its shareholders. Even if it is fully owned by a single person or a group, the company maintains its independent status. This distinction ensures the company can continue existing regardless of changes in ownership.

However, while a company has legal recognition, it is not considered a citizen and cannot claim fundamental rights granted to individuals.

Example

Suppose John and Mary start a bakery and register it as a private limited company (e.g., "Sweet Treats Pvt. Ltd."). The company can enter into contracts, own property, and sue or be sued in its own name. If the company faces a lawsuit, John and Mary’s personal assets are protected, and only the company’s assets are at risk

Corporate Taxation

As a separate legal entity, a company is taxed independently from its owners. Corporate tax rates vary based on the type of company, its turnover, and prevailing tax laws. This separation ensures that individual shareholders are not personally liable for the company's tax obligations, reinforcing financial security and stability.

Example

Tech Innovators Pvt. Ltd." earns ₹2 crores in a financial year. The company pays corporate tax at the applicable rate (e.g., 25% for companies with turnover up to ₹400 crore), separate from the personal income tax liabilities of its shareholders. The shareholders are not personally liable for the company’s tax dues.

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Limited Liability

Limited liability protects shareholders by restricting their financial responsibility to the amount they have invested in the company. This means that even if the company faces financial losses or legal claims, the personal assets of shareholders remain secure. This feature makes private limited companies an attractive option for entrepreneurs and investors.

Example

If "Green Energy Pvt. Ltd." takes a loan and fails to repay it, the shareholders are only liable up to the amount unpaid on their shares. Their personal assets, such as their homes or personal savings, cannot be used to settle the company’s debts.

Company has Transferability of Shares

Shares in a company can be transferred freely unless restricted by the company's articles of association. This feature enhances liquidity, allowing investors to buy or sell shares easily.

While shares of public companies are freely transferable, private companies may impose certain restrictions on share transfers to maintain control over ownership.

Example

A shareholder in "Family Foods Pvt. Ltd." wants to transfer shares to her son. She can do so, provided the company’s Articles of Association allow it and the required approvals are obtained. This enables her to pass on ownership without affecting the company’s existence.

Company is a Juristic Person

Under the Companies Act, a company is considered a juristic person, meaning it has legal rights and obligations similar to a natural person. However, an authorised individual must represent it in legal matters, usually a Board of Directors or a specifically empowered Director.

While a company can file lawsuits, it cannot take an oath or serve as a witness in court, as these actions require a natural person.

Example

"Urban Developers Pvt. Ltd." can purchase land, enter into contracts, and hire employees in its own name. It is treated as a legal person, distinct from its shareholders, and can enforce its rights in court through an authorized representative.

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Company has Perpetual Succession

A company's existence is independent of changes in ownership or shareholder status. Even if a majority shareholder (owning 99.99% of shares) passes away, the company continues to operate until it is formally wound up. This ensures stability and continuity in business operations.

Example

"Dabur India Ltd." was incorporated in 1884 and has continued to exist and operate despite changes in ownership, management, or the death of shareholders. The company’s existence is not affected by such changes and continues until it is formally dissolved

Common Seal (If Applicable)

A common seal acts as the official signature of the company, used to authenticate important documents like contracts and deeds. While the Companies Act of 2013 has made it optional for private companies, some organisations still choose to adopt it for added authenticity and formal recognition.

Example

"Metro Pvt. Ltd." adopts a common seal as its official signature. When signing a property purchase agreement, the document is stamped with the company’s common seal, signifying its authenticity and approval by the board of directors. While optional, some companies still use it for formal documents

Decree Against Company & Corporate Veil

A company is generally not liable for an employee's wrongful acts unless they occur within the scope of employment. For liability to arise, the wrongful act must be directly linked to business operations rather than simply occurring during work hours.

The "corporate veil" protects shareholders from personal liability, but courts can lift this veil in cases of fraud or misconduct.

Example

An employee of "RapidMove Logistics Pvt. Ltd." causes damage to a client’s goods while making a delivery as part of his job. The client sues the company, not the employee personally. However, if the directors used the company to commit fraud, the court could hold them personally liable by lifting the corporate veil.

Company can Own Property

A company, as a separate legal entity, can own property in its name, and its assets are distinct from those of its members. Members do not have direct ownership over company assets but may have a right to claim remaining assets after the company is wound up.

Example

"TechHive Innovations Pvt. Ltd." purchases office equipment and furniture. These assets are owned by the company itself, not by any individual shareholder or director. If a shareholder leaves, the equipment still belongs to the company.

Company can be Trustee

A company can act as a trustee if its Memorandum of Association (MoA) permits it. The objects clause in the MoA defines the company's ability to function as a trustee. Companies often act as trustees in managing trusts, employee benefit funds, or asset management services, ensuring structured administration of assets.

Example

"SecureTrust Pvt. Ltd." is appointed as the trustee to manage a scholarship fund for underprivileged students. The company manages the fund’s assets and disburses scholarships according to the trust’s rules.

Capacity to Sue and Be Sued

As a separate legal entity, a company has the right to initiate legal proceedings and can also be sued in its own name. This ensures accountability and allows the company to protect its rights, enforce contracts, and address disputes independently of its owners or directors.

Example

"PureWater Solutions Pvt. Ltd." discovers that a supplier has delivered defective water filters. The company files a lawsuit against the supplier in its own name. Similarly, if the company fails to pay its rent, the landlord can sue the company directly.

Importance of Understanding Company Features

Understanding these features is crucial for ensuring legal compliance and making informed business decisions. It helps entrepreneurs, investors, and stakeholders navigate corporate operations effectively while minimising risks. Recognising the legal and financial implications of these features enables better decision-making in establishing and managing a company.

Frequently Asked Questions