Empowering Financial Inclusion: A Complete Guide to Micro finance Company Registration in India

Microfinance institutions (MFIs) are important avenues for providing low-income people in developing countries like India with issues abruptly for shutting away the economic poor with small-scale credit and financial services access. First and foremost, microfinance company registration is the first and most important step in officially initiating that activity and ensuring its sustainability.

This is all the knowledge needed, whether you are a social entrepreneur, NGO, or startup aimed at effecting change in rural India, about the process and benefits of micro finance company registration and Section 8 Company Registration. The complete information will take you through everything from eligibility to documentation, compliance, and benefits that pave the informed way for empowering communities.

Microfinance Company: Now, What Is That?

A microfinance company (MFI) refers to a financial institution that gives small loans and other financial services meant for people or small businesses that do not enjoy normal banking facilities. Generally, loans from microfinance companies have no collateral and thus are normally reserved for self-employed persons, farmers, women entrepreneurs, or microenterprises.

Unlike these huge institutions, as most of them are based on economic development and social empowerment, the MFIs have acted as a key player for each agenda designed by India with regard to financial inclusion, that is.

As micro finance company registration gives legitimacy, so would the institution operate within the legal frame prescribed by the Reserve Bank of India and the Ministry of Corporate Affairs.

Legal Framework RBI and Section 8 Company Registration.

There are two major ways of recording a microfinance company in India:

●      That is, an NBFC requisitioned and supervised by the Reserve Bank of the country as an NBFC-MFI (Non-Banking Financial Company-Micro Finance Institution).

●      Section 8 Company under the Companies Act, 2013, with a license from the Registrar of Companies, ROC.

But among the two, the most significant and initial microfinance venture for small-scale entrepreneurs and NGOs is to have the legal provision that permits operation under Section 8 company registration without the heavy capital requirements of an NBFC.

Let us see both modalities.

Micro Finance Company Registration as NBFC-MFI.

Eligibility Criteria

●      Under the Companies Act, 2013, the company's registration must be mandatory;

●      The minimum Net Owned Fund (NOF) required is ₹5 crore.

●      85% of assets should qualify as microfinance loans.

Documentation Required

●      The company should be registered with the RBI.

●      Incorporation under ROC

●      MEMORANDUM OF ASSOCIATION (MOA) & ARTICLES OF ASSOCIATION (AOA)

●      Board resolution for approving application for NBFC registration.

●      Net worth certificate from a chartered accountant

●      Audited financial statements

●      Business plan for a minimum period of three years

Process of Registration

●      Incorporate under the Companies Act, 2013.

●      Apply to the RBI for an NBFC license through the COSMOS portal.

●      Submit the application along with required documentation with the RBI.

●      Once cross-checked, the RBI issues a CoR (Certificate of Registration), which enables operational activity as a microfinance institution.

Such heavy capital requirements can indeed be daunting to smaller companies, though this allows a company to lend on a much larger scale.

Micro finance Company Registration Under Section 8 Company

Section 8 company registration could be the best option for startups, NGOs, or budding entrepreneurs with limited funds but a highly social vision. It gives the freedom to operate as a not-for-profit microfinance company without RBI approval.

Section 8 Company Registration—what is it?

Section 8 company registration is under the Companies Act, 2013, which is directed towards furthering charitable objectives involving social welfare, education, and financial inclusion. Such companies are not to share their profits as dividends but must reinvest their money in their social projects.

Thus, under the corporate laws in India, a microfinance company registered under Section 8 can, by lending small amounts to low-income individuals at terms of low-interest rates, give access to the population at the bottom of the pyramid."

Step-by-Step Process

The registration of a microfinance business in accordance with the Companies Act: A step-by-step guide

Step 1: Obtain DSC and DIN

●      The directors who are proposed need to be able to:

●      Digital Signature Certificate (DSC) for electronic filing as well as

●      Director Identification Number (DIN) from the MCA.

Step 2: Name Approval

The organization should suggest a unique name by using its RUN (Reserve Unique Name) option available via the MCA portal. Names should be reflective of the financial or social inclusion goals of the organization (for instance, "XYZ Micro Finance Foundation").

Step 3: Draft MOA & AOA.

This entails the writing of the following:

●      Vision, mission, and the activities of a microfinance company.

●      Internal Governance Structure.

Step 4: Apply for Section 8 License

The online registration and 12 form submission will be made on the following basis:

●      Draft MOA and AOA

●      List of Directors and Promoters

●      Projecting income and expenditure for 3 time periods

●      A declaration that the proceeds are to be used for charity purposes

●      A Regional Director (MCA) is responsible for reviewing and issuing Section 8 Licenses. Section 8 License if all requirements are satisfied.

Step 5: Incorporate a Company

After the grant to the company, submission with the SPICe+ incorporation form and attaching all the required documents and the payment of the required fees must be made. Following the success of registration with ROC, the Certificate of Incorporation will be issued.

Step 6: Start Business Operations

The incorporation has taken place. The microfinance company is able to continue lending operations according to RBI regulations for Section 8.

Benefits of Micro finance Company Registration Under Section 8

1. No Requirement for Minimum Capital

Contrary to NBFC-MFIs, 8 microfinance businesses are not required to have an initial capital investment of 5 crores, making them an excellent choice for startups as well as social companies alike.

2. Tax Benefits

Alongside the exemptions from tax under Section 12A, Section 80G from the Income Tax Act also provides tax exemptions to Section 8 businesses.

3. Microfinance Companies Don't Require RBI License

The microfinance firm under Section 8 is not a requirement for the direct approval of RBI, which reduces the regulatory burden.

4. Social Impact and Credibility

As a nonprofit organization, being an authorized Section 8 company would command more respect from the government, donors, and investors.

5. Right to Government Grants

This creates opportunities for Section 8 companies to apply to government schemes in the future to facilitate the growth and expansion of their business.

Key Compliance Requirements Post-registration

Legal compliance and smooth running for any microfinance business that is registered under Section 8 requires:

●      Annual Filings: Submission of annual returns and financial statements through the MCA.

●      Auditing: Ensure that your accounts are in order and have an annual audit conducted by an accredited CA.

●      Board meetings: Board meetings must be scheduled regularly, in line with the Companies Act.

●      Procurement: Loan practices that are fair and ethical methods for recovering.

●      CSR and Donations: Increased transparency in the use of funds and donations.

Comparison: NBFC-MFI vs. Section 8 Microfinance Company

Why Lawgical India for Microfinance Company Registration?

In Lawgical India, we simplify the procedure of microfinance registration of companies and Section 8 company registration with complete legal assistance.

The experts on board manage everything from documentation and application for licenses to compliance and advice, ensuring that the registration process is quick as well as transparent and free of errors.

We don't simply make sure you register your business; we assist you in creating an environmentally sustainable, compliant, and thriving microfinance institution that helps communities.

Questions about Micro Finance Company Registration

1. How much is the minimal amount of capital required for a microfinance company to be registered in India?

If you want to register as an NBFC MFI, it needs a minimum net owned fund of Rs 5 crore. Section 8 of the company registration law does not, however, require minimal capital requirements.

2. Do I need RBI approval for microfinance companies to register under Section 8?

No. The Section 8 micro finance company registration is not required to obtain an RBI license; rather, it has to follow the good practices in fair lending.

3. Does a Section 8 company give micro loans that have interest?

Yes. As per Section 8,microloans the company must provide microloans with a reasonable interest rate to ensure that the operations are running smoothly; every profit must be directed towards the purposes of the company.

4. How long will a Section 8 company registration take?

In general, it can take between 20 and 30 business days to get the approval of Section 8 company registration, subject to the verification of documents and the approvals required.

5. How do I start my microfinance business through Lawgical India?

Lawgical India involves end-to-end legal assistance, expert advice, and prompt filing assistance and thereby ensures a smooth, easy, compliant, and stress-free registration of the microfinance business.