FINANCE
SECTION 8 MICRO FINANCE COMPANY
(Reg. under section 8 the Companies Act,2013)
When you wish to start a finance business to helping poor people and having in
trouble to getting in RBI License, the one and only alternative is to form a section 8
Micro Finance Company (earlier known as section 25 of Companies Act,1956)
under the Companies Act, 2013
Introduction
The Micro finance Company is basically the financial institutions that provide small-scale
financial services in the form of loan, credit or savings. These companies are introduced
to ease the credit system for small businesses as they don’t get a loan from banks due to
their complex process. Therefore it is commonly named as a Micro-credit, Micro-benefit
organization. They offer small loans to various small businesses or households that do
not have access to formal banking channels or eligibility for loans.
They provide small loans that are less than Rs.50,000 for rural areas and for urban it is Rs.1,25,000.
The simplest way to register a Microfinance Company in India is to register the Section-8
Company with MCA (Ministry of Corporate Affairs). Without charging any marginal money or
guarantee security. It can give loans at inexpensive rates directed by the RBI and central
government. They are a huge support to all rural and agricultural development including income
and employment creation.
There are basically 2 types of microfinance companies that are allowed in India, one is
which has to be registered with the RBI and another is the non-profit type, which is
registered as section 8 company and does not need RBI approval.
Main Features of Section-8 Micro Finance Company
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• RBI approval is not required.
• No need of minimum capital of Rs. 2 Crores.
• Minimum Compliances.
• Can give unsecured loan to small business of Rs.50,000.
• Can give loan for dwelling residence up to Rs.1.25 lakh.
• Section-8 company have to follow the RBI guidelines on interest rate and processing
charges.
• It is a legal finance business and you can sue the defaulter in case of non-payment of
loan amount.
• In India, finance businesses are authorised only to Non-Banking Finance Companies
(NBFC) and governed by RBI. NBFCs are required to get registration with RBI and
comply with RBI guidelines. However, some business forms have been given exemption
by the Reserve Bank of India (RBI) to do finance activities up to a certain extent.
• The Reserve Bank of India through its master circular RBI/2015-16/15 DNBR (PD)
CC.No.052/03.10.119/2015-16 Dated July 01 2015 has exempted all Section 8 Companies
engaged in micro finance activities.
• As per Para 2 (iii), Sections 45-IA, 45-IB and 45-IC of the Reserve Bank of India Act, 1934
(2 of 1934) shall not apply to any non-banking financial company which is engaged in
below mentioned activities:
• (a) 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.
• (b) Licensed under Section 8 of the Companies Act, 2013; and.
• (c) Not accepting public deposits as defined in paragraph 2(1) (xii) of Notification No. 118
/DG (SPT)-98 dated January 31, 1998.
Benefits of Section-8 Micro Finance Company
Government of India and the Reserve Bank of India have created conducive policy
framework for Microfinance Institutions (MFIs) to provide necessary legitimacy and
impetus to the sector. The following are the benefit of Micro Finance Business.
• Provide access to funding
• Encourage self-sufficiency and entrepreneurship
• It offers a better overall loan repayment rate than traditional banking products.
• Strengthen financial condition for some days till situation gets better.
• Help in meeting credit needs for such a population range from emergency loans,
consumption loans, business loan, working capital loan, housing etc.
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Loan Limits by Section-8 Micro Finance Company
• Borrower with a rural household annual income not exceeding Rs. 1,00,000 or urban and
semi-urban household income not exceeding Rs. 1,60,000 will be eligible.
• Loan amount will not exceed Rs. 60,000 in the first cycle and Rs. 1,00,000 in subsequent
cycles.
• Total indebtedness of the borrower will not exceed Rs. 1,00,000.
• Tenure of the loan not to be less than 24 months for loan amount in excess of Rs. 30,000
with prepayment without penalty.
• Loan to be extended without collateral.
• Aggregate amount of loans, given for income generation, is not less than 50 per cent of
the total loans given by the MFIs.
• Loan is repayable on weekly, fortnightly or monthly installments at the choice of the
borrower.
Basic Documents required for Incorporation of Section-8
Micro- Finance Company.
• Aadhar Card, Aadhar number is now a necessity for applying for any registration in
India.
• Address proof will be required for all directors and shareholders of the company to be
incorporated.
• For Indian nationals, PAN is mandatory. For foreign nationals, apostilled or notarised
copy of passport must be mandatorily submitted.
• Residence proof documents like bank statement or electricity bill should not be more
than 2 months old.
• All documents submitted must be valid
• Register office of all companies must be in India . If it is a Rented Property, Rent
agreement and NOC from a landlord. If it is a Self-owned Property, Electricity bill or
any other address proof.
• Documents submitted must be valid and not more than 2 month-old.
What are the compliances to be complied with after
starting the loan business under the NBFCs?
The Section 8 Company Shall comply the following compliances every year:
1. ROC Filings such as Annual Returns, Balance Sheets, Profit and Loss Accounts, etc;
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2. Maintenance of proper accounts;
3. Appointment of Statutory Auditor;
4. Income Tax Returns and GST Returns;
5. Preparation of Financial Statements & get Audited.
What are the Interest Rate on Loan Amount?
Section 8 Micro Finance is abided by the Reserve bank of India even it has been exempted
from RBI License and hence for the Interest rate, it has to follow the RBI Guidelines time
to time. Presently the Interest rate is Maximum 26% P.A on reducing balance method or
flat rate as decided by the mutual agreement.
Is Income Tax is levied in Section 8 Microfinance?
Income tax is a tax, which is levied on Income or profit, the section 8 company is a non-
profit making company and it can not earn profits, however we can use the word
“Surplus” in lieu of “profit” and the Net Surplus (after deducting all the expenditures) is
Chargeable to tax at the specified rate of Income Tax but if you have 80G and 12A License,
you can get a benefit of up to 100% deduction of tax.
Sources of Funds for Section 8 Micro Finance Company
to distribute the loans
A section 8 Micro Finance company can raise funds to distribute the loans or to use for
other social activities from the various sources. Some of them are as follows:
Subscriptions from Members
Donation from Members or outsiders
Life time Membership Fee
Tenure-able Membership Fee
FDI (Foreign Direct Investments)
Loan from Banks
Public Deposits
Income from other social activities.
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Can a Personal Loan is provided by Section 8 Micro
Finance Company?
Yes, as we discussed above, section 8 micro finance can provide the unsecured loans
without collateral and personal loans also comes under the ambit of unsecured loans.
Is a section 8 Micro Finance Company eligible to do
Micro Finance business, as it is NGO?
Yes, as we discussed above, section 8 micro finance company is registered under the
Companies ACT, 2013 and having a valid license and certificate and also works under
the guidelines of RBI even it is exempted from license from RBI. The motive to exempt
the RBI license to section 8 Companies for helping the poor people through the social
activities.
Can we use this NGO for helping of people in health &
education or other social activities?
Yes, but for this you have to well draft the Memorandum (Bye-Laws) of Company. It all
is possible. Don’t worry VAKIL KARO expert will help you surely for all the process.
Process to Register Section 8 Micro Finance company
Obtaining Digital Signature Certificate (DSC) and Directors Identification Number (DIN)
Filing of Form INC-1 for Reservation of Name
After the approval of INC-1, File form INC-12 to registrar for a license under sub section
(1) of section 8.
Registrar will issue a license in Form INC-16
Filing of forms and documents with registrar for incorporation (This is same as in case of
public company limited by shares)
Issuance of certificate of incorporation by registrar
To Register the Company estimated time is 30-60 days.
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THANKYOU
For any query feel free to Contact us
VAKIL KARO (a brand of JSONS SOLICITORS PRIVATE LIMITED)
MOBILE : 9636838878
WEB: WWW.VAKILKARO.CO
www.vakilkaro.co-9636838878
