Within India's dynamic financial landscape, the rise of non-banking financial companies (NBFCs) has been transformative, catering to diverse financial needs. Yet, within this thriving sector, asset-light companies encounter a maze of regulatory hurdles that may impede their growth and operational agility.
Asset-light companies represent a paradigm shift in traditional business structures by minimising physical asset ownership. Instead of relying on assets such as equipment, inventories, real estate, etc., such companies leverage intangible assets, including partnerships, outsourcing, licensing, etc. to deliver their products and services. This results in cost structure improvement, greater flexibility and faster scalability compared to traditional companies with substantial tangible assets.
Typically, asset-light companies carry lower debt burdens on their balance sheets. They often operate in sectors such as consulting and advisory services, broking services, real estate and agency services, digital streaming, e-commerce, artificial intelligence, or fintech.
NBFCs are entities primarily engaged in financial activities, where the company’s financial assets constitute more than 50% of its total assets, and income from these assets constitutes over 50% of the gross total income. NBFCs must obtain registration from Reserve Bank of India (RBI) and comply with its regulatory framework. While the RBI has implemented stringent regulatory framework for NBFCs, it has also provided an exception to the companies (having a principal business of financial activities) regulated by other regulators, to eliminate dual registration and compliance requirements.
Further, such a company may qualify as a Core Investment Company (CIC) if at least 90% of their total net assets are in the form of investment (equity shares, preference shares, bonds, debentures, debt or loans) in group companies with equity shares and convertible instruments constituting at least 60% of their total net assets.
Key hurdles
Asset-light companies, which rely heavily on technology, services, and intangible assets rather than physical ones, may face challenges under the NBFC regulatory framework.
A pertinent challenge emerges for asset-light companies, particularly those operating on service-based models, which is the potential risk of inadvertently being classified as NBFCs by surpassing the 50% threshold. This could trigger regulatory issues that might reshape their operational dynamics.
However, companies engaged in broking business, investment advisory and portfolio management services regulated by the Securities and Exchange Board of India (SEBI), as well as insurance companies under the purview of the Insurance Regulatory and Development Authority (IRDA), will not be classified as NBFC since they fall under the exception. Additionally, such asset-light companies also do not get classified as a CIC because they typically do not have any significant investment in group companies.
While being classified as an NBFC isn't inherently negative, the accompanying regulatory framework and compliance requirements could impact the very essence of such companies. Therefore, the imperative for restructuring arises to safeguard their core operations while addressing the regulatory concerns.
Overcoming challenges
Companies can operate as Limited Liability Partnerships (LLP), instead of a company since NBFC regulations do not directly apply to LLPs. However, LLPs may hold less credit worthiness considering it is not governed and regulated. As a result, potential investors may investigate deeper into the valuation of such LLPs due to a lower level of transparency involved and accordingly, fund raising and liquidity may become difficult.
On the other hand, businesses structured through a company should optimise its financial structure within the bounds of the tax regulations. This can mitigate the cascading impact of surplus income being trapped in the company without compromising on the growth. Fostering collaboration between regulatory bodies and industry stakeholders can lead to tailored regulations catering to the nuances of asset-light businesses. Holding regular dialogues, workshops, and feedback sessions can further aid in formulating a more adaptive regulatory framework.
While India's NBFC regulatory framework ensures stability, recalibrating these regulations to accommodate the unique characteristics of asset-light companies is vital. A flexible and forward-thinking approach from regulatory bodies is indispensable to unlock the full potential of companies and propel India's financial ecosystem towards innovation-driven growth.
