The Reserve Bank of India Act, 1934
CHAPTER III B: PROVISIONS RELATING TO NON BANKING INSTITUTIONS RECEIVING DEPOSITS AND FINANCIAL INSTITUTIONS
Section 45-Ic: Reserve Fund
Bare Act
45 IC Reserve fund
- Every non-banking financial company shall create a reserve fund and transfer therein a sum not less than twenty per cent. of its net profit every year as disclosed in the profit and loss account and before any dividend is declared.
- No appropriation of any sum from the reserve fund shall be made by the non-banking financial company except for the purpose as may be specified by the Bank from time to time and every such appropriation shall be reported to the Bank within twenty-one days from the date of such withdrawal:
Provided that the Bank may, in any particular case and for sufficient cause being shown, extend the period of twenty-one days by such further period as it thinks fit or condone any delay in making such report.
- Notwithstanding anything contained in sub-section (1), the Central Government may, on the recommendation of the Bank and having regard to the adequacy of the paid-up capital and reserves of a non-banking financial company in relation to its deposit liabilities, declare by order in writing that the provisions of sub-section (1) shall not be applicable to the non-banking financial company for such period as may be specified in the order:
Provided that no such order shall be made unless the amount in the reserve fund under sub-section (1) together with the amount in the share premium account is not less than the paid-up capital of the non-banking financial company.
Simplified Act
Simplified Explanation of Section 45-IC Reserve Fund
- Every company that provides financial services without being a bank (non-banking financial company) must set aside at least 20% of its yearly profit into a savings account (reserve fund) before it can pay out any profits to shareholders (dividends).
- These companies cannot use the money in the reserve fund unless they have a specific reason that the Reserve Bank of India (the Bank) approves. If they do use the money, they must tell the Bank within 21 days after taking it out. However, if a company has a good reason, the Bank can allow them more time to report or forgive them for reporting late.
- Even though companies are usually required to set aside this money, the Central Government can temporarily lift this requirement for a company if the Reserve Bank of India agrees. This can happen if the company has enough capital and savings compared to the amount it owes to its depositors. But the government will only do this if the company's savings and additional funds from stock sales (share premium account) are at least equal to the money it has received from selling shares (paid-up capital).
Explanation using examples
Imagine a non-banking financial company (NBFC) named "QuickFin Services" that provides loans and financial services. At the end of the financial year, QuickFin Services calculates its net profit and discovers it has made a profit of 10 million rupees after tax.
According to Section 45-IC of the Reserve Bank of India Act, 1934, QuickFin Services is required to transfer at least 20% of this net profit, which amounts to 2 million rupees, into a reserve fund before they can declare any dividends to their shareholders.
Later in the year, QuickFin Services faces an unexpected financial crisis and decides it needs to appropriate some funds from the reserve fund. However, they can only do so for purposes specified by the Reserve Bank of India (RBI), and they must report this withdrawal to the RBI within 21 days.
If QuickFin Services fails to report within the stipulated time, they can request an extension or condonation for the delay, provided they have a sufficient cause and the RBI agrees to it.
Furthermore, if QuickFin Services has ample paid-up capital and reserves in comparison to its deposit liabilities, the Central Government, upon the RBI's recommendation, could exempt QuickFin Services from the mandatory reserve fund contribution for a specified period. But this exemption would only be granted if the reserve fund and share premium account together equal at least the paid-up capital of QuickFin Services.
