Reserve Bank of India Act, 1934 | Chapter IIIB

Section 45-IC: Reserve Fund Requirements for NBFCs

Section 45-IC of the Reserve Bank of India Act, 1934 requires every non-banking financial company (NBFC) to maintain a reserve fund and transfer a prescribed part of its annual net profit to that fund. It also regulates appropriation from the reserve and provides for limited exemptions.

Key requirement: An NBFC must transfer at least 20% of its net profit every year, as disclosed in its profit and loss account, to its reserve fund before declaring any dividend.

What is a reserve fund under Section 45-IC?

A reserve fund is a statutory fund built out of an NBFC's profits. The requirement strengthens the company's financial base by retaining part of its earnings instead of distributing all profits as dividends. The provision is distinct from the registration and net owned fund requirements under Section 45-IA.

Section 45-IC: Provisions explained

Sub-section (1): Annual transfer to reserve fund

Every non-banking financial company must create a reserve fund and transfer to it a sum of not less than twenty per cent of its net profit every year, as disclosed in the profit and loss account, before any dividend is declared.

Sub-section (2): Restriction on appropriation and reporting

No appropriation from the reserve fund may be made except for a purpose specified by the Reserve Bank of India (RBI) from time to time. Each appropriation must be reported to the RBI within twenty-one days from the date of withdrawal.

Proviso: In a particular case, on sufficient cause being shown, the RBI may extend the twenty-one-day period or condone a delay in reporting.

Sub-section (3): Limited exemption by Central Government

Despite sub-section (1), the Central Government may, on the RBI's recommendation and having regard to the adequacy of the NBFC's paid-up capital and reserves relative to its deposit liabilities, declare by a written order that sub-section (1) will not apply to that NBFC for the period specified.

Proviso: No such order may be made unless the reserve fund under sub-section (1), together with the share premium account, is not less than the NBFC's paid-up capital.

Practical compliance considerations

Calculate annual net profit: Use the amount disclosed in the company's profit and loss account.
Transfer before dividend: Credit at least 20% of that net profit to the reserve fund before declaring a dividend.
Control withdrawals: Make appropriations only for purposes specified by the RBI.
Report promptly: Notify the RBI of any appropriation within twenty-one days, or seek an extension or condonation on sufficient cause.
Verify exemption orders: An exemption is not automatic; the Central Government must issue a written order based on the RBI recommendation and statutory conditions.

Illustration of the 20% transfer

If an NBFC discloses an annual net profit of Rs. 1 crore in its profit and loss account, Section 45-IC(1) ordinarily requires a transfer of at least Rs. 20 lakh to the reserve fund before declaring a dividend. This illustration assumes that no valid exemption order applies.

Frequently asked questions

What is the reserve fund requirement under Section 45-IC?

Every non-banking financial company must create a reserve fund and transfer at least 20% of its annual net profit to it before declaring any dividend.

Can an NBFC withdraw money from its reserve fund?

Only for purposes specified by the RBI. The appropriation must be reported to the RBI within 21 days, subject to extension or condonation for sufficient cause.

Can the reserve fund requirement be waived?

The Central Government may issue a written order on the RBI recommendation for a specified period, subject to the statutory conditions in Section 45-IC(3).

Official legal resources

For the statutory text, amendments and applicable RBI directions, consult the India Code legislative database and the Reserve Bank of India official website. RBI regulatory requirements may operate alongside Section 45-IC depending on the NBFC's category and activities.