NBFC classification blocks amalgamation without prior RBI compliance when financial assets and income dominate the business profile.

A scheme of amalgamation could not proceed without Reserve Bank of India approval where the transferor companies' financial profile showed NBFC characteristics. The materials indicated investment, lending and advances activities, with substantial investments and little or no operational income in some entities; on that basis, the companies failed to dislodge the finding that their principal business was financial in nature. Applying the RBI test that financial assets and related income exceeding 50% of total assets and gross income point to NBFC status, the tribunal treated prior regulatory compliance as necessary. The rejection of the scheme was therefore upheld and the appeal failed.

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Issues: Whether the rejection of the scheme of amalgamation was justified on the ground that the transferor companies were carrying on non-banking financial company activities and, therefore, prior approval of the Reserve Bank of India was required.

Analysis: The report of the Regional Director showed that the companies were engaged in investment activities and in lending and advances, while some companies reflected zero operational income but substantial investments as assets. On the materials placed, the companies did not establish that they were outside the definition of a non-banking financial company. The relevant RBI principle treats a company as an NBFC when financial assets exceed 50 per cent of total assets and income from financial assets exceeds 50 per cent of gross income, and the statutory definition in the Reserve Bank of India Act, 1934 also covered companies whose principal business was lending or receiving deposits. The appellants failed to produce sufficient material to dislodge the finding that the scheme could not be considered without RBI compliance.

Conclusion: The rejection of the scheme was upheld and the appeal failed.

Ratio Decidendi: Where the material shows that a company's principal business is investment or lending activity and its financial profile indicates NBFC characteristics, prior regulatory compliance and approval cannot be bypassed in a scheme of amalgamation.

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