1. Background

A "family office" is generally understood as a privately controlled entity established to manage the wealth, investments, and financial affairs of a single family or multiple families. Modern family offices increasingly operate as centralised hubs overseeing not only investment strategies but also wealth preservation, governance frameworks, and the training and integration of next-generation family members into financial decision-making.

The concept of family offices originated in Europe in the 19th century and gained prominence in the United States, with one of the earliest examples being the Rockefeller family office established in 1882 to manage concentrated family wealth. In India, the concept gained traction post the economic liberalisation of 1991, which led to significant wealth creation among business families and entrepreneurs.

India has witnessed significant growth in the number of family offices over the past decade. Industry data suggests that the number of family offices in India has expanded sharply from approximately 45 in 2018 to nearly 300 in 2024, with broader estimates placing the current range between 300–500 family offices depending on classification.

1.1 Legal Background

We need to understand the regulatory challenge of family offices being construed as non-banking financial companies ("NBFCs"), in case they are incorporated in a company structure.

The regulatory framework governing NBFCs in India is primarily derived from Chapter IIIB of the Reserve Bank of India Act, 1934 ("RBI Act"). Section 45-IA of the RBI Act mandates that any entity engaged in the business of a non-banking financial institution is required to obtain a certificate of registration from the Reserve Bank of India ("RBI") and maintain the prescribed minimum net owned funds, unless specifically exempted.

Family offices structured as companies were often examined under the NBFC framework due to the wide definition of "financial institution" under Section 45-I(c) of the RBI Act. The key test applied was the Principal Business Criteria (PBC), commonly known as the "50-50 test", under which an entity would be classified as an NBFC if more than 50% of its total assets constituted financial assets and more than 50% of its gross income was derived from such financial assets. Given that family offices are inherently investment-centric vehicles holding securities, group investments, and financial assets, they frequently satisfied both limbs of this test despite operating solely with proprietary capital and without any public interface.

2. Statutory Definitions and Interpretation

The classification of family office as an NBFC is fundamentally a definition-driven exercise, and therefore, the applicability of the regulatory regime depends on whether the family office entity satisfies the cumulative elements embedded within these statutory definitions.

A "company" under Section 45I(aa) refers to any corporate entity incorporated under the Companies Act (including private and public companies). A "financial institution" under Section 45I(c) covers non-banking entities engaged in financing activities such as lending or investment in securities. Section 45I(f) provides that a "non-banking financial company" is essentially a company which either qualifies as a financial institution or undertakes financial activities such as lending or accepting deposits as its principal business.

3. Regulatory Position Under the Amendment Directions

The notified Amendment Directions recognises a distinct category of entities that operate (a) without public funds; and (b) without customer interface, which although technically falling within the definitional ambit of NBFCs, do not warrant full-scale regulatory oversight. Pursuant to the newly inserted provisions (Para 38A read with Para 65A), entities which otherwise qualify as NBFCs but meet the above conditions and having an asset size of less than ₹1,000 crore are exempt from the requirement of registration under Section 45IA and 45IC of the RBI Act, 1934. Such entities are classified as "Unregistered Type I NBFCs."

Key Definitions

'Customer Interface' refers to any interaction between the NBFC and its customers in the course of business.

'Public Funds' refers to funds raised either directly or indirectly through public deposits, inter-corporate deposits, bank finance and all funds received from outside sources such as funds raised by issue of commercial papers, debentures etc. — but excludes funds raised by issue of instruments compulsorily convertible into equity shares within a period not exceeding five years from the date of issue.

The Amendment Directions also add an Explanation to the definition of 'public funds' which reads as "Indirect receipt of public funds means funds received not directly but through associates and Group entities which have access to public funds." This broadens the practical scope of the 'public funds' test for family groups where a holding company or affiliate has bank borrowings or external debt.

Group Aggregation Rule

The Amendment Directions introduce a group aggregation rule in Para 38A(1), Explanation II: where multiple Unregistered Type I NBFCs exist within the same Group, their asset sizes are required to be aggregated. If the aggregate asset size reaches ₹1,000 crore or above, all such entities within the Group are required to obtain registration as Type I NBFCs. This is a significant watch-point for family groups with multiple investment holding companies.

Compliance Requirements

Entities availing of the above exemption are nevertheless subject to certain baseline governance and disclosure requirements:

• Annual Board Resolution (Para 65A(3)): The board of directors must pass a formal resolution each year confirming that the company has neither accessed public funds (directly or indirectly) nor engaged in any customer interface activities.
• Notes to Accounts Disclosure (Para 65A(4)): The entity must disclose in its Notes to Accounts that it is an 'Unregistered Type I NBFC' as defined in the Directions, along with the status of public funds and customer interface.
• Auditor Exception Report (Para 38A(4)): The statutory auditor is not required to positively certify compliance in the routine audit report, however, the statutory auditor is obligated to submit an 'Exception Report' to the RBI in the event of any violation of the conditions on public funds, customer interface, or any other condition for the exemption.

4. Conclusion

The Amendment Directions provide a viable pathway for family offices structured as companies to operate without RBI NBFC registration, provided they meet the criteria for "Unregistered Type I NBFC" classification. The key requirements are: (i) no access to public funds (directly or indirectly), (ii) no customer interface, (iii) asset size below ₹1,000 crore (aggregated at group level), and (iv) compliance with annual board resolution and Notes to Accounts disclosure requirements.

Family offices should carefully evaluate their structure against these criteria, particularly the broadened "public funds" definition which captures indirect receipt through group entities, and the group aggregation rule which may require registration where multiple investment holding companies exist within the same family group.