Advocate Bhavesh Bhatia

Questions Answered by Advocate Bhavesh Bhatia

Q: Clarification on RBI Approval Requirement for Revenue-Based Funding

I am starting a Revenue-Based Funding (RBF) business for small B2B businesses. I invest money and receive a share of business revenue until a fixed amount is recovered. There is no fixed EMI or guaranteed return, and repayment depends on business performance. If the business fails, I may lose money. Does this type of model require RBI approval or NBFC registration in India?

Advocate Bhavesh Bhatia answered
Ss a senior lawyer, I have reviewed your proposed Revenue-Based Funding (RBF) model for small B2B businesses in India.prima facie, Your model involves investing capital in small businesses and receiving a share of their revenue until a fixed amount is recovered. There is no fixed EMI, no guaranteed return, and you bear the risk of loss if the business fails. This structure generally does not require NBFC registration or RBI approval if properly drafted as an equity investment rather than a loan.Key Reasons:RBI applies the Principal Business Test (50/50 Rule) for NBFC registration. If your activity is structured as a genuine investment with revenue sharing and full risk participation, it usually falls outside the definition of lending activity under Section 45-IA of the RBI Act.To stay safe, avoid using words like loan, borrower, interest, or repayment in your agreements and pitch documents. Instead use investment, investee, and revenue share or variable return.Recommended Safe Structure:Use Compulsorily Convertible Preference Shares (CCPS) and treat the revenue share as a variable preferred dividend. This keeps the transaction in the investment category.Other Important Compliances in 2026:DPDP Act 2023: You will be a Data Fiduciary as you access business and promoter data. Implement proper notice and consent mechanisms.GST: Revenue share may attract 18% GST as a service. Take a specific tax opinion.If you scale up significantly or use automated digital platforms, ensure compliance with RBI Digital Lending Guidelines.Risks:If agreements create any absolute obligation to repay capital plus a fixed markup, RBI or courts may re-characterize it as lending, triggering NBFC registration, penalties, and tax issues.Bottom Line:Your described RBF model does not require NBFC registration or RBI approval when structured correctly as equity/revenue-share with genuine risk sharing. However, poor drafting can convert it into a lending activity.I strongly recommend using a CCPS-based term sheet.