NBFC Takeover

NBFC Takeover involves acquiring control through share or asset purchases, enabling market expansion, diversification, and financial growth.

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Overview of NBFC Takeover

Acquisition or transfer of control over an NBFC by another entity, typically a larger financial institution, another NBFC, a corporate player, or an individual with a good track record. Such takeovers can involve the purchase of shares, assets, or the entire operational control of the NBFC, depending on the specific terms of the transaction. The takeover of an NBFC may be driven by various strategic reasons, including market expansion, diversification of services, enhanced financial capabilities, or entry into a new geographical region.

NBFC takeovers are complex transactions that involve several legal, financial, and regulatory considerations. The process is typically subject to the regulations of the RBI, Securities and Exchange Board of India (SEBI), and other relevant regulatory bodies, depending on the structure and scale of the acquisition.

Benefits of NBFC Takeover

NBFCs play a crucial role in India’s financial sector by providing services like loans, asset financing, and investment management to individuals and businesses underserved by traditional banks. They are categorized into different types based on their functions and activities for NBFC registration.

  1. Market Expansion: Acquiring another NBFC allows for geographical expansion, reaching new customer segments, and diversifying the business portfolio.
  2. Increased Customer Base: The takeover enables access to a larger customer base, which can lead to enhanced business opportunities and revenue growth.
  3. Diversification of Services: Integration with another NBFC may bring complementary services or expertise, allowing for diversification of offerings and reducing dependency on specific products or markets.
  4. Synergy Benefits: Consolidating operations can lead to cost synergies, improved operational efficiency, and better utilization of resources.

Documents Required for NBFC Takeover

To ensure a smooth and efficient takeover process, the acquirer must be well-informed about all relevant details related to the transferor. This helps avoid unnecessary delays and ensures compliance with regulatory requirements. The following documents must be submitted to the RBI office for the NBFC takeover:

  1. Directors and Shareholders Information: Detailed information about the directors and shareholders of the acquiring and target NBFC, including their backgrounds and ownership details.
  2. Non-Criminal & Non-Conviction Statement (under Section 138 of the NI Act): A statement affirming that neither the directors nor the company have any criminal convictions or pending criminal cases under Section 138 of the Negotiable Instruments Act.
  3. Declaration of Association and Non-Association: A declaration from the acquirer regarding any past or present associations with the target NBFC or any affiliates.
  4. Bankers’ Report: A report from the bankers of the acquirer and the target company, outlining their financial standing and history.
  5. Three Years’ Financial Statements: The audited financial statements of the acquiring company and the target NBFC for the last three years, providing insight into their financial health.
  6. Due Diligence Report: A comprehensive due diligence report that evaluates the financial, legal, and operational aspects of the target NBFC.
  7. Company’s Legal Documents: Legal documents such as incorporation certificates, memorandum, and articles of association, and any other regulatory approvals that the target or acquirer holds.
  8. PAN Number: The Permanent Account Number (PAN) of the acquirer and the target company, ensuring tax compliance.
  9. KYC Documents: Know Your Customer (KYC) documents for the acquirer, directors, and shareholders, verifying their identity and compliance with anti-money laundering regulations.
  10. NBFC Business Plan: A detailed business plan outlining the acquirer’s strategy, goals, and vision for the NBFC post-takeover, along with a financial and operational roadmap.
  11. Acquirer’s Source of Capital: Information regarding the source of capital used for the takeover, providing transparency about the acquirer’s funding sources.
  12. Directors’ Identification Number (DIN): The Director Identification Number (DIN) of the directors involved in the takeover process.
  13. Registered Business Address: The registered address of the acquirer and the target NBFC.
  14. Other Statutory Information: Any other statutory and regulatory documents or information as required by the RBI or relevant authorities to complete the takeover process.

Submitting these documents in a timely and organized manner is essential for a smooth takeover process and regulatory compliance.

NBFC Takeover Process

The takeover of a Non-Banking Financial Company (NBFC) involves acquiring an existing NBFC by following regulatory guidelines set by the RBI. The process requires submitting an application to the Regional Office of the Department of Non-Banking Supervision, under whose jurisdiction the NBFC’s registered office falls.

The takeover procedure follows a series of steps to ensure compliance with RBI norms and legal requirements.

Step 1: Signing Memorandum of Understanding

The first step in the takeover process is signing a Memorandum of Understanding (MoU) between the acquiring company and the target NBFC. The MoU outlines the responsibilities, terms, and conditions agreed upon by both parties. It must be duly signed by the directors of both the acquirer and the target company, forming the basis for further negotiations and regulatory approvals.

Step 2: Conduct Due Diligence Proceeding

The NBFC takeover requires the acquirer company to review the following aspects before starting the proceeding for the acquisition of NBFC:

  • Recognition of financial and strategic goals.
  • Thorough background verification.
  • NBFC market analysis.
  • Assessment of financial aspect.

Step 3: Valuation and Transfer of Assets

In this step, the valuation of the target NBFC is conducted using the Discounted Cash Flow (DCF) method, which determines the entity’s net present value. A Chartered Accountant (CA) then issues a certificate detailing the valuation method used and the assessed financial worth of the NBFC. This ensures transparency in the transfer of assets and helps establish a fair acquisition price.

Step 4: Signing Share Transfer Agreement

A share transfer agreement (share purchase agreement) shall be signed depending upon the mutual consent of the parties, and the acquired company shall pay the remaining amount.

Step 5: Application to RBI

At this stage, a formal application must be submitted to the Reserve Bank of India (RBI) on the acquiring company’s letterhead to seek approval for the takeover. Obtaining RBI approval is mandatory for completing the process. Any queries or additional requirements raised by the RBI must be addressed promptly to secure the necessary no-objection certificate (NOC) for the NBFC takeover.

Step 6: Drafting a Public Notice

After receiving the approval from RBI, a public notice shall be made within 30 days of the approval in two newspapers. The Public notice is made to check if there is any objection from the public regarding the takeover.

Step 7: Liquidation & Transfer Process

At this stage, the target NBFC’s assets are liquidated, and the proceeds are used to settle outstanding liabilities. The remaining assets are then transferred to the acquiring NBFC, ensuring a smooth transition. This step finalizes the financial restructuring, allowing the acquiring entity to take full control of the target NBFC’s operations.

Step 8: Compliance with MCA

The NBFC must comply with the Ministry of Corporate Affairs (MCA) for filing necessary forms for the name change or any change in directors and shareholders of the company.

Step 9: Intimation to RBI

Lastly, the RBI should also be continuously intimated about any such change in the management of the company or compliance with the MCA requirements.

RBI Guidelines for NBFC Takeover

Acquisition/ Transfer of Control of NBFCs

An NBFC shall require prior written permission of the Reserve Bank for the following:

  1. An NBFC shall require prior written permission of the Reserve Bank for the following.
  2. Any change in the shareholding of the NBFC, including progressive increases over time, which would result in acquisition/ transfer of shareholding of 26 percent
  3. Provided that, prior approval would not be required in case of any shareholding going beyond 26 percent due to buyback of shares/reduction in capital where it has approval of a competent Court. However, the same is to be reported to the Reserve Bank not later than one month from its occurrence.
  4. Any change in the management of the NBFC which would result in change in more than 30 percent of the directors, excluding independent directors.
  5. Provided that, prior approval would not be required in case of directors who get reelected on retirement by rotation.

Application for prior approval for acquisition/ transfer of control

NBFCs shall submit an application, in the company’s letter head, for obtaining prior approval of the Reserve Bank, along with the following documents:

  1. Information about the proposed directors/shareholders as per RBI Master Direction.
  2. Sources of funds of the proposed shareholders acquiring the shares in the NBFC
  3. Declaration by the proposed directors/shareholders that they are not associated with any unincorporated body that is accepting public deposits
  4. Declaration by the proposed directors/shareholders that they are not associated with any company, the application for CoR of which has been rejected by the Reserve Bank
  5. Declaration by the proposed directors/shareholders that there is no criminal case, including for offence under section 138 of the Negotiable Instruments Act, against them
  6. Bankers’ report on the proposed directors/ shareholders.

Applications in this regard shall be submitted to the Regional Office of the Department of Supervision of the Reserve Bank in whose jurisdiction the Registered Office of the NBFC is located.

Requirement of Prior Public Notice about change in control/ management.

  1. A public notice of at least 30 days shall be given before effecting the sale of, or transfer of the ownership by sale of shares, or transfer of control, whether with or without sale of shares. Such public notice shall be given by the NBFC and also by the other party or jointly by the parties concerned, after obtaining the prior permission of the Reserve Bank.
  2. The public notice shall indicate the intention to sell or transfer ownership/ control, the particulars of transferee and the reasons for such sale or transfer of ownership/ control. The notice shall be published in at least one leading national and in one leading local (covering the place of registered office) vernacular newspaper.

Investment from FATF non-compliant jurisdictions

  1. Investments in NBFCs from FATF non-compliant jurisdictions shall not be treated at par with those from the compliant jurisdictions. New investors from or through non-compliant FATF jurisdictions, whether in existing NBFCs or in companies seeking CoR, should not be allowed to directly or indirectly acquire ‘significant influence’ in the investee, as defined in the applicable accounting standards. In other words, fresh investors (directly or indirectly) from such jurisdictions in aggregate should be less than the threshold of 20 percent of the voting power (including potential voting power8) of the NBFC.
  2. Investors in existing NBFCs holding their investments prior to the classification of the source or intermediate jurisdiction/s as FATF non-compliant, may continue with the investments or bring in additional investments as per extant regulations so as to support continuity of business in India.

Penalty for Non-Compliance with NBFC Takeover Guidelines

The penalty for non-compliance with NBFC takeover guidelines attracts regulatory actions from the RBI. The RBI may issue the cancellation of the NBFC Certificate of Registration, fines, and necessary penalties.

Timeline for Takeover of NBFC

In the ordinary course of business, the takeover of NBFC usually takes 5 to 6 months to process. This timeline is also subject to regulatory delay

FAQ's

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