All you need to know about NBFC Takeover

Ashish M. Shaji

03 Jan, 2022

The takeover of NBFC (Non-Banking Financial Company) means the purchase of NBFC by another company. The takeover can only be undertaken if both the target and the acquirer are registered under the Companies Act.

How did the emergence of NBFC Takeover come about?

In the recent past, mergers and takeovers have become more usual than before. It has played a pivotal role in the expansion of the business. The efficiency of the takeover process made the RBI emphasize on the incorporation of the takeover of NBFCs. 

The takeover of NBFC can prove to be beneficial for those companies that fail to register an NBFC of their own. The Reserve Bank of India lays down the regulations and procedures for the takeover of NBFCs.

What are the types of NBFC takeover?

There are two types of acquiring a target company-

• Friendly Takeover

A friendly takeover is based on mutual consent between companies. During this form of acquisition, the acquirer company offers the target company to be acquired, and the latter willingly accepts the offer.

• Hostile Takeover

In case of a hostile takeover, an acquiring company looks to purchase the target company secretly. This form of takeover happens when an entity attempts to take control of the firm without the consent or co-operation of the target company’s board of directors.

Points to remember before taking over an NBFC

Before you opt for the takeover of NBFC, the following points must be considered:

• Due Diligence

Before you purchase a company, conduct extensive research, and do background verification. A checklist must be made of the aspects which require to be analyzed. Make corporate goals and consider whether the target company would be able to meet the goals.

• Check the suitability

An acquirer must check the list of befitting candidates for takeover before offering acquisition to any company. During the process, a company shall shortlist the candidate who is fit to their business and suffices the central objective of the acquirer.

• Evaluate the financial position

You must carefully evaluate the financial reputation of the company that you want to acquire. Calculate the maximum amount payable for takeover, cash flows, and finalize the best mode to finance the takeover.

What are the benefits of takeover of NBFCs?

The takeover of NBFCs has the following benefits:

• It increases the profitability of the target company.
• There is a decrease in competition.
• It can increase sales and revenue.
• It can expand the distribution market.
• It causes an increase in the scale of the economy.

RBI regulation for NBFC takeover: Requirement of RBI approval

The Reserve Bank of India has laid down the following norms which must be followed by NBFCs:

• An NBFC requires the approval from RBI if there is a change in the management or not;
• While taking over a listed NBFC, an acquirer should take the RBI approval; and
• RBI approval is also required in the case where there is any change in the management of the company, which will result in more than 30% director.

RBI regulation for NBFC takeover: Non-Requirement of RBI approval

The RBI’s approval is not required when:

• Shareholding of the company goes beyond 26% due to buyback of shares or share reduction in the capital. It can only be implied after obtaining approval from the competent court.
• There is a change in management by 30% inclusive of independent directors or by the rotation of directors on board.

Application and the relevant documents to obtain RBI approval

In case where prior approval is required from the RBI, the following details must be included in your application:

• Information regarding the proposed shareholders/directors;
• Information regarding the source of funds to be utilized by your company’s proposed shareholders for acquiring shares in NBFC;
• Bankers report for proposed shareholders/directors;
• A declaration stating non-association of your company with any other entity that has denied the registration certificate by RBI; and
• A statement regarding non-criminal background and non-conviction under section 138 of the Negotiable Instrument Act by all proposed directors and shareholders.

Steps to be taken post RBI’s approval

After obtaining the RBI’s approval follow these steps:

Publish a public notice

The first step involves the publication of public notice. The public notice must be published in two regional languages. One language should be English, and the other should be vernacular language. The notice must be published after 30 days of RBI approval.

Formal agreement

The second step involves entering into a formal agreement with the target company to purchase share/transfer of management/ transfer of shares or such interest for NBFC takeover.

Publish a second public notice

When the company comes close to complete 30 days of entering into the stated agreement, a second public notice is to be published. Just like the first notice, the second notice also must be in two regional languages. One in English and the other in vernacular language.

Transfer of Assets

When the scheme is approved by the RBI without any objections, the transfer of assets will take place.

Conclusion

Read our article:The Takeover of NBFC – NBFC Takeover Procedure