A Complete Overview of Buying and Selling of NBFCs

Ashish M. Shaji

14 Oct, 2021

The Reserve Bank has laid down the process of buying and selling of NBFCs. Buying an NBFC is a much simpler and fast-growing business method, and it only takes close to 60 days to execute the whole process. In this article, we shall discuss the conditions related to buying and selling of NBFCs.

Overview

In finance terms, buying of NBFCs is called business entity takeover of NBFC by consent, where the seller entity decided to sell its assets to the entity acquiring and secretly acquires the control over the business.

There are certain business organizations that experience a great success or crushing defeat after such hold because the concept of buying and selling NBFCs is not new in the financial world.

There could be a possibility of bias and ambiguity in the process of buying and selling NBFC. Therefore the RBI has prescribed the procedure for the same. Before selling the NBFC, always check if prior RBI approval is required or not for executing the sale.

Conditions to be fulfilled for buying and selling of NBFCs

The RBI approval should be taken as the first step under the following conditions of NBFC arrangements, in case of failure, the whole process will be null and void:

• Buying and selling of NBFC may or may not cause a change in the management;
• Any deviation in the shareholding causing 26% buying or selling of the paid up equity capital of NBFCs, including any progressive gains over time;
• Any amendment in the management by change in more than 30% of the directors, excluding independent directors of the NBFC.

Circumstances that don’t require RBI approval

There are certain circumstances where the prior approval from the reserve bank is not required. They are as follows:

• Change of 26% in the company’s share capital that results from the buyback of the shares or reduction in capital by an approval from a competent court;
• Change in 30% of the management due to the change in the independent directors or due to the rotation of the directors of the board.

Documentation for buying and selling of NBFCs

There are certain documents required for fulfilling the process. An application is made to the reserve bank on the letterhead of the company, along with the documents mentioned below:

• Information regarding the proposed directors;
• Information about the source of fund required for acquiring shares in the NBFC;
• A statement of non-association with any entity accepting deposits is required by all proposed directors;
• A statement for non-association with any entity that is denied of a certificate of registration by the reserve bank is needed by all proposed directors;
• A statement by all the proposed directors is required specifying their non-criminal background and non-conviction under Section 138 of the negotiable instruments act;
• Bankers’ report is needed of all the proposed directors.

Once these formalities are completed, an application must be submitted to the regional office of the department of non-banking supervision, where the control of the NBFC registration office is located for obtaining a prior approval before undertaking such arrangements.

Public Notice in case of alteration in management

The public notice must include the following information:

• Transferee company’s intention to sell or transfer its ownership or control;
• The particulars of buying a company in respect of its assets and liabilities in the balance sheet;
• The reasons furnished by the transferee company for the sale or transfer of its ownership or control.

Buying and Selling of NBFCs: Share Purchase Agreement

The share purchase agreement should be prepared, and it should be signed by the buyer and the seller about the management of the seller company, which is being handed over to the acquirer and, in case of any remaining consideration, will be paid off within 31 days of public notice in the newspaper or as mutually agreed upon by all parties.

Transfer of all assets and liabilities

In the procedure of buying and selling of NBFCs, the last process involves signing the purchase agreement wherein the assets of the transferor company is discharged in the balance sheet, and the liabilities are paid off.

The acquirer shall obtain a clean bank balance in the company’s name computed on the basis of net worth on the date of the takeover.

Conclusion

NBFCs, with their transparency, convenience and performance, is a standout choice among organized banking. One cannot deny that NBFCs

are the real contenders in the economic sector that represents the real potential of money lending by avoiding traditional barriers. However, as these financial institutions don’t have the liberty to obtain public deposits that are repayable on demand, many choose to sell out ultimately. The RBI^[1] has laid down the process for buying and selling of NBFCs. One can go through the entire process with ease by adhering to the details mentioned above.

Read our Article: NBFCs urge RBI for Restructuring Loans and Fresh Liquidity Support amidst Covid-19