Change in Shareholding Pattern of NBFC

Narendra Kumar

02 Dec, 2020

RBI is putting strict regulations on NBFCs. Since NBFC deals with financial activities it is essential to ensure the fit and proper character of the management of NBFCs. Therefore, RBI had issued guidelines to deal with the change in control or management of the NBFCs. In this article, we will discuss the Change in Shareholding Pattern of NBFC.

What is RBI Guidelines for Change in Management of NBFC?

RBI had issued the Non-Banking Financial Companies (Approval of Acquisition or Transfer of Control) Directions, 2014 (2014 Directors), requiring NBFCs to seek prior approval from the RBI prior to effecting any change in control or management of the NBFC.

The above directions are applicable to every NBFC whether accepting public deposits or not, but does not include primary dealers.

What is a Change in Control of NBFC?

As per the definition, “control” includes the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner.

Thus, to summarise, any direct or indirect change in the company resulting in the change of the following would amount to change in control:

• Right to appoint of the majority of directors; and
• Right to control management or policy decisions.

What are the Circumstances Require Prior Approval of the RBI?

Prior written permission of the RBI shall be required in the following circumstances:

• Any takeover or acquisition of control of an NBFC, which may or may not result in a change of management.
• Any change in the shareholding pattern of an NBFCs, including progressive increases over time, which would result in acquisition/ transfer of shareholding of 26% or more of the paid-up equity capital of the NBFC.
  • The term “progressive increase” means that while looking at the quantum of shareholding, we will have to consider the aggregate of shareholding acquired by a person.
  • For an example: A person acquires 10% of paid-up equity capital of an NBFC at the first instance and acquires 16% of the paid-up equity capital at the next instance. In the first instance the person is acquiring only 10% of the paid-up equity capital, hence the same is not crossing the threshold.

    However, in the second instance, even though the shareholder is acquiring only 16%, but in aggregate its shareholding is reaching the threshold; hence, a prior approval of the RBI would be required for the acquisition of 16% of paid up equity capital.

• Any change in management of the NBFC which would result in a change in more than 30% of the directors, excluding independent directors.
  • If change is occurred due to death, prior permission is not possible as death cannot be predicted, hence NBFC shall intimate to the RBI in a reasonable time.

What are the Circumstances Where Prior Approval of the RBI is not Required?

Prior written permission of the RBI shall not be required in the following circumstances:

• Any change in Shareholding pattern of NBFC going beyond 26% due to buy-back of shares/ reduction in the capital where it has the approval of a competent court which is required to be reported to the RBI within one month from its occurrence.
• Any change in the management of the NBFC which would result in a change in more than 30% of the directors, where the directors are re-elected on retirement by rotation.

Application for Approval:

• NBFCs are required to submit the application on their letterhead along with the following documents:
  • Information on the proposed directors/ shareholders;
  • Sources of funds of the proposed shareholders acquiring shares in the NBFC;
  • Declaration by the proposed directors/ shareholders that they are not associated with any unincorporated body that is accepting deposits;
  • Declaration by the proposed directors/ shareholders that they are not associated with any company, the application for Certificate of NBFC Registration of which has been rejected by the RBI;
  • Declaration by the proposed directors/ shareholders that there is no criminal case against them; and
  • Bankers’ Report on the proposed directors/ shareholders.
• The application shall be submitted to the regional office of the Department of Non-Banking Supervision.

The Requirement for Prior Public Notice:

• A public notice of at least 30 days is required to be given before effecting the sale of, or transfer of the ownership by the sale of shares, or transfer of control, whether with or without the sale of shares. which would mean prior public notice is to be served for the following :
  • any NBFC Takeover or acquisition of control of an NBFC, which may or may not result in the change of management;
  • any change in the shareholding of an NBFC, including progressive increases over time, which would result in acquisition/ transfer of shareholding of 26 percent or more of the paid-up equity capital of the NBFC.
  • NBFCs are not required to serve a prior public notice for the change in management resulting in a change in more than 30% of directors.
• NBFCS shall give public notice and also the other party or jointly by the parties concerned, after obtaining the prior permission of the RBI shall give public notice.

The public notice for change in the shareholding pattern of NBFC shall indicate followings:

1. The intention to sell or transfer ownership/ control,
2. The particulars of the transferee and the reasons for such sale or transfer of ownership/ control.
3. Reasons for such transfer

• The notice shall be published in at least one leading national and in one leading local (covering the place of registered office) vernacular newspaper at least 30 days before the transfer.

Read our article:NBFC: Things to know before Incorporating this Financial Institution