NBFC

Checklist for Takeover of NBFC

The term NBFC stands for Non-Banking Financial Company which is registered under the Companies Act 1956/2013. The main business activity of NBFCs includes giving loans and advances, assets financing, investing in shares, debentures and other marketable securities. It provides working capital loans and credit facilities as well. In this article, we will discuss the Checklist for Takeover of NBFC.

What is meant by Takeover of NBFC?

The term takeover of NBFC means the purchase of one NBFC by the other company. The Takeover takes place only when the two of the companies are already registered. In this process two companies are involved i.e.:

1. Target company.
2. Acquirer Company.

Target Company: Target Company is the company which is being targeted to be acquired by the other company.

Acquirer Company: Acquirer Company is the Company which is acquiring the target company.

How to do Takeover of NBFC?

NBFC Takeover can be done in 2 ways i.e.:

1. Friendly Takeover or
2. Hostile Takeover

Friendly takeover-

Friendly takeover as the name suggests is the takeover which takes place between the companies with their mutual consent. Acquirer Company offers the target company for being acquired and the same offer is being accepted by the target company and the process of takeover take place. Ordinarily, a friendly takeover takes place when the target company is happy with the benefits that they analysed. 

Hostile Takeover-

A hostile takeover is totally different from a friendly takeover. In this process, the acquirer company secretly tries to acquire the acquired company. Generally, this kind of takeover takes place when the management of the acquired company is unwilling to accept the offer of the takeover. Hostile takeover is where entities are involved in reaching out to shareholders by putting a tender offer and they don’t think twice before indulging in proxy fight.

Takeover of NBFC: Pros and Cons

There are both pros and cons of NBFC takeover. We have discussed them one by one below.

Pros:

1. The increase in profitability of Target Company.
2. The decrease in competition.
3. The increase in sales/revenue.
4. Expansion of a distribution network.
5. Economies of scale.

1. The amount paid for goodwill is often less as compared to its actual price.
2. Conflict in new management.
3. Cultural clashes between the two companies.
4. Reduce employees’ morale.
5. Hidden liabilities of Target Company.

RBI Regulations regarding the Takeover of NBFC

The RBI has specified some norms which are required to be followed by NBFC’s and they are as follows:

1. Any takeover or acquisition of an NBFC requires prior approval of RBI whether there is a change in management or not.
2. The approval taken from RBI should be written approval.
3. If there is an acquisition or transfer of shareholding for more than 10% of NBFC then prior approval of RBI will be required.
4. If there is a change in shareholding for more than 26% for the reason of buyback/reduction in share capital then no approval of RBI is required, but this reduction/buyback should have been approved by the competent authority.
5. If there is a change in the directors of the company i.e. more than 30% change is taking place in directors then a prior written approval shall be required.
6. Any change in the direction of the company requires a prior public notice at least 30 days prior to the announcement of such change.

Procedure for NBFC Takeover

NBFC Takeover procedure is as mentioned below:

• Signing of MOU

The first step towards the takeover of NBFC is signing of the MOU i.e. Memorandum of Understanding with the proposed company, the MOU specifies that both the companies agree to enter into an agreement of takeover. The MOU is signed by both the directors of both the companies i.e. Acquirer Company and Target Company. In the signing of the MOU, token money is given by Acquirer Company to the target company. MOU shall specify the responsibilities and requirement of each party.

• Convening of Board Meeting

After the signing of MOU, a Board Meeting shall be convened in both the companies to discuss on following matters;

1. Date, timing, place of convening Extra Ordinary General Meeting.
2. For passing required resolutions in EGM.
3. Replying to any query of RBI in relation to takeover scheme.
4. Public Notice

After the approval of the RBI has been granted then the public notice shall be made in two newspapers within 30 days of such approval to invite any objection of the public which is taking place due to take over.

• The signing of the Share Transfer agreement

After the expiry of the 31^st day of newspaper notice, share transfer agreement shall be signed and remaining consideration shall be paid by the acquired company.

• NOC from Creditors

Before the sale of business or transfer of business from Target Company to Acquirer Company, Target Company shall take NOC from its creditors.

• Transfer of assets from Target Company to Acquirer Company

If no objections have been received and the RBI approves the scheme of taking over then the transfer of assets shall take place. But the transfer should not be contravening any clause of the agreement.

• Valuation of the entity

The valuation of the company shall be done. This valuation shall be done in accordance with the rules provided by RBI^[1]. The technique adopted for valuation shall be DCF i.e. Discounted Cash Flow Method, this will represent the net present value of the entity. After the evaluation, a certificate shall be obtained by the Chartered Accountant briefing the method adopted for valuation.

• Notice to Regional Office

After the approval of scheme and the process of valuation, NBFC shall submit an application to the Regional Office of RBI. This application shall be on the letterhead of the company. Any change in management of the NBFC after the takeover should also be intimated on a continuous basis to RBI.

The application made to the Regional Office shall contain details regarding:

• Information on the proposed directors and shareholders.
• Shareholders who are acquiring the NBFC their sources of funds.
• Declaration to be given by the shareholders and directors that they are not associated with any unincorporated entity which is accepting the deposit.
• Declaration to be given by the directors that no criminal proceedings have been initiated against them in the past or are pending against them in any court of law.

Conclusion

The takeover of NBFC has become more convenient and simpler after the interference of RBI. RBI has liberalized the governance requirements of the takeover process.

Read our article: Prior Approval for NBFC’s Merger/Amalgamation from RBI