The Takeover of NBFC – NBFC Takeover Procedure

Narendra Kumar

31 Dec, 2020

With the evolution of newer business models, the NBFCs are also witnessing many changes in their operations, management, and regulations. The RBI is simultaneously making the business of the NBFC smoother while retaining the basic compliance requirement. Non-systematically important, smaller NBFCs have been liberalized from the RBI regulations, while systemically important, larger NBFCs have been continuously monitored and strengthened to bring them on a par with the global standards. In this article, we will discuss the NBFC Takeover Procedure in details.

The takeover of NBFC – NBFC Takeover Procedure

Mergers and takeovers around the world are making its presence strongly felt over the whole corporate scenario. The NBFCs are also under the impact of these compromises and arrangements. On the basis of the representations received from the industry, the Reserve Bank of India lays down the NBFC takeover procedure.

The Requirement of Prior Approval

RBI has prescribed the whole procedure in relation to the NBFC Takeover or change in the management of NBFCs. Minor changes in the management or control are outside the purview of the takeovers. For any significant change, prior approval of the RBI shall be obtained. Failing that, the whole process shall be considered null and void.

Prior approval from the Reserve Bank of India is taken in the following conditions:

1. Any Takeover of NBFC or acquisition of control, which may or may not results in a change in management.
2. Any variation in the shareholding of an NBFC, resulting in 26% acquisition/ transfer of the paid-up equity capital, including progressive increases over time,
3. Any change in the management by the way of change in more than 30% of the directors of the NBFC.

However, prior approval will not be required in following circumstances:

1. In case the shareholding goes beyond 26% due to the buyback of shares/ reduction in the capital by the  approval of a competent court
2. Change in the management by 30 % inclusive of Independent Directors or by rotation of the directors in the Board.

Application for Prior Approval

If the entity falls under the criteria of the above requirement for prior approval, the next step to be followed is to make an application to the RBI ^[1]for the grant of the aforesaid approval on the letterhead of the company along with the following necessary documents:

• Proposed directors/shareholders information;
• Sources of funds required for acquiring shares in the NBFC by the proposed shareholders;
• A declaration by all the proposed directors/shareholders stating their non-association with any entity accepting deposits;
• A declaration by all the proposed directors/shareholders stating their non-association with any entity which has been denied a Certificate of Registration by the RBI;
• A statement of non-criminal background as well as non-conviction under section 138 of the Negotiable Instruments Act by all the proposed directors/shareholders;
• Bankers’ Report with regard to proposed directors/ shareholders.

Thereafter, the application for approval shall be submitted to the Regional Office of the Department of Non-Banking Supervision in whose control the Registered Office of the NBFC is located. All the queries aroused by the RBI in respect to the concerned takeover shall be timely answered so as to avoid any unforeseen delay in the approval. Applications for NBFC takeover procedure, approval usually goes through a processing time of three to four months in the normal course of business.

The Requirement of Prior Public Notice in Case of Change in Management/Control

In the case of the transfer of the ownership by a sale of shares, or transfer of control, whether with or without share transfer, a public notice shall be given in one leading national and one leading local newspaper at least 30 days prior to effecting such sale or transfer.

The public notice shall be indicative of:

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

This shall be done post getting the approval from the Reserve Bank.

Once the above conditions are satisfied, the Share Purchase Agreement is prepared and signed, the management is handed over, and the consideration remaining, if any, shall be paid off within 31 days of the public notice in the newspaper or as mutually agreed upon by all the parties. Subsequently, all assets of the target company as shown in the balance sheet will be liquidated and liabilities will be paid off, and the acquirer will receive a clean bank balance in the name of a company which will be calculated on the basis of net worth as on the date of the takeover.

Conclusion

The process is little lengthy but is well defined. The systematic approach is needed for timely completion. Complying with the laws, conforming to the rules and regulations, and promptness in action is needed. The Acquirer Company shall beforehand gather all the necessary information with respect to the Transferee Company so as to avoid any ambiguity in the future. It shall also be kept in mind that only an NBFC registered under the Act shall undertake to acquire the control of another NBFC.

Do you wish to apply for NBFC Registration? Or are you looking for an NBFC Takeover advisory? Would you like to know about NBFC/Fintech consulting or know more about peer to peer lending? Please feel free to contact Enterslice, India leading online legal and tax advisory firm.

Read our article:What is the Objective of Business Takeover?