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Prior Approval for NBFC’s Merger/Amalgamation from RBI

Simardeep Singh

| Updated: Nov 03, 2020 | Category: NBFC

Amalgamation from RBI

Reserve bank of India(RBI) being a Regulatory body for NBFC operating across India Came up with a requirement to curb the takeovers of the these Financials Bodies  and to save them from the web of Hostile takeover and avoid making the ecosystem monopolistic and competitive. In this article we described about Prior Approval for NBFC’s Merger/Amalgamation from RBI.

Accordingly Reserve bank of India (RBI) came up with directions wherein the Lending ecosystem was at verge of improvement with a foresight. The Non-Banking Financial Companies (Approval of Acquisition or Transfer of Control) Directions, 2014 were introduced in this regard.

There are some checks formulated by the Regulator which will be discussed hereinafter.

Herein we will be discussing about the less discussed though economically viable checks for NBFC during the Merger or Amalgamation. As a corporate practice and strategy for merging of two or more NBFCs into a single entity in order to enhance the financial and operational strengths of both organization, the majority stake in the Resultant entity gets changed significantly.

Approval for NBFC’s Merger/Amalgamation from RBI: Applicability on the NBFCs

While Considering the Directions issued in regard to the NBFC‘s Merger/Amalgamation following instances be considered as:

Part I

Applicability on the NBFCs

Part II

Applicability on the NBFCs

Considering the Two parts enlisted herein above in the Part I wherein anyone non-NBFC company being merged into the NBFC entity would fall under the ambit for requiring the prior approval of concerned Reserve bank of India[1] (RBI) Before approaching the Tribunal I.e NCLT.

In a usual parlance, the following arrangements would be key factor to trigger the requirements under the above mentioned directions:

  • Merger which would result change in shareholding pattern of 26 percent or more of the paid-up equity capital of the Resultant NBFC:

Herein the key factor be considered is progressive increase in the shareholding over time while taking in considering the ones having Equity capital with voting power considering the intent of the Regulation wherein other securities (if any) like Preferences Shares  or other convertible securities not be considered due non availability exercising voting power unless exceptional circumstances persists.

  • Change in the management/ Board of the NBFC  and the result in a change in more than 30 percent of total directors, excluding independent directors if any  on Board of the Company:

For Instance the in Private Concern wherein the there are two Directors in an NBFC and the Company intends to appoint 2 more than Directors on its Board wherein this clause is triggered. Also it should be taken in to consideration that the Change herein refers to Appointment and/or Resignation in the Resultant Entity be considered.

Coming to the Part II arrangement wherein irrespective of the Triggering the above mentioned checks the NBFCs would be required to have prior permission of the Reserve bank of India (RBI).

Approval for NBFC’s Merger/Amalgamation from RBI: Procedural requirements

Initially the Following steps be followed up while initiating the whole of the process:

  • Signing the MOU and get to get approval from Board of Directors.
  • Seek Consent from Designated Bank concerned for the proposed merger/ amalgamation.
  • Prepare KYC Documents of Directors & Companies associated.
  • Business Plan and Projections.
  • Seek RBI Approval for proposed Merger of NBFCs concerned.

Once the detailed documentary checks are completed before approaching the concerned NCLT under section 230 to 233 of the Companies Act, 2013 Following list of the Documents be submitted for seeking approval:

  • A certified true copies of the latest audited Financial Accounts of the transfer company.
  • SEBI’s prior approval in this regard as per the takeover code.
  • Draft Scheme of the Merger
  • Secured or Unsecured Creditors
  • Approval/ NOC from the Official Liquidator
  •  Approval/ NOC from the Regional Director
  • Certified Valuation Report
  • Details of the legal proceeding, if any

The RBI has discretionary powers to approve voluntary amalgamation of 2 banking companies under the provisions of Section 44A of the Banking Regulation Act, 1949 which is further governed by sections 232 to 234 of the Companies Act, 2013.

Precautionary Checks

The Indian banking sector from the past two decades have witnessed significant increase in banking mergers. This is due to increasing competition amongst the companies working under banking ecosystem as a result of same, many banking companies/companies and NBFCs are opting for the mode of the merger with a view to expand their service base in the Indian banking sector. However, the banking regulator, Reserve Bank of India is cautious enough in implementing  and making them enforceable through regulations, so that the mega-mergers won’t affect the Indian banking system in long run.

Case

Lakshmi Vilas Bank and Indiabulls Housing Finance Ltd were held and go struck in the RBI’s regulatory mechanism which did not favor the merger plan. Due to this very reason, Lakshmi Vilas Bank had to face the Prompt Corrective Action (“PCA”) initiated by RBI due to a high level of bad loans/NPAs, insufficient Capital Adequacy Ratio (“CAR”) and a negative Return on Assets (“RoA”) reported for the respective closing the Financial year.

The very reason due to which RBI while using its discretionary power dissent over the further proceedings

Conclusion


Henceforth, RBI has adopted a strict enough method in considering the financial status of the amalgamating/merging entities including private banking companies, public-sector banks, and NBFCs (unlisted or listed). As a matter of fact, the amalgamating banking companies have to first make sure that they have achieved the requisite Capital Adequacy Ratio (CAR) as per the RBI norms. A bank with less CAR and huge NPA problems shall end up facing the difficulties by RBI as we witnessed herein above. On the backdrop of the Cases and Instances being prevailing in the Current scenarios being prevailing in the Indian financial sector, the RBI has already decided to operationalize ‘unified departments for supervision and regulation’ of commercial banks, urban co-operative banks (UCBs), and non-banking financial companies (NBFCs) which will be in effect from 01.11.2019.

Read our article:Merger Amalgamation Companies Act 2013

Simardeep Singh

Simardeep brings with himself over 3 years of experience in Compliance & Legal domain. Professionally, he is a Company Secretary, Law Graduate and a Bachelor in Commerce. As a professional, he has handled various Corporate Law and Secretarial Assignments for Big Corporates. He also has hands-on experience in setting up entities in India & Abroad along with Involvement in Investment Banking Deals. Also provides advisory on NCLT, RBI, and FEMA compliances and acts as a mentor for startups from the Compliance prospective.

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