RBI Requirements in Case of NBFC Takeover

Tanya Verma

26 Jun, 2020

NBFC takeover is one of the ways, how anyone starts a business in the NBFC sector. The other way is to incorporate a new Non-Banking Financial Company. The takeover means acquiring the control of the management of one NBFC by another business entity. In this blog, we are going to learn about NBFC takeover, RBI Regulations related to NBFC Takeover and the cases in which NBFCs need prior approval from RBI.

What is an NBFC Takeover?

There are specific activities related to NBFCs which cannot be carried out without taking prior permission from the Reserve Bank of India. However, minor changes in the NBFC may not need approval from the RBI, but it is compulsory to take RBI’s consent in case of any significant changes in the company.

NBFC takeover is one of the most popular forms of the business strategy of NBFCs. It means acquiring or gaining control over the management of an already established NBFC. Usually, NBFC takeover is of two types, which are either Friendly or Hostile.

• Friendly Takeover: Acquiring after giving prior consent to the target company. In this, the acquirer voluntarily approaches the management of the target company; they negotiate and then acquire their shares. In this system, both parties are in a win-win situation as it includes mutual advantages of both the parties.
• Hostile Takeover: In Hostile takeover, the scenario is the opposite of the Friendly takeover. In this system, the acquirer passes a direct order without any prior consent and acquires the control over the management of the target company.

Also, Read: Checklist for Takeover of NBFC

RBI Regulations Related to NBFC Takeover

RBI regulates the functioning of the NBFC sector. The regulatory body has specified certain rules

Regulatory Approvals:

• Any NBFC takeover or acquisition which may or may not result in the change of management
• Any variation in the NBFC shareholding that results in acquiring/transfer of 26% or more of the paid-up equity capital of the entity
•  Any difference in the NBFC’s management  that results in a change in 30% or more of the directors excluding the independent directors of the body
• The acquirer must notify the Bank within thirty days in case of change of control or management and when no prior approval is required

Supervisory Approval:

• The instances where prior approval from the RBI is required:
  • One director is nominated where three directors are already appointed
  • One director is expected to be appointed where one out of four directors resigns
  • If there is a variation in 26%  or more of the paid-up capital
• The cases where prior approval from the RBI is not required:
  • One director is appointed where four directors are already present
  • Where there is an increase in paid-up capital but not in shareholdings

The Procedure of NBFC Takeover

The following are the procedure of taking over an NBFC:

• First, the acquirer  goes through the documents of the target company, and when it confirms the acquisition, it signs the Memorandum Of Understanding {MOU} after taking some token money
• The   acquirer  suggests preparing the details of the KYC documents, business plan, and projections, for three years for the reference to the  incoming director
• Submission of the information on the company location to the RBI
• Coordination and replying to the queries put up by the RBI regarding the takeover of the NBFC
• After receiving the RBI’s approval, the target company needs to publish a public notice in two newspapers for the general public to see it. It is also done to invite objections if any
• Lastly, signing of Share Purchase Agreement, handing over of the management, payment of any residual amount, etc. are carried out on the 31^st day of publishing of the notice in the newspaper 

Application for NBFC Takeover

NBFCs need to submit an application along with the following documents to obtain prior approval of the Bank in the company’s letterhead;

• Details of the proposed directors or shareholders as mentioned in the Annexure
• The sources of fund of the shareholder
• Declaration by proposed directors or shareholders stating that they are not involved in any unincorporated body accepting deposits
• Statement by proposed directors or shareholders saying that there is no criminal case {Including the offence under Section 138 of the Negotiable Instruments Act} against them
• Report of the Bank on the proposed directors/shareholders
• The directors/shareholders have to submit a declaration that they are not a director of any other company whose Certificate of Registration {CoR} is rejected by the RBI

Also, Read: Sample Format of Sale Purchase Agreement (SPA)

NBFC Registration VS NBFC takeover

In case, of NBFC registration, you file a fresh application and have a completely new team of management. While in case of an NBFC takeover, there may be a conflict when you try to retain the members of the target company. When you file an application of NBFC registration, you have the knowledge of all liabilities and its rules & regulations. While when you are planning to acquire the target company, there is a risk of not being aware of the hidden liabilities, which causes a problem in the process.

Conclusion

The NBFC takeover is the process of taking over an NBFC by any other business entity. There are two types of NBFC takeover. One is ‘Friendly takeover’ in which the acquiring company takes over an NBFC by providing them prior notice and negotiating various terms. Second is ‘Hostile takeover’ which as the name suggests is the way of acquiring over an NBFC by force and not providing any prior intimation or notice.

The management of the NBFC must notify and take prior permission from the RBI to make any significant changes in the NBFC.  However, small changes made in the company are not subject to receive any approvals from the RBI.