RBI Requirements in Case of NBFC Takeover
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.
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 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 31st 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
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.
NBFC
Registration
|
NBFC Takeover
|
If the finance assets of an
entity increases above 50% of the total asset or income generated from
financial assets is more than 50% of total gross income then the company will
be NBFC.
|
The amount paid for goodwill is
generally less than the actual price
|
Incorporation of new/fresh
company and norms
|
Conflicts in new management
|
New team of Management and
other employees, so no conflicts
|
Clash of cultures of two
different companies
|
More zeal to work in the new
employees
|
Employee morale decreases
|
No hidden liabilities
|
The liabilities of the Target
Company may be hidden
|
You are aware of all the rules
and regulations
|
There is a risk of not being
aware about all the norms
|
Lesser problems in the
functioning
|
Various problems faced in the
entity’s processing
|
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.
Tanya is working as writer & editor from past 2 years with experience in covering startup and technology related topics.
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