NBFC

How to Sale NBFC in India

Numerous of a financial organization which is not merely getting NBFC licenses are taking a secondary route to obtain one, by buying out some existing NBFC(Sale NBFC), ideally, some entity which is not operational or is a minute player. This is the most efficient & less costly way to obtain NBFC License. Thus, the group offers an extensive range of services to buy (takeover/acquisition) or NBFC for sale in India. Many NBFCs (Non-Banking Financial Companies) registered with Reserve Bank of India as a Non-Deposit Accepting (Category-B) companies are available for Sale through NBFC Liaising Group.

NBFC Takeover Process

• The Takeover of NBFC or sale NBFC shall go through the documents of the Target Company & once it confirms the Acquisition of the said NBFC, MOU to be signed with some token money.
• KYC Documents, Business Plan and Projection for three years to be prepared in reference to incoming directors as suggested by the acquirer.
• Submission of Documents those prepared to be submitted to the RBI was the registered office of the company is located.
• Coordinating with and replying to all RBI queries raised for the purpose of the takeover.
• After getting RBI approval letter to issue a public notice in the two newspapers for 30 days as per the RBI regulations indicating such change of management and inviting any objections if any from the public or any interested parties.
• The signing of Share Purchase Agreement and handing over of change of management, payment of remaining considerations, etc. to be carried out on the 31st day of newspaper notice or as mutually agreed by all the parties.
• Further, kindly note that, all assets as shown in the target company balance sheet will be liquidated and liabilities will be paid off and Acquirer will get neat and clean bank balance in the name of company which will be calculated as net worth as on the date of takeover and which will also be taken over by the concerned acquirer after acquisition of the said Non-Banking Financial Company.
• The time essential for getting RBI approval for change of management of the NBFC (Non-Banking Financial Companies) shall take 3 to 4 months roughly.
• The credential of incoming Acquirers is one of the most important criteria in addition to tracking record of the company present status with RBI for getting RBI Approval for change of management.

RBI Approval – Sale NBFC

• The takeover of NBFC or sale NBFC requires prior approval of RBI. Application on the letterhead of the Company can be submitted to the regional office of RBI having jurisdiction with a covering letter.
• Details about the proposed directors/ shareholders
• Sources of funds of the proposed shareholders acquiring the shares in the NBFC;
• Statement by the proposed directors/ members that are not related to any of the body which is not incorporated that is accepting deposits;
• Statement by the proposed directors/ members that they are not related to any company, the application for Certificate of Registration of which has been rejected by the Reserve Bank;
• Statement by the proposed directors/ shareholders that there is no criminal case, including for offence under section 138 of the Negotiable Instruments Act, against them;
• Bankers’ Report on the proposed directors/ shareholders.
• Financial Statements/Annual Report for the last three years
• Apart from the above, a public notice of at least 30 days shall be given before effecting the sale of, or transfer of the ownership by the sale of shares, or transfer of control, individually or jointly by the parties, one in a national daily and one in the vernacular daily newspaper.

The Requirement of Prior Approval of RBI in case of Sale NBFC

Prior approval in writing of the Reserve Bank will be required for –

• Any takeover or acquisition of control of an NBFC or we can say sale NBFC, which may or may not result in the change of management;
• Any alteration in the shareholding pattern of an NBFC, time, which will result in acquisition/ transfer of shareholding of 26 % or more of the paid-up equity capital of NBFC. Prior approval will not be needed in case of any shareholding going beyond 26% due to buying back of shares/reduction of share capital where it has the approval of the competent court. But, the same is however required to be reported to the reserve bank not later than 1 month from its occurrence.
• Any modification in the management of the NBFC which would result in a change in more than 30 per cent of the directors, excluding independent directors.
• Provided that prior approval shall not be needed for those directors who get re-elected on retirement by rotation.
• Application for prior approval
• Applications in this regard may be submitted to the Regional Office of the Department of Non-Banking Supervision in whose jurisdiction the Registered Office of the NBFC is located.
• The requirement of Prior Public Notice about change in control/ management
• However, a public notice of at least 30 days will be provided before effecting the sale of, or transfer of the ownership by the sale of shares, or transfer of control, whether with or without the sale of shares. Such public notice shall be given by the NBFCs and also by the other party or jointly by the parties concerned, after obtaining the prior permission of the Reserve Bank.
• And such public notice will direct the intention to sell or transfer ownership/ control, the particulars of the transferee and the reasons for such sale or transfer of ownership/ control. The notice will be available in at least 1 leading national & in one leading local (covering the place of registered office) vernacular newspaper.
• The instructions contained above are applicable with immediate effect, i.e., the same will apply to any takeover or acquisition of control, any alteration in the shareholding pattern or any change in the management.
• Application of other laws not barred
• The provisions of these Directions shall be in addition to, and not in derogation of the provisions of any other laws, rules, regulations or directions, for the time being in force

NBFCs Taking Foreign Loans or Foreign Investments

In our country, the interest rates are high in contrast to the rest of the world. Thus taking loans from other countries which have lower interest rates are very helpful for an Indian company. An NBFC also chooses foreign investment over Indian investment as foreign investors might be able to invest much more money compared to an Indian resource.

On the other hand, foreign investors are also attracted to Indian companies in various stages of growth for various reasons like this country has growing customer base and foreign capital can witness more growth in an emerging economy like India as compared to saturated western markets which offer limited growth opportunities.

• Law Governing Foreign Loans and Foreign Investments in NBFC
  

All the requirements concerning to foreign exchange in & are regulated by the FEMA, 2000 & the working & operations of NBFCs are regulated by the Reserve Bank of India within the framework of the RBI Regulation Act 1934^[1] and the directions issued by it. NBFCs are allowable up to 100% FDI but subject to the minimum capitalization norms as issued by the Government.

The Foreign Exchange Management Act^[2], 1999 and Foreign Exchange Management (Borrowing and Lending in Foreign Exchange) Regulation, 2000 and the RBI regulations govern the provisions relating to foreign loans.

• Foreign Loans and NBFC
  

Loans from foreign institutions are named as external Commercial Borrowings or ECB. The foreign loans could be taken from foreign banks or foreign financial institutions.

One can also take ECB in the form of bonds, preference shares, and debenture. A loan from a foreign shareholder who owns at least 25% of the shares of the borrower company will also come under the ambit of ECB.

However, not every sector of business can avail of foreign loans. The RBI allows ECBs to be obtained only some specific sectors after fulfilling all the necessary requirements. To get foreign loans from a Non-banking financial company it only requires complying with the procedural requirements. There is no need for the approval of RBI while availing the loans.

• Modes of Bringing Foreign Investments
  

NBFC shall bring their foreign investment not only in liquid currency but also in some other ways like an exchange of shares, conversion of loans to share, exchange of some skillsets, etc.

In Foreign Exchange Management Regulation there are certain rules and restriction mentioned about the external commercial borrowing. There are specific rules one need to follow the maturity period and the amount of interest to be paid.

The cost of an ECB includes the interest charged by the bank, other fees and expenses paid in foreign loans. It must be within the limit which is measured with respect to a reference rate called the LIBOR or London Interbank Offered Rate.

For a loan whose average maturity period is 3-5 years, its interest would be 3.5% over six months the LIBOR and for the loan which will be matured after more than 5 years its interest ceiling would be plus 5% over the six month LIBOR.

• The Procedure of Taking Foreign Loans
  

For any foreign loans under the automatic route, the NBFCs require submitting Form 83 to the Authorized Dealer bank to acquire the LRN number. The LRN number or Loan Registration Number must be certified by a company secretary or chartered accountant.

Then the AD bank must forward a copy of from 83 to the department of statistics and Information Management of RBI. The loan can be only be taken after the allotment of the LRN number. When a non-banking financial company is unable to repay its loans, it can convert some or all of its debts into equity after taking the consent of the lender. Provided that, when a company wants to convert the loan into equity it must ensure that the shares are issued under the FEMA pricing guidelines.

• Consequences of Violation of ECB Regulations
  

According to section 15 of the Foreign Exchange Management Act, if anyone contravenes the provisions of the ECB regulation he will get punishment up to thrice of the amount involved. Moreover, the corporate entities that violated the ECB policy are under investigation by RBI can only avail foreign loans under the approval route. When the violation is a continuous one in nature, an additional penalty of INR 5000 will be payable per day.

When the violation is unintended, it can be rectified by compounding with RBI, which may help in getting a much lower penalty.

• Extant FDI Policy for NBFC
  

In accordance, FDI policy, foreign investment in the NBFC sector is permitted under the automatic route. An automatic route is one where no Foreign Investment Promotion Board or RBI approval is needed before making the proposed investment. In automatic route up to 100%, foreign investment is permitted without the approval of the foreign investment promotion board. Under section 10 of FEMA, all foreign transactions are required to rout only through entities licensed by the RBI.

However, in accordance with FDI policy, foreign investment was permitted under automatic route only in the following 18 prescribed non-banking financial service activities. These are –

• Merchant Banking
• Underwriting
• Portfolio Management Services
• Stock Broking
• Asset Management
• Venture Capital
• Custodial Services
• Factoring
• Leasing & Finance
• Housing Finance
• Credit Card Business
• Micro Credit
• Rural Credit
• Non-fund based activities
• Investment Advisory Services
• Financial Consultancy
• Forex Broking
• Credit Rating Agencies
• Money Changing Business

The minimum capitalization norms for foreign investment under the automatic route in non-banking sectors are permissible in these specified activities with the compliance of the below-mentioned norms. Once an NBFC is established with the requisite capital under the Foreign Exchange Management Regulation, subsequent diversification either through the existing company or through downstream NBFCs could be undertaken without any further authorization.

These investments are dependent on the following minimum capitalization norms:-

• For foreign capital up to 51% to be brought upfront $0.5 million.
• For foreign capital more than 51% and up to 75% to be brought upfront $5 million.
• 50 million for foreign capital more than 75% of which $7.5 million to be brought up front and the balance in 24 months.
• The NBFCs having foreign investment more than 75% and up to 100%, and with a minimum capitalization of $50 million, can set up step down subsidiaries for specific NBFC happenings, without any restriction on the number of operating subsidiaries and without bringing in additional capital.
• Joint Venture operating NBFCs that have 75% or less than 75% foreign investment can also set up subsidiaries for undertaking other NBFC activities, subject to the subsidiaries also complying with the applicable minimum capitalization norm mentioned above.
• For all permitted fund based NBFCs irrespective of the level of foreign investment For Non- Fund based activities US $0.5 million to be brought up front.

But it is subject to certain conditions. It would not be permissible for such a company to set up any subsidiary for any other activity, nor can it be participating in any equity of an NBFC holding company. All of the above capitalization norms also apply to each downstream subsidiary engaging in NBFC activities, except where its parent entity already has more than 75% foreign investment. Further, if the activity being carried out was ‘non-fund based’ then irrespective of the level of foreign investment, capitalization was capped at USD 500,000.

• Transfer or Issue of Security by a Person Resident outside India
  

Non-Banking Financial Companies(NBFCs)
Foreign investment in NBFC is allowed under the automatic route in only the following activities:   Underwriting Portfolio Management Services Investment Advisory Services Financial Consultancy Stock Broking Asset Management Venture Capital Custodial Services Factoring Credit Rating Agencies Leasing & Finance Housing Finance Forex Broking Credit Card Business Money Changing Business	100%	Automatic

However, it shall not be allowable for such a business to set up any subsidiary for any other activity, nor it can participate in any equity of an NBFC holding/operating company.

Note: The following activities would be classified as Non-Fund Based activities:

• Investment Advisory Services
• Financial Consultancy
• Forex Broking
• Money Changing Business
• Credit Rating Agencies
• This will be subject to compliance with the guidelines of RBI.

Note: Credit Card business includes issuance, sales, marketing & design of various payment products such as credit cards, charge cards, debit cards, stored value cards, smart card, value-added cards, etc. Leasing & Finance comprises only financial leases & not operating leases.FDI in operating leases is permitted up to 100 % on the automatic route. The NBFC will have to comply with the guidelines of the relevant regulator/s, as applicable.

• NBFC Prudential norms for banks/ FIs for the sale transactions
  

Provisioning/Valuation norms

• When a bank / FI sells its financial assets to SC/ RC, or transfer the same will be removed from its books.
• If the sale to SC/ RC is at a price below the net book value (NBV) (i.e., book value fewer provisions held), the shortfall should be debited to the profit and loss account of that year.
• If the sale is for a value higher than the NBV, the excess provision will not be reversed but will be utilized to meet the shortfall/ loss on account of sale of other financial assets to SC/RC.
• When banks/ FIs invest in the security receipts/ pass-through certificates issued by SC/RC in respect of the financial assets sold by them to the SC/RC, the sale shall be recognized in books of the banks / FIs at the lower of:
• The redemption value of the security receipts/ pass-through certificates, and
• The NBV of the financial asset.

The securities (bonds and debentures) offered by SC / RC should satisfy the following conditions:

• The securities must not have a term in excess of six years.
• The securities must carry a rate of interest which is not lower than 1.5% above the Bank Rate in force at the time of issue.
• The securities must be secured by an appropriate charge on the assets transferred.
• The securities must provide for part or full prepayment in the event the SC/RC sells the asset securing the security before the maturity date of the security.
• The commitment of the SC/RC to redeem the securities must be unconditional and not linked to the realization of the assets.
• Whenever the security is transferred to any other party, a notice of transfer should be issued to the SC/ RC.

Investment in debentures/bonds/security receipts/Pass-through certificates issued by SC/RC. All instruments received by banks/FIs from SC/RC as sale consideration for financial assets sold to them and also other instruments issued by SC/RC in which banks/ FIs invest will be in the nature of SLR security. In non-SLR instruments which are prescribed by RBI from time to time will be applicable to bank’s/FI’s investment in debentures/ bonds/ security receipts/PTCs issued by SC/RC related to the valuation, classification &other norms suitable to investment. Thus, the instruments supplied by SC/RC is limited to the actual realization of the financial assets allocated to the instruments in the concerned scheme the bank shall estimate the Net Asset Value (NAV), found from SC/RC from time to time, for valuation of such investments. Capital Adequacy for NBFCFor the purpose of capital adequacy, banks/FIs should assign risk weights asunder to the investments in debentures/bonds/security receipts/PTCs issued by SC/RC and held by banks as an investment:

• i) Risk weight for credit risk: 100%.
• ii) Risk weight for market risk: 2.5 %

Applicable risk weight = (i) + (ii)Exposure Norms for NBFCBanks’/FIs’ investments in debentures/bonds/ security receipts/PTCs issued by an SC/RC will constitute exposure on the SC/RC. As only a few SC/RC are being set up now, banks’/ FIs’ exposure on SC/RC through their investments in debentures/ bonds/security receipts/PTCs issued by the SC/ RC may go beyond their prudential exposure ceiling. Thus, the extraordinary nature of the event, banks/ FIs shall be allowed, in the initial years, to exceed the prudential exposure ceiling on a case-to-case basis.