Takeover of NBFC

Overview of NBFC Takeover

The NBFC takeover ensures the business acquisition of one NBFC by another company, or NBFC registered under the Companies Act of 2013. The NBFC acquisition process is governed under the Non-Banking Financial Companies (Approval of Acquisition or Transfer of Control) Directions of 2014 issued by the RBI.

The NBFCs are acquired only after the approval of the Reserve Bank of India. The non-banking financial company takeover procedure is considered to be in its starting stage in India. The RBI simplified the non-banking financial company takeover process rather than the registration of a new NBFC company.

What is an NBFC?

NBFC, which stands for Non-Banking Financial Institution, is a company engaged in the principal business of loans, advances, acquisitions of shares, debentures, etc., issued by the government or local authority.

The NBFC Registration is processed under the RBI and the Companies Act of 2013. Generally, an NBFC offers financial services such as giving loans and advances, asset financing, investing in shares, debentures, and other marketable securities.

Types of Non-Banking Financial Company Takeover

Takeovers can be of many types, making use of diverse strategic methods and regulatory considerations. Non-banking financial company takeover can be done in two different ways:

1. Friendly Takeover

A friendly takeover is a type of NBFC takeover that takes place between the companies with their mutual consent. Acquirer Company offers the target company for being acquired and the same offer is being accepted by the target company.

2. Hostile Takeover

A hostile takeover is the direct acquisition of the target company by the acquirer company through reaching the company's shareholders or fighting to replace management to get the acquisition approved.

Usually, this kind of non-banking financial company takeover occurs when an entity attempts to take control of another company without the consent or cooperation of the target company's Board of Directors.

3. Funding Takeover

The funding takeover targets to acquire the shares of the acquiring NBFCs. This type of takeover insists upon acquiring cash, debt, or stock Funding in NBFC.

4. Distressed Asset Takeover

The NBFCs are authorized to acquire riskier shares of the target NBFCs that become insolvent, injecting capital, debt resolution, and improving the management facilities.

Benefits of NBFC Takeover

The NBFC takeovers and mergers attract various benefits in the whole corporate scenario. Consider the following benefits of the NBFC acquisition process carried out under the RBI regulations:

1. Ensures Business Expansion

Business expansion is one of the most common reasons for NBFC takeover, which authorizes the acquisition of NBFC to expand its reach and business presence in the untapped markets of India.

2. Gateway to New Markets

NBFC acquisition enables acquiring NBFCs or any other entity to access the challenges and opinions of the customer and the new market landscape. The strategy of NBFC takeover also allows the NBFC companies to remunerate from the existing customer and market segments available.

3. Acquisition of Specialized Skills

Another benefit of the NBFC takeover is to enjoy and strategize in the competitive market with the specialized skills and updated technological developments already existing in the target NBFC.

4. Diversification of Product Portfolio

The NBFC takeover also assists in the diversification of the product portfolio, which reduces the reliability of the single line of business.

5. Company’s Profitability

The NBFC takeover leads to a rise in the profitability of the target company through increased sales and revenues. Also, the rise in profit level is traced to the decrease in competition due to buying an already existing NBFC.

6. Reach Market Demands

The takeovers of NBFCs acquire new market demands, which ensures the use of updated skills, expertise, and technological developments.

7. Saves Time

The NBFC takeover reduces the time in comparison to the registration of a new NBFC.

Market Size of NBFC Takeover

The market size of NBFC takeovers from Jan. 1st, 2017, to May 31st, 2018, is the highest among all sectors. Approx. 23.7% of open takeover offers were launched for listed NBFCs under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011. Hence, the interest in NBFC takeovers is expected to grow rapidly compared to the registration of NBFCs and other banking institutions.

Future Scope for NBFCs

The future of NBFCs in India seems promising and holds immense potential, all thanks to the digital revolution the world has witnessed in the last few years.

Given below are the significant areas where NBFCs can play a substantial role-

• Technological Adoption
• Partnership with Fintech Companies
• Digital Onboarding and Loan Management
• Offer BNPL Products
• Bring Innovation in Lending Products
• Contribution to Green Financing and Sustainable Development
• Financial Products for Agri-businesses
• Focus on Socially Responsible Investments
• Blockchain Technology
• Financial Inclusion
• Mentorship Programs for Women
• Financial Literacy Initiatives

Eligible Criteria for NBFC Takeover

The NBFC takeover process requires the fulfilment of specific eligibility criteria. The acquisition of NBFCs must possess the following prerequisites before applying to the Reserve Bank of India:

1. Number of Parties

The NBFC takeover process generally involves two types of NBFC companies duly registered in India. The following are the types of companies involved in the NBFC takeover process.

1.1. Target Company

The company that is being targeted to be acquired by another company is a Target company. The target company must be duly registered under the Companies Act of 2013 and have a valid NBFC COR.

1.2. Acquirer Company

The type of company acquiring the targeted company is Acquirer Company. The acquirer company, as well as an individual, is authorized by the RBI to generally acquire or transfer the shares of the existing shareholders of the target company

2. NBFC Asset Classification

The NBFCs must secure their asset classification under the NBFC Asset Liability Management System provided by the provisioning norms set by the target NBFC.

3. Management Change Public Notice While NBFC Takeover

If there is a change in management or control, a public notice shall be given to one leading national newspaper and one local newspaper. The public notice is to be given at least 30 days before such sale of shares or transfer of control, whether with or without share transfer. Following are the indications of public notice:

• Intention to sell or transfer ownership or control;
• Particulars of the transferee;
• Reasons for such sale or transfer of ownership or control.

Documents Required for NBFC Takeover

The acquirer should be well versed with all the information connected with the transferor to avoid delay in the process. The following required Documents need to be submitted to the RBI office with the company’s letterhead for NBFC takeover:

• Directors and Shareholders information;
• Non-criminal & non-conviction (u/s 138 of NI Act) Statement;
• Declaration of association and non-association;
• Bankers’ report;
• 3 years’ financial statement;
• Due diligence report;
• Company’s legal documents;
• PAN Number;
• KYC documents;
• NBFC business plan;
• Acquirer’s source of capital;
• Directors’ Identification Number (DIN);
• Registered Business Address;
• Other statutory information about the company

NBFC Takeover Process

The NBFC takeover process mandates the acquisition of NBFCs through filing applications to the Regional Office of the Department of Non-Banking Supervision, in whose jurisdiction the registered office of the NBFC is located. The NBFC procedure requires the fulfilment of the following steps:

Step 1: Signing Memorandum of Understanding

The first step is to sign the Memorandum of Understanding (MOU) with the proposed Company. The MOU, which mentions each company's responsibilities and requirements, must be duly signed by the directors of both the Acquirer and the Target Company.

Step 2: Conduct Due Diligence Proceeding

The NBFC takeover requires the acquirer company to review the following aspects before starting the proceeding for the acquisition of NBFC:

• Recognition of financial and strategic goals;
• Thorough background verification;
• NBFC market analysis;
• Assessment of financial aspect.

Step 3: Valuation and Transfer of Assets

The next step requires adopting the Discounted Cash Flow (DCF) Method for cost assessment, which presents the entity's net present value. After the evaluation, the chartered accountant shall issue a certificate briefing on the method adopted for valuation.

Step 4: Signing Share Transfer Agreement

A share transfer agreement (share purchase agreement) shall be signed depending upon the mutual consent of the parties, and the acquired company shall pay the remaining amount.

Step 5: Application to RBI

In the next step, an application must be duly filed with the RBI to obtain approval on its letterhead. The RBI approval must be acquired mandatorily.

All the queries raised by the RBI must be answered in a timely manner to receive the no-objection reply required for the takeover of an NBFC.

Step 6: Drafting a Public Notice

After receiving the approval from RBI, a public notice shall be made within 30 days of the approval in two newspapers. The Public notice is made to check if there is any objection from the public regarding the takeover.

Step 7: Liquidation & Transfer Process

The next step allows for the liquidation of all the assets of the target NBFC. The assets of the target NBFC are transferred to the acquiring NBFC, and the liabilities are paid off.

Step 8: Compliance with MCA

The NBFC must comply with the Ministry of Corporate Affairs (MCA) for filing necessary forms for the name change or any change in directors and shareholders of the company.

Step 9: Intimation to RBI

Lastly, the RBI should also be continuously intimated about any such change in the management of the company or compliance with the MCA requirements.

Mandatory Compliance Required for NBFC Takeover

The NBFC takeover guidelines must be duly complied with to uphold and foster the regulatory standards, investors’ confidence, and integrity of the NBFC. NBFC takeover requires the fulfilment of the following mandatory requirements set by the RBI.

1. Compliance with NBFC Takeover Regulations

The RBI has set specific regulations for carrying out the NBFC takeover process. The following are the RBI regulations that govern the acquisition of non-banking financial companies in India.

• NBFC acquisition under the Companies Act of 2013;
• Non-Banking Financial Companies (Approval of Acquisition or Transfer of Control) Directions of 2015.

2. Compliance with Conditions Governing RBI Approval

The acquiring NBFCs must comply with specific conditions to obtain prior approval from the RBI. Consider the following conditions when the prior approval of the RBI is required for the NBFC takeover process.

• 26% acquired shareholdings increase over time;
• More than 30% of BOD status change;
• Acquisition of shares or otherwise;
• Amalgamation with any other entity;
• Conversion Of NBFC Into Bank.

3. Compliance with Conditions When No RBI Approval Required

There exist certain conditions when no RBI approval is required for the acquisition of NBFC in India. Following are the conditions when no prior approval is required for the acquisition of the already existing NBFCs in India:

• Change in 30% management of BOD excluding independent directors;
• 26% Buyback or reduction in shares or capital upon the approval of the competent court.

Penalty for Non-Compliance with NBFC Takeover Guidelines

The penalty for non-compliance with NBFC takeover guidelines attracts regulatory actions from the RBI. The RBI may issue the cancellation of the NBFC Certificate of Registration, fines, and necessary penalties.

Recent Updates for Acquisition of NBFC

The Non-Banking Financial Companies (Approval of Acquisition or Transfer of Control) Directions of 2015 is a set of new rules enacted by the RBI. The NBFC's new directions provide for the following:

• When prior approval of RBI is required;
• Change in Shareholding rule (COSR);
• Recent application of change of management rule;
• Publication of takeover notice in the newspaper (with RBI approval);

Fee Structure for NBFC Takeover

The fee structure for NBFC takeover may differ depending upon specific requirements and updates verified by the RBI. The minimum positive net-owned fund required to acquire NBFC ranges somewhere between Rs. 2 crores whereas, the RBI requires the buyer to hold at least Rs. 5 crores.

The cost of NBFC takeover also upholds professional fees of 8 lakhs, excluding other necessary expenses.

Timeline for Takeover of NBFC

In the ordinary course of business, the acquisition of an NBFC usually takes 5 to 6 months to process. This timeline is also subject to regulatory delays (if any).

Why Choose Enterslice for NBFC Takeover?

Enterslice is dedicated to duly complying with the elaborative procedure for Non-banking financial company takeover as specified by the RBI. Some of our services for the NBFC acquisition are as below mentioned:

1. Time and Cost-Efficient

If you are looking forward to the NBFC transfer or takeover, start connecting with our team of experts, who guarantee a timely and cost-efficient acquisition of NBFCs in India.

2. Identifies Existing NBFCs

We ensure that existing NBFCs are identified to form an ideal deal to carry forward the sale proceeds for the NBFC takeover.

3. Due Diligence

We ensure due diligence for the shareholders and directors during the NBFC takeover.

4. Transfer of Equity Holding

Assists in the transfer of equity of the existing NBFC in compliance with the well-established RBI norms.

5. Smooth NBFC Takeover

We ensure the smooth acquisition of NBFC by drafting relevant documents and negotiating the best deal for NBFC takeover.

6. Asset Valuation

Ensures asset valuation and transfer of assets to present the net present value of the entity. After the evaluation, the chartered accountant obtains a certificate briefing on the method adopted for valuation.