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Takeover of NBFC

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  • Due diligence of Target company.
  • Object & Name change.
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NBFC Takeover

RBI has simplified the NBFC takeover can process and a takeover deal can be executed in 45 to 60 working days. Takeover of NBFC is easier than Fresh registration of NBFC.

Acquirer of NBFC should first conduct due diligence and overview the financials of the target company. Once The target NBFC is go to go and to execute acquisition of the said NBFC, MOU to be signed with some advance money.

What is Takeovers in the financial terms, means the purchase of one business entity by another. This can be either friendly takeover, wherein the seller entity consents to sell its assets to the acquirer entity. Or on the other hand, this can take form of hostile takeovers, where the acquirer entity deliberately and secretly acquires the control of the other entity. In both the conditions, the balance sheet of the seller entity stands null after all its assets and liabilities are transferred to the acquirer.

The concept of mergers and takeovers is not new to the economic world. Many business houses have experienced either a remarkable success or disheartening breakdown after such arrangements. NBFCs, being considered as near substitute to the conventional banks, have also not been left untouched by the takeover and acquisition drives. The Reserve Bank of India laid down the procedure for the Takeover of NBFCs so as to prescribe a systematic system eliminating every bias and ambiguity.

In case of the friendly takeovers of the NBFCs, the first step in the process is to sign the MOU with the proposed company after the decision for NBFC takeover is been approved by the Board of both the companies. Once the Board has consented for the aforesaid takeover, the next step in the process is to seek RBI’s approval for the subject.

What is NBFC Takeover Procedure / NBFC for Sale Procedure

When we are talking about the RBI’s approval for NBFCs arrangements and takeovers, the minor changes in the management of NBFCs or minor acquisition of control of NBFCs is kept outside the meaning of the takeovers.

Prior approval from the Reserve Bank of India is taken in the following conditions of NBFCs arrangements, failing which the whole process shall be considered null and void:

  • Any takeover or acquisition of control of NBFC, may or may not resulting in change of management.
  • Any deviation in the shareholding, resulting in 26 per cent acquisition/ transfer of the paid up equity capital of NBFCs, Including any progressive increases over time.
  • Any amendment in the management by the way of change in more than 30 per cent of the directors, excluding independent directors, of the NBFC.

Prior approval of RBI will not be required in following circumstances:

  • The change of 26% in the share capital of the company, resulting from buyback of shares/ or reduction in capital by the  approval of a competent Court
  • Change of 30% in the management due to the change in the Independent Directors or by rotation of the directors in the Board.

Documents Checklist for NBFC Takeover

RBI prior approval from RBI is require for NBFCtakeoverin India and need to justify the purpose of any takeover or acquisition of control, the next step to be followed is to make an application to the RBI on the letterhead of the company, for the endowment of the aforesaid approval, along with the following necessary documents:

  • Information of Proposed directors/shareholders;
  • Details regarding sources of funds of the proposed shareholders required for acquiring shares in the NBFC;
  • A statement by all the proposed directors/shareholders stating  their non-association with any entity accepting deposits;
  • A statement by all the proposed directors/shareholders stating  their non-association with any entity which has been denied of Certificate of Registration  by the RBI;
  • A statement by all the proposed directors/shareholders , specifying their non-criminal background as well as non-conviction under section 138 of the Negotiable Instruments Act;
  • Bankers’ Report of all proposed directors/ shareholders.

Thereafter, the application shall be submitted to the Regional Office of the Department of Non-Banking Supervision in whose control the Registered Office of the NBFC is located for obtaining the prior approval before undertaking such arrangements. The Reserve Bank may arouse various queries or ask for clarifications regarding various points mentioned in the application for approval. All such queries shall be answered in the timely manner in order to avoid an undue delay in processing the application from the RBIs side. The approximate time of around two to three months is required for getting the approval, depending up on case to case basis.

Requirement of Prior Public Notice in case of change in management/control

After getting RBI's approval for concerned takeover, a public notice shall be given in one leading national and one leading local newspaper at least 30 days prior to such sale of shares, or transfer of control, whether with or without share transfer.

The public notice shall indicate the following information in comprehensive language:

  • the intention of the transferee company to sell or transfer its ownership/ control;
  • the particulars of transferee company in respect of its assets and liabilities lying in the Balance Sheet; and
  • the reasons stated by the transferee company for such sale or transfer of its ownership/ control.

Preparation of Share Purchase Agreement

After the public notice of the takeover, the Share Purchase Agreement is prepared and signed by the acquirer and transferor, the management of the transferor company is handed over to the acquirer and the consideration remaining, if any, shall be paid off within 31 days of the public notice in the newspaper or as mutually agreed by all the parties.

Transfer of all assets and liabilities of Transferee Company to the Transferor Co

Subsequent to the signing of the Share Purchase Agreement,the assets of the transferor company present in the balance sheet will be discharged and liabilities will be paid off and Acquirer will just receive a clean bank balance in the company's name calculated on the basis of net worth as on the date of the takeover.

Impact of NBFC on Indian Economy

In the current scenario, the NBFC sector is acting as a catalyst to the overall economic development of the country. In order to provide necessary regulatory support to the segment and also to ensure financial stability in the long run, the RBI is continuously trying to bring necessary changes in the NBFC regulatory space. A lot of changes in their operations, management and regulations have been witnessed by NBFCs, pursuant to the proactive role of the financial market in the Indian economy. Keeping the same in mind, the RBI has liberalized the compliances and governance requirements of NBFCs particularly the non-deposit taking NBFCs having no public funds and no customer interface.

Conclusion

The whole process of NBFCs takeover is governed by the RBI regulations and the notifications issued by it from time to time in this regard.Although the concept of NBFCs takeovers is still in its infant stage, but the RBI has ensured that the process to be followed shall be systematic and comprehensive. All the compliances, as prescribed in this behalf shall be duly satisfied. The acquirer shall be well-versed with all the information connected with the transferor in order to avoid any delay in the process.

Frequently asked Questions
What is NBFC takeover?

Any Change in shares of an NBFC by 26% or more or change in management by 30% or both will have consideredas Takeover of NBFC or.

Do I need to provide minimum net owned fund at the time of takeover?

You need to maintain minimum current assets balance of INR 2 Cr, it may be inform of Loan to customers or bank balance.

What is RBI NOD?

Before proceeding for change in management or transfer or shares or sale of NBFC, NOD has to obtain from RBI.

Meaning of net owned fund for NBFC takeover?

Paid-up Share capital+ profit+ Reserves and Surplus +balance in share premiumother free reserves –investment in group company directly or indirectly –accumulated loss- provision for NPA- deferred expenses-Investments in shares of other NBFCs - investment in shares or bond or debenture in group companies in excess of ten percent of NOF.

What is difference between Initial capital at time of license by the RBI?

As per RBI for Fresh registration, you should have Minimum Fixed deposit of Rs. 2 Cr to apply for NBFC License. This called initial capital as well Net owned fund. Later upon approval from RBI for NBFC license you use Fixed deposit amount in lending or any other pre-approved business activity.

What is the process of Name change of NBFC, when takeover of NBFC takeover is under process?

For Change in name, you need to obtain name availability certificate from MCA and thereafter you can reach to RBI for NOD. Once NOD is granted you can proceed for name change.

Do I need income proof at time of takeover of NBFC?

Yes. You need to submit last 3 years income tax return to RBI.

Is there any relevancy for CIBIL Score at time of Takeover of NBFC?

Yes. You should have minim CIBIL score 700+ and there should be no dispute or write off of loans in past 24 months with banks / NBFC.

 

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