Procedure of Takeover NBFC

The financial sector of India is diverse and NBFC is playing an important role in the sector. The NBFCs are filling a financial gap in the sectors which are underserved by the banks. However, there is a change in the operation of banks and NBFCs. Financial institutions have to follow the compliances related to management and control changes.

The NBFCs must be grown to cater to more financial needs of the people, and for that, they acquire other NBFCs. In the business world, mergers and acquisitions are common. The purchase of NBFC by another registered NBFC is called an acquisition or takeover. The Reserve Bank of India (RBI) has created an easier framework for NBFC takeover. 

Remember only registered NBFCs can take over another NBFC. As per the framework, you must obtain an NOC (Non-Objection Certificate) from RBI to legally take over an NBFC. In the article, a complete NBFC takeover checklist is shared.

What is NBFC?

The NBFCs are the companies established under the Companies Act, of 1956. The NBFCs are engaged in the business of finance, accepting deposits, delivering credit and channelising the scarce financial resources to create wealth. So, they cater for the financial requirements of the corporate sector, deliver credit to the unorganised sector and small borrowers.

The NBFCs provide financial services to selected groups and industries. So, to provide credit to these groups, the NBFC have to raise capital at frequent intervals. Due to lending money, there will be a change in the control and management of NBFCs such as a change in directorship, and transfer of shareholding.

Reasons Behind the Situation for Takeover

There can be multiple reasons to take the NBFC and these are as follows:

• Expand the business operations and activities.
• Capture new markets and new customer segments to grow the business.
• Comply with the regulatory requirements or guidelines of the authorities.
• Acquire skills, technology and expertise as per the market requirements.
• Diversify the product portfolio and service offerings.

Prior Approval for Acquisition

There are mainly two types of NBFCs: Deposit Accepting NBFCs and second is Non-Deposit Accepting NBFCs. Before acquiring any NBFC, taking a prior approval is required:

• Any person who is planning to acquire a company and if the acquisition results in the major shareholding in the banking company then having a prior approval of RBI is required. Apply to the RBI.
• After receiving the application and declaration, the RBI will seek comments from the banking company or the acquisition. 
• The Board of Directors of a banking company check the 'fit and proper' status of a person proposing an acquisition, based on information and due diligence. The RBI will assess the 'fit and proper' status of the applicant and make a binding decision on the acquisition. 
• Conditions may be imposed by the Reserve Bank. If the aggregate holding falls below five per cent, fresh approval from the Reserve Bank is required to raise the holding to five per cent or more. 
• Major shareholders from FATF non-compliant jurisdictions are not permitted to acquire shares, but existing shareholders can continue with their investment with prior approval from the Reserve Bank.

Requirements to Obtain Prior Approval from RBI

The prior written approval of the Reserve Bank of India is required for - 

• Any takeover or acquisition of control of an NBFC, whether by acquisition of shares or otherwise.
• Any merger/amalgamation of an NBFC with another entity or with an NBFC that provides the acquirer/another entity control of the NBFC.
• Any merger/amalgamation of an NBFC with another entity or with an NBFC can result in the acquisition/transfer of shareholding over 10% of the paid-up capital of the NBFC.
• Prior written approval of the Reserve Bank is also required before approaching the Court or Tribunal under Section 391-394 of the Companies Act, 1956 or Section 230-233 of the Companies Act, 2013 seeking an order for mergers or amalgamations with other companies or NBFCs.

Process to Take Over an NBFC

Below are the steps that must be followed for NBFC company takeover:

1. Before acquiring an NBFC, the acquirer must check the financial condition of the target company. After the acquisition is confirmed by the boards of both companies, the acquirer must sign the Memorandum of Association (MOA) and make an advance payment.
2. All documents prepared for submission to the RBI should be submitted to the registered office of the company.
3. Once the RBI approves the acquisition, a letter must be issued as a public notice. This notice must be published in two newspapers for 30 days, as per RBI guidelines. This is done to invite objections from the public or any interested party.
4. The signing of the Share Purchase Agreement, change of management, and payment of any remaining prerequisites must be carried out on the 31st day of the newspaper notice or as mutually agreed by all parties.
5. Before the transfer of ownership of shares or control of the NBFC company, a report on the proposed directors/shareholders must be published in the newspaper for at least 30 days, along with the financial statements of the last three years.

Information Shared on NBFC Takeover

The following information must be shared about the promoters, Directors and shareholders while taking over an NBFC:

1. Name, Designation, Nationality and Age.
2. Business Address and Residential Address
3. E-mail address or telecom number
4. PAN Number under the Income Tax Act
5. Director Identification Number (DIN)
6. Educational or Professional Qualifications
7. Social Security Number or Passport
8. Professional Achievement relevant to the job
9. The line of business or vocation
10.  Any other information relevant to the Company

Conclusion

To conclude, the acquisition of NBFC in India is now easier than registering a new one, it is because of the simplified procedure introduced by the RBI. However, an NBFC takeover process is still in the early stages, but it is designed systematically. The person who wants to acquire an NBFC needs to be well-informed about all the information of the transferer to avoid any delays. 

The NBFCs play an active role in the current financial market, so the RBI has eased the compliances and governance requirements of the NBFC takeover procedure. If you want to start your own NBFC, then reach out to Registrationwala, as we assist our clients in the complete process and make it easier for them to get the registration certificate without much hassle.

Author: Dushyant Sharma

Hey there, I'm Dushyant Sharma. With the extensive knowledge I've gained in past 8 years, I have been creating content on various subjects such as banking, insurance, telecom, and all the important registration and licensing processes for various companies. I'm here to help everyone with my expertise in these areas through my articles.