Overview of NBFC Takeover
NBFC talks about the Non-banking Financial Company, which is engaged in the business of commercial activity. The economic activity refers to activities relating to the loans and advances and also involved in the acquisition of shares or stocks or bonds or debentures or securities which are allotted by the Government or any local authority or other securities like leasing, hire-purchase, insurance business, chit business. In simple words, it refers to the companies engaged in banking services like accepting deposits, giving cash advances, intermediation, leasing, hire purchase, and much more. NBFC Takeover is a method which involves taking over any existing NBFC and forming a new NBFC.
What is NBFC Takeover?
NBFC is the abbreviation for Non-Banking Financial Company, which is registered under the Companies Act. The primary purpose of any NBFC includes business activities like assets financing, giving loans and advances, investing in shares, debentures, and other marketable security. Moreover, it also provides working capital loans and credit facilities to any person or Company.
While retaining the essential compliance requirement, RBI is simultaneously making the business of NBFCs to function smoothly. Smaller the NBFCs have been opened with the help of RBI regulations, while larger the NBFCs have been continuously observed and strengthened to bring them on a par with the global standard.
Takeover Process in Chart form
Now let’s talk about the requirements which are required to be considered by the acquirer
before acquiring the target company.
Before acquiring the target company, the acquirer must verify that the target company has
complied with all reporting requirements of the Registrar of Companies, Taxation authorities
and Reserve Bank of India, with no tax obligations.
What is the need for NBFC Takeover?
In the whole commercial scenario around the world, mergers and takeovers are actively making its occurrence. NBFCs are being considered as an addition to the concerned bank, are also coming under the impact of these negotiations and provisions. For this, Reserve Bank of India has laid down the procedure for the takeover of NBFCs. The acquisition of NBFC means the purchase of NBFC by another company. Only registered NBFC can undertake to acquire the control of any other NBFC.
What are the ways for NBFC Takeover?
There are two ways for NBFC takeover, and they are as follows-
Friendly takeover
This is the type of acquisition that takes place between the companies with their mutual agreement. Acquiring Company offers the target company for being acquired, which is then being accepted by the target corporation.
Hostile takeover
Acquiring Company secretly or forcefully tries to purchase the corporation. Generally, this kind of takeover takes place when the management of the acquired Company is unwilling to accept the offer of the acquisition.
What are the Benefits of NBFC Takeover?
NBFC Takeover has its benefits for the acquiring as well as the target corporation. They are as follows-
Benefits of NBFC takeover
- Increase in profit of Target corporation.
- There is a decrease in competition.
- Increase in sales or revenue generation.
- Economies of scale.
- Expansion of a distribution network.
What are the Drawbacks of NBFC takeover?
NBFC Takeover has its drawbacks for the acquiring as well as the target corporation. They are as follows-
- Conflict in new management.
- The Amount paid for generosity is often less as compared to the actual price.
- Cultural clashes in two companies.
- Hidden liabilities of Target Company.
- Reduce employee’s morale.
What are the documents compulsory for NBFC Takeover?
Consent from the Reserve Bank of India to take over any prevailing NBFC is mandatory. The documents necessary for takeover are as follows-
- Material regarding sources of funds of the proposed shareholders required for acquiring shares in the NBFC;
- Material about the Proposed directors or shareholders;
- A declaration from every proposed directors or shareholder stating their non-association with any entity which has been denied by the RBI;
- A report from all the proposed directors or shareholders affirming their non-association with any entity which accepts deposit;
- Moreover, a report by all the proposed shareholders or directors, qualifying their non-criminal background as well as non-convicting background under section 138 of the Negotiable Instruments Act;
- Bankers’ Report of all proposed directors/ shareholders
Why is it necessary to take prior approval from the RBI before NBFC Takeover?
For NBFC takeover, first, you need to check out approval for Takeover of NBFC from RBI? Or you can proceed directly. The support from RBI, on some occasions, are obligatory to be taken before you pledge the process for NBFC takeover, and in other cases, no such prior approval is compulsory.
Prior consensus from the Reserve Bank of India has to be taken in the following conditions –
- Whichever takeover or acquisition of control of NBFC, may or may not result in a change of management;
- Additionally, any deviation in the shareholding, resulting in 26 percent acquisition or transfer of the paid-up capital of NBFCs, With any progressive surges over time;
- Any change in the management is more than 30 percent of the directors, excluding independent directors of the NBFC.
What are the cases where you do not need prior approval from the RBI before NBFC Takeover?
Various situations wherever you do not need to take the previous consent of the RBI-
- If there is a change of 26% in the share capital of the Company, resultant from buyback of shares or decrease in the money by the consent of a proficient Court
- Or if there is a change of 30% in the administration due to the difference in the Autonomous Directors or by rotation of the directors in the Board.
What is the Procedure for NBFC Takeover?
The process to takeover an NBFC before the approval from the Reserve Bank of India are as follows-
- Provide all the information of the Proposed shareholders/ directors;
- Provide information about the sources of funds which your company’s proposed shareholders will utilize to acquire shares in an NBFC;
- Bankers’ Report for proposed shareholders/ directors;
- A declaration which specifies non-association of your company with any other entity that has denied a Certificate of Registration by RBI.
- Further affix a statement, declaration, and affidavit of non-criminal background. As well as provide non-conviction proof under section 138 of the Negotiable Instruments Act by all the proposed directors/shareholders.
Submit the application for approval to the Regional Office of the Department of Non-Banking Supervision which controls the Registered Office of the situated NBFC.
After you have obtained RBI approval follow these steps:
Publish the Public NoticeThe first step that you need to undertake is to publish the Public Notice in two regional languages. Amongst them, one should be English, and the other is vernacular language. Ensure that you publicize the notice after 30 days of RBI approval.
Enter into Formal AgreementThe next step is to enter into a formal agreement with the target company to purchase share/ transfer of management/ transfer of shares/ or such interest for NBFC Takeover.
Publication of the Second Public Notice When your company is about to complete 30 days of entering into the stated agreement, it’s time to publish a second public notice. Likewise, the notice has to be in two regional languages of English and other in vernacular language.
- Intention to sell or transfer control/ ownership;
- All the relevant particulars of the transferee;
- Mention Reasons for NBFC takeover or the transfer of control/ownership
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