NBFC Takeover is a process of taking over an NBFC by other company. You can take over an NBFC if you are a business entity by following the guidelines laid down by the Reserve Bank of India.
What is the NBFC Takeover?
NBFC is the acronym for Non-Banking Financial Company, which is registered under the Companies Act. The main function of an NBFC includes business activities like assets financing, giving loans and advances, investing in shares, debentures, and other marketable securities. Also, it provides working capital loans and credit facilities.
While retaining the basic NBFC compliance requirement, RBI is simultaneously making the business of NBFCs smoother. Smaller NBFCs have been liberalized from the RBI regulations, whereas larger NBFCs have been continuously monitored and strengthened to bring them on a par with the global standards.
Need for NBFC Takeover
In the whole corporate scenario around the world, mergers and takeovers are strongly making its presence. NBFCs, being considered as a near substitute to the conventional banks, are also coming under the impact of these compromises and arrangements. For this, Reserve Bank of India[1] lays down the procedure for the takeover of NBFCs. The takeover of NBFC means the purchase of one NBFC by another company. Only registered NBFC under the Act shall undertake to acquire the control of another NBFC.
Ways to takeover NBFC
There are two ways of taking over an NBFC, and they are as follows;
- Friendly takeover
It is a type of takeover which takes place between the companies with their mutual consent. Acquirer Company offers the target company for being acquired, which is then being accepted by the target company.
- Hostile takeover
Under this, Acquirer Company secretly or forcefully tries to acquire the company. Usually, this kind of takeover takes place when the management of the acquired company is unwilling to accept the offer of the takeover.
Advantages and disadvantages of taking over an NBFC
NBFC Takeover has its own advantages and disadvantages for the acquirer and the target company. Some of them are as follows;
Pros of NBFC takeover
- Increase in profit of Target Company.
- The decrease in competition.
- Increase in sales/revenue generation.
- Expansion of a distribution network.
- Economies of scale.
Cons of NBFC takeover
- Amount paid for goodwill is often less as compared to its actual price.
- Conflict in new management.
- Cultural clashes in two companies.
- Reduce employee’s morale.
- Hidden liabilities of Target Company.
Read our article:NBFC Registration – Know the entire Incorporation Procedure
Documents required for NBFC Takeover
You need to take approval from the Reserve Bank of India to take over an existing NBFC. Also, there is a need to justify the purpose of any takeover or acquisition of control. Furthermore, 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 documents;
- Information regarding sources of funds of the proposed shareholders required for acquiring shares in the NBFC
- Information about the Proposed directors/shareholders;
- A statement from every proposed directors/shareholder stating their non-association with any entity which has been denied of Certificate of Registration by the RBI
- A report from all the proposed directors/shareholders stating their non-association with any entity accepting deposits
- Also, a statement by all the proposed shareholders/ directors, justifying 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 a timely manner in order to avoid an undue hindrance in processing the application from the RBIs side. The approximate time of around two to three months is required for getting the approval, depending upon case to case basis.
Taking prior approval from the RBI
To proceed for NBFC takeover, firstly check out, do you need prior approval for Takeover of NBFC from RBI? Or you can proceed directly. The approval from RBI in certain cases are required to be taken before you initiate the process of NBFC takeover and in other cases, no such prior approval is required.
Prior consent from the Reserve Bank of India has to be 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 result in a change of management
- Furthermore, 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 change in the management by way of change in more than 30 per cent of the directors, excluding independent directors, of the NBFC
In what case you do not need prior approval from the RBI?
You need to take approval from the RBI before taking over an NBFC. On the other hand, there are various situations where you do not need to take the prior consent of the RBI:
- In case there is a change of 26% in the share capital of the company, resulting from buyback of shares/ or reduction in the capital by the approval of a competent Court
- Or in case there is a change of 30% in the administration due to the change in the Independent Directors or by rotation of the directors in the Board.
Procedure for NBFC Takeover after RBI Approval
The procedure to takeover an NBFC after getting the approval from the Reserve Bank of India is as follows;
Step 1: Formulate the Share Purchase Agreement get it duly signed and implement the terms as enumerated in the agreement.
Step 2: The management is required to be handed over.
Step 3: Pay up the remaining consideration if any, it shall be paid off within 31 days of the public notice in the newspaper or as mutually agreed upon by all the parties.
Step 4: The assets of the target company appearing in the balance sheet are required to be liquidated, and liabilities shall be paid off.
Step 5: Calculate the net worth of the company as on the date of the takeover of NBFC for the new start.
Step 6: Memorandum of Understanding
The procedure of takeover actually starts from here where it is necessary to sign the Memorandum of Understanding (MOU) with the proposed Company. It signifies that both the companies have together agreed to enter into a takeover agreement. The MOU is signed by the both the Directors of Acquiring Company and the Targeting Company. The object of MOU is to mention the requirement and responsibilities of both the companies. During the takeover and signing of the MOU, a token money is paid to the target company by the Acquirer Company.
Step 7: Convene Board Meeting
The next step after signing the MOU is to hold a Board meeting.
Step 8: Public Notice
A public notice shall be made within 30 days from the approval in two newspapers after getting approval from RBI. The purpose of Public notice is to check if there is any objection with regard to the takeover.
Step 9: The Signing of the Share Transfer Agreement
After the expiry of notice day in the newspaper, the next step will be that there shall be signature of share transfer agreement and then the acquired company will have to pay the remaining amount.
Step 10: NOC from Creditors
It is mandatory to obtain NOC by the target company from the creditors before takeover of the business from the Target Company to the Acquirer Company.
Step 11: Transfer of Assets
In case there are no objections received from the public, the transfer of assets shall take place.
Valuation the entity
RBI has set up technique that is adopted for cost assessment which is Discounted Cash Flow (DCF) Method. This will let us know the net present value of the entity. The Chartered Accountant after the evaluation, obtain a certificate which shall brief the method adopted for valuation.
Notice to Regional Office
After the valuation process and the Takeover scheme approval, the NBFC shall now apply to the Regional Office of RBI. The application shall be on the company’s letterhead.
Conclusion
NBFC Takeover is a process that involves taking over an existing NBFC and forming a new NBFC. Also, similar to the forming a new NBFC requires RBI’s approval, taking over an NBFC also, needs the regulatory body’s consent unless it is exempted from the government’s end. However, you can opt for NBFC Registration rather than NBFC Takeover for better results.
Read our article:Internal and Statutory Audits in Non-Banking Financial Companies: All You Need To Know
