What is NBFC Takeover? – An Overview
Registered under the Companies Act, 2013, NBFC stands for Non-Banking Financial Companies. NBFC takeover implies acquiring or gaining control of one NBFC by another company. To captivate the management of the target company, an NBFC needs to go through the registration process under the act. NBFC's have financial services under its wings. Financial services that NBFC offers are asset financing, acquisition of shares, debentures, securities, bonds, and stocks, granting loans as well as advances, and investing in various commercial securities. NBFC is not only limited to previously mentioned points but also extend to providing credit facilities and working capital loans.
RBI is striving to make the road smoother for NBFCs. Consistent monitoring and shoring up of larger NBFCs are on the run to make them match pace with the global standards.
There are two different paths you can tread to begin your business venture in NBFC -
- Incorporating NBFC under Companies Act
- NBFC takeover of an already set business
Why Takeover of NBFC Gained Momentum in Recent Times?
From time to time, we keep on reading in the newspapers and watching on the T.V. about mergers and takeovers. In the world of corporate, Mergers and Takeovers are creating a lasting impact in the mind of people. RBI has laid down rules and regulations to facilitate the process of the takeover of NBFC's.
The non-banking financial company takeover revolves around two entities
- Target Company
An acquirer company is keeping its eyes on a 'to be acquired' company known as the Target Company.
- Acquirer Company
A company that has got the ability of acquiring the target company is renowned as Acquirer Company.
Types of NBFC Takeover
To touch new heights in today's rapidly emerging business world, the takeover of NBFC has become a widespread habit that companies are adopting.
NBFC takeover can be of two types
- Hostile Takeover
The name hostile takeover is itself indicating about this term. A Hostile takeover is a type of takeover in which the acquirer or acquiring company uses different tactics to gain ownership of the target or target company without the nod of the board of directors associated with that target company. During such kinds of takeovers, entities get involved in reaching out to shareholders by putting a tender offer on their table, and they even don't hesitate to indulge in a proxy fight to replace the management to get the acquisition accepted. For acquirers, the target company's board of directors’ support and approval doesn't matter at all.
- Friendly Takeover
A friendly takeover is a scenario that depicts the story of the acquisition of a target company by another company peacefully as this takeover is subject to the assistance and approval of the management and board of directors. The shareholders of the target company's say yes to the deal only if they feel that the price per share is better as compared to the current market price. Generally, a friendly takeover is likely to take place when the target companies are happy with the benefits that they have overseen during the prior analysis time frame.
The benefits of the friendly takeover are not only limited to the better per-share price, but it's more and beyond that. The target companies get opportunities to fuel their business growth. Furthermore, they can explore different spheres of the market as well. In brief, a friendly takeover is all about mutual consent.
A Friendly Takeover has the Edge over the Hostile Takeover!
As it's a thing of common understanding that with consent peace comes and with disagreement disputes and battles comes, it's simple to comprehend the dominance of friendly takeover over the hostile takeover.
- Unlike hostile takeover, in this type, the target companies don't go face to face with the bothersome disputes or issues.
- It is a type of takeover in which the target company, as well as acquirer, actively participates in sketching the deal considering and prioritizing a sense of satisfaction for both.
- And last but not least, the additional advantage of better price per share.
Pros and Cons of NBFC Takeover
- Hiking up profits of Target Company
- Sales and Revenue climbing up
- The scale of the economy showing a positive and upward trend
- Reduction in the level of competition and competitive pressure
- Wide expansion of distribution channels
- Rare management conflict
- In few cases, the amount paid during the takeover is less in comparison to the actual price
- Two different companies joining hands, cultural clashes are sometimes unavoidable
- Low employee morale is obvious
- After the merger, the masked liabilities of the target company's can be problematic in future
Due Diligence - An Investigative Exercise on the Target Company
Due diligence is a reasonable investigation and verification of the documents and facts covering the background verification and preparation of well-analyzed reports, which shall lay the ground on which checking of the authenticity of documents and events along with the in-depth audit of the transactions of target companies.
One thing you should understand is that by doing due diligence of the target company, you will learn a lot about the target company and unwrap many aspects that you may fail to know otherwise without going for due diligence.
Due Diligence - Documents and Records to Be Checked
Go through the financial records of previous years and check the financial statements that provide the financial information for the last three years. Also, it's mandatory to check pending cases against the company or claims related to indebtedness, if any. Such details can bring a change in the decision related to takeover of NBFC.
There are certain documents that RBI and various other authorities are expected to inspect. Check those documents as priority.
Additionally, inspect those relevant documents that are presented during the incorporation time or during the initial days of the company. Here you have to check documents like GST, VAT, certificate of incorporation, and other registration related documents.
You can move further and carry out a formal memorandum of understanding agreement, and it should be approved with a specific token of money.
Gather information related to KYC of those directors and promoters who have left the company and also those who are currently working in the company.
Throwing Light on the Procedure for NBFC Takeover in India
- Memorandum of Understanding
The procedure for Non-Banking Financial Company Takeover triggers off from the Memorandum of Understanding (MOU) to get signed with the proposed company. It defines that both of the companies are ready to move into a takeover agreement. Director of the acquirer company and the target company, come on board and sign the MOU. Memorandum of Understanding touches upon the needs and responsibilities of all the companies. At the time when MOU gets approved, the acquirer company pays the token money to the target company.
- Prior Approval Requirement of RBI is the Most Crucial Step
As the governance and control of NBFC lies in the hands of RBI, its consent matters the most and is necessary to get the approval in these cases mentioned below
1. At the onset of takeover of NBFC procedure, approval becomes mandatory.
2. When shareholding pattern witnesses a change by becoming responsible for the transfer of 26% of the paid up capital of the corporation to other.Exception to the Second Point
1. RBI has nothing to do with the decline in capital or buyback of the shares as competent court exists to deal with them.
2. In those circumstances when management changes and thereby, leading to a change of 30% of the total number of directors.
- Publish the Public Notice Bilingually
Publication of public notice should take place in two regional languages. The first language should be English, and the second one in natural language should be published in the duration of 30 days after getting approval from RBI, cool your heels for objections, find the intelligent solutions, and resolve them, if any, before proceeding further.
- Set Foot in the Formal Agreement
From here on, two concerned parties can think of entering into a formal agreement, and they can now purchase share/transfer of administration/transfer of shares/ or before-mentioned concerns for takeover.
- Publish the Second Public Notice
The requirement is to publish the second public notice in two different regional languages. English should get weightage as the first language while get published the other one in ingrained language. Before moving into an agreement, public notice should be posted before 30 days for the purchase of share/transfer of authority/transfer of shares or before-divulged concerns for takeover.Public notice engirdle the following significant things
1. Intention to transfer or sell direction/ownership;
2. To the point particulars of the transferee; and
3. The purpose behind the act of sale or transfer of authority/ownership
- A Further Step that follows the Publishing of Public Notice
1. This step talks about the liquidation of all the assets of the target company. Moreover, all the liabilities would be apt to be paid off.
2. The acquirer will get to see a fair balance in the bank on the company's name. Calculation on this part considers net worth as the basis as it was on the takeover day.
- Obtain NOC from Creditors End
Before the transfer of business takes place Target Company Shall acquire NOC from the creditors.
- Assets Transfer
Once the scheme gets approved by the Reserve Bank of India without any kind of objections, the transfer of assets shall take place.
- Entity Valuation in Agreement with the Rules
As RBI has provided a set of rules and regulations, the valuation of the entity can be made possible following them. The discounted cash flow (DCF) method is the technique that support in the valuation process. It's a method that is known for portraying the net present value of any entity.
NBFC Takeover Procedure for those Cases where Prior Approval Matters as Given Above
Submit an application to the zonal office of the Non Banking Supervision Department under whose jurisdiction registered office of the NBFC lies. Along with the application engraved on the company's letterhead, it's vital to attach certain valid documents in the form of attachments. This application must seek approval of the NBFC takeover.
The Following Documents get accompanied along with the Application as Attachment Parts
1. Information related to the proposed shareholders and directors
2. Information linked to the need for the source of funds for share acquisition in NBFC by the proposed shareholders
- Declaration Stating Association/Non Association
Information in connection with the proposed shareholders/directors of being related to any incorporated as well as an unincorporated body that is responsible for acceptance of deposits or even minute details of application mentioned for Certificate of Registration (COR) which has gone through the rejection by RBI.
- Need for Banker's Report
It's mandatory to have the Bankers' Report with regard to proposed shareholders and directors.
- Declaration Expressing No Criminal Case
The proposed shareholders and directors should come forward and give the declaration affirming non-conviction together with the non-criminal background under section 138 of the Negotiable Instruments Act.
- Financial Records for the Previous Three Years
Annual reports depicting the financial statements of the last three years must get appended.
How to Change the Name of the Company while Takeover of NBFC is in Progress?
To initiate the procedure for the name change, the acquirer company must manage to reach out to the Ministry of Corporate Affairs and get the name availability certificate from there only. Hereafter, the acquirer has to knock at the doors of RBI for Notice of Default (NOD). Provided with the Notice of Default, the company can make strides for the name change.
NBFC Takeover Certificate Scrutinization along with the Issuance
When it comes to scrutinizing the application, the regional office of the Non-banking supervision department takes charge. In the case of queries, serving the notice will become a necessary thing apart from the stipulation of details into the notice. In the rest of the cases, the takeover gets easy approval.
After filing of the application with the authorities, they take 3-4 months. Getting approval from the RBI end is a challenge in itself, as it requires a lot of effort. Many agencies are working all day and night dealing with the RBI NBFC takeover, and have proved their mettle in this area. As we have got a well-experienced team, we, at the Corpbiz family, can also help you out with the appropriate solutions to meet your requirements.
The NBFC takeover procedure is not as a complex process as registering a new NBFC company. RBI has made things better for those who are looking for takeover by simplifying the takeover procedure. Despite the fact that the non-banking financial company takeover procedure has begun its journey in India recently, RBI has arranged things in such a way that the process for takeover has become simple and convenient.
Avoiding delay in the process becomes possible when the acquirer is familiar with most of the information related to the transferor. NBFC is accelerating on the road of the financial market. Considering this, the Reserve Bank of India has liberalized the governance needs of the takeover process. At the time of the NBFC takeover, changing the name of the company is also possible. We are providing A1 solutions to assist you with everything we can do in relation to the takeover of NBFC.
Frequently Asked Questions
In simple language, when a business entity purchases any other business entity is called NBFC Takeover.
Yes, it is necessary to have RBI registration for NBFCs set up under section 45-IA of the RBI Act, 1934.
Yes, you have to submit income tax returns for the last three years to RBI.
NOD has to acquire from RBI before proceeding for sale of NBFC, or change in management or transfer.
The minimum CIBIL score should be more than 700, and there shouldn't be any dispute or write off of loans with banks in the previous two years.
Infrastructure development, Wealth Creation, Providing customized loan solutions, Providing employment opportunities, and financial assistance to marginalized communities of India.
After an application gets filed, the Scrutinization process requires around 3-4 months.
NBFCs can grant loans like loans against securities, business loans, unsecured personal loans, Gold loans, loans to MSMEs, etc.
- Increase in sales and revenues.
- Escalating the profitability of the target company reduces the scope of competition.
- NBFCs cannot issue demand drafts, while Banks can issue demand drafts.
- NBFCs cannot issue the cheque to its customers while Banks can issue the cheque.