Overview of NBFC Takeover
A Non-Banking Financial Company (NBFC) is a form of business entity registered under The Companies Act 1956 or The Companies Act 2013. NBFCs are incorporated to engage in the business of financial lending and other financial functions. They are defined under section 45-IA of the RBI Act 1934. Such companies need to obtain a Certificate of Registration (COR) from RBI in order to commence financial business activity. This process is also known as NBFC registration or obtaining of NBFC license from RBI. Another way to commence such business activity is to go for the NBFC Takeover process.
NBFC takeover is a process of acquiring a functioning RBI registered NBFC and not going for the NBFC registration process from the initial stage. NBFC takeover is a suitable but complex process.
This process is suitable for individuals or corporates who want to opt for a speedy and confirmed functioning of their financial business.
This process is complex and goes through multiple stages, requiring the highest level of professionalism and diligent working. At Corpbiz, we have 150+ professionals, including CA, CS, CMA, and Lawyers who are proficient in RBI registrations and NBFC takeover Procedure. We can serve your NBFC takeover requirement in less than 60 days.
What Business activities can you do after the NBFC takeover?
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 extends to providing credit facilities and working capital loans.
How NBFC Takeover works?
The Non-Banking Financial Company Takeover Revolves Around Two Entities
An acquirer company is keeping its eyes on a 'to be acquired' company known as the Target Company.
- A company that has got the ability to acquire the target company is renowned as Acquirer Company.
The target company is acquired by the acquirer company, and shares of the existing shareholders are transferred to the proposed shareholders or entity after following the due procedure. The acquiring company enjoys the pre-existing RBI registration of the target company along with its market standing.
The process flow involves the following steps:
- Due Diligence
Conduct extensive research and background checks before purchasing a business. A checklist of the aspects that need to be examined should be created. Make business goals and assess whether the target company is capable of achieving them.
- Examine the suitability
Before making an acquisition offer to any company, an acquirer must review the list of suitable candidates. During the process, a firm will identify candidates that are a good fit for their firm and meet the acquirer's primary goal.
- Evaluate the financial position
The financial standing of the firm you wish to buy must be properly assessed. Calculate the maximum amount payable for the takeover, as well as cash flows, and decide on the best financing method.
Types of NBFC Takeover
NBFC Takeover Can Be Of Two Types
- Hostile Takeover
The name hostile takeover is itself indicating 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 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 don't matter at all.
- Friendly Takeover
A friendly takeover is a scenario that depicts the story of the acquisition of a target NBFC 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.
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.
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
- Expansion in market share when two companies in the same domain unite
- Wide expansion of distribution channels
RBI approval is required in the following case;
As the governance and control of NBFC lie in the hands of RBI, its consent matters the most and is necessary to get the approval in these cases mentioned below.
- At the onset of Takeover of NBFC procedure, approval becomes mandatory.
- In those circumstances when management changes and thereby, leading to a change of 30% of the total number of directors.
- When shareholding pattern witnesses a change by becoming responsible for the transfer of 26% or more of the paid-up capital of the corporation to others.
An exception to the RBI approval requirement
- RBI has nothing to do with the decline in capital or buyback of the shares as a competent court exists to deal with them.
- Change in management in case of rotation of board members inclusive of independent directors.
Procedure for RBI approval when Prior RBI Approval is required
Submit an application to the zonal office of the Non-Banking Supervision Department under whose jurisdiction the 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 Attachments
- Information related to the proposed shareholders and directors
- 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 and case 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.
Procedure for NBFC Takeover in India
The procedure for NBFC takeover is as follows;
1. 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. The 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.
2. Prior Approval Requirement of RBI is the Most Crucial Step if required
3. Publish the Public Notice Bilingually
The public notice should be published in two regional languages. The first language should be English, and the second, in regional language, should be released within 30 days of receiving RBI clearance.
4. 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.
5. 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 regional 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.
6. Public Notice Engirdle the Following Significant Things
- Intention to transfer or sell direction/ownership;
- To the point particulars of the transferee; and
- The purpose behind the act of sale or transfer of authority/ownership
7. Commencement of Liquidation process
- 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.
- The acquirer will get to see a fair balance in the bank in the company's name. Calculation on this part considers net worth as the basis as it was on the takeover day.
8. Obtain NOC from Creditors End
Before the transfer of business takes place, Target Company Shall acquire NOC from the creditors.
9. 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.
10. Entity Valuation in Agreement to the RBI prescribed 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 supports the valuation process. It's a method that is known for portraying the net present value of any entity.
Grant of NBFC Takeover Approval
The regional office of the Non-banking Supervision Department is the concerned department for the grant of the NBFC takeover Non Objection Certificate (NOC). The department may ask queries if it is not satisfied with the preliminary screening of the application.
Frequently Asked Questions
In simple language, when a business entity purchases, any other NBFC 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 2-3 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 their customers, while Banks can issue the cheque.