NBFC Takeover

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What is NBFC Takeover?

In modern business markets, the use of the term ‘takeover’ is widespread. It is used in a reference when one business assumes control or management of another business. Similarly, when a company purchases an NBFC, the process is known as an NBFC Takeover. The procedure of NBFC Takeover is laid down by RBI, and it takes around 50-60 days in the process of NBFC Takeover. NBFCs sale/takeover involves a Target Company and an Acquirer Company. The NBFC takeover should be preceded by a due diligence report of the Target Company, which allows the Acquirear Company to make an informed decision.

Checklist for Due Diligence

  • Corporate Matters
  • Foreign Direct Investment and Overseas direct Investment
  • Finance related matters
  • Property held by the Target Company
  • Human Resources of the Target Company
  • Secretarial Compliances
  • Matters related to regulations such as RBI compliance records
  • Litigation
  • Insurance
  • Taxation Compliances

Due Diligence of the Target Company

Before beginning with the process of NBFC Takeover, the Acquirer Company should prepare a Due Diligence report of the Target Company. Due Diligence report gives an insight of the assets and liabilities Target Company and helps the Acquirer Company estimate the commercial potential of the Company.

RBI’s Regulations for NBFC Takeover

Before proceeding for NBFC Takeover, it is essential to check whether your company needs approval for Takeover from RBI or can you proceed without the approval. In certain cases you need to take the approval for Takeover from RBI before you initiate the process. However, in certain cases, no prior approval is required.

RBI’s prior approval is required for:

  • Any takeover of an NBFC, which may or may not bring a change of management in the Company.
  • Any such change in the shareholding of an NBFC that would result into acquisition or transfer of shareholding of 26 per cent or more of the paid-up equity capital of the NBFC.
  • Any such change in the management of the NBFC that would lead to a change of 30% of the number of directors.

RBI’s prior approval is not required in case:

  • The shareholding goes beyond 26% because of the buyback of shares or reduction in capital by the approval of a competent court. However, the same is required to be reported to RBI not later than one month from its occurrence.
  • The 30% change in the number of directors pertains to the change of Independent directors or due to the rotation of directors.

Now, from aforementioned points you can easily make out whether your company needs approval from RBI before proceeding further with NBFC Takeover or you are eligible to proceed without the approval and proceed for NBFC Takeover.

Application for Prior Approval of Takeover from RBI

To take prior approval from RBI for NBFC Takeover, you have to submit an application in this regard to the Regional Office of the Department of Non-Banking Supervision in whose jurisdiction the Registered Office of the NBFC is located. Following are the documents you will have to furnish in the RBI’s office with Company’s letterhead:

  • Complete information on Proposed Directors and Shareholders
  • Information related to the source of fund needed for acquiring shares in NBFC by the proposed shareholders.
  • A declaration from all the proposed Directors and Shareholders stating their non-association with any entity that accepts deposits.
  • A declaration from all the proposed Directors and Shareholders stating their non-association with any entity whose application for Registration with Reserve Bank of India (RBI) has been rejected.
  • A declaration from all the proposed Directors and Shareholders stating their non-criminal background as well as non-conviction under section 138 of the Negotiable Instruments Act.
  • Banker’s Report of proposed Directors/Shareholders.

Post Approval Steps of NBFC Takeover

Once you get the approval for Takeover from RBI and if there is a change in management or control a public notice shall be given in one leading national newspapers and one local newspaper. The public notice shall be given at least 30 days before affecting the sale of, or transfer of ownership or transfer of control by NBFC and also by other party or jointly by both parties.

The public notice must indicate:

  • The intention to sell or transfer ownership or control.
  • The particulars of the transferee and transferor.
  • The reason behind such sale or transfer of ownership or control.

Steps to be followed after receiving approval from RBI:

  • Prepare the Share Purchase Agreement to get it duly signed and implement the terms as listed in the agreement.
  • The management is required to be handed over.
  • Within the 31 days of the public notice in the newspaper the remaining consideration if any should be paid.
  • All the assets of the target company, as shown in the balance sheet will be liquidated, and all the liabilities shall be paid off.
  • The net worth of the company as on the date of the takeover should be calculated.

Checklist before NBFC Takeover

Before you initiate the procedure of NBFC takeover keep following things in mind:

  • Thoroughly check the legal authenticity of all the documents that are to be submitted to RBI and other authorities.
  • Scrutinize the previous records such as indebtedness if any, financial statements of last three years, any pending cases against the company or any legal suit pending against the company which could impact the process of NBFC Takeover.
  • Check all important documents such as incorporation certificate, VAT, GST and all other such certificates availed at the time of incorporation or during the ongoing tenure of the company.
  • Inspect the KYC details of the directors, promoters; investors added and at present working in the company.

When you gather information about the authenticity of the company, simultaneously you can proceed and execute a formal Memorandum of Understanding (MoU) agreement and get it signed along with a certain token of money.

Pros and Cons of NBFC Takeover

Taking over an NBFC is a lengthy and time-consuming process. However, it does help you avoid the troubles involved in starting a new business. The process of NBFC Takeover has its pros and cons. Firstly, let’s talk about the benefits of NBFC Takeover. Following are some of the benefits of NBFC Takeover:

Pros of NBFC Takeover

  • Increase in profitability.
  • Acquiring an NBFC will increase the market presence of your company and at the same time, reduce competition in the market.
  • Sales and revenue of the company will increase.
  • Acquiring an NBFC can create Economies of scale, which refers to the process of increasing production by lowering the cost of production.

Cons of NBFC Takeover

  • Rise of conflict in new management.
  • Your company may have to face the dirth of hidden liabilities of the target company.
  • Culture and values of the target company may clash with already existing values of your company.
  • In some cases, the morale of the employees of the target company drops to a level that they are not able to perform up to the mark.

After successful submission of NBFC Takeover application, the regional office of the department of Non-Banking Supervision shall scrutinize the application, and if all details are found correct, the NBFC will be approved, and if any query is found, notice shall be served and accordingly reply has to be filed.

The Takeover of NBFC Company is more easier than the Registration of a new NBFC Company as RBI has simplified the takeover procedure. RBI ensures that the procedure for registering and acquiring an NBFC is systematic and comprehensive. The acquirer of the target company should be competent with all the information related to the target company in order to avoid delay in the process. NBFCs are playing an active role in the financial market. Keeping the same in mind, the RBI has liberalized the compliances and governance requirements of the process of NBFC Takeover.

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Frequently Asked Questions

To commence the process of the takeover of NBFC, prior approval of RBI is required and once the approval is granted a public notice should be published in the leading newspaper. It shall be noted that only an NBFC can take over another NBFC.
You should have a minimum CIBIL score of 700 and above that. Apart from a good CIBIL score, there should be no dispute or write off of loans in the past 24 months with banks/NBFC.
To change the name of NBFC you need to obtain a name availability certificate from MCA and then you can reach to RBI for NOD. Once you are granted NOD, you can proceed with the name change.
Yes, you will have to submit the income tax return of the last three years to RBI.

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