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NBFC Takeover

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NBFC TAKEOVER

A Non-banking financial company (NBFC) is a company which is registered under the Companies Act, 1956. Basically it’s a financial institution that offers various kinds of banking services but they are not Bank. It engaged in the financial transactions like business of loans, provide credit facilities, acquisitions of shares, stocks, bonds, debentures etc… issued by the Government, currency exchange, retirement planning, money markets, chit funds. Generally, these kinds of institutions are not allowed to take traditional demand deposits—readily available funds, such as those in checking or savings accounts—from the public. Due to these limitations they are outside the scope of conventional oversight from state and federal financial regulators.

The term Takeover means get control on someone else company whether by buying all shares or by purchasing that company, paying certain amounts. Basically what it means in the financial terms is purchase of one business entity by another. So, NBFC takeover is very popular form of business strategy.

In NBFC, management takeover the target company, either directly or indirectly, with an intention to acquire that company or gain the control over all the board of directors of the particular company.

Takeovers are usually initiated by a larger company for a smaller one. It can be voluntary, if it’s happening with mutual decision by both the companies. Sometime it may happen without any prior information or by mutual decision, in these cases; the bigger company goes after the target without their knowledge.

A takeover, merges two companies into one, and brings major operational advantages and improvements to performance and for shareholders.

Types of NBFC takeover

  • Friendly takeover- In this kind of takeover, it happens with mutual consent of both the companies. The offer shall be made by Acquirer Company to the target company and shall be accepted by the same. This kind of acquisition generally goes smoothly as both companies consider it a positive situation. In friendly takeover, the  management of target company happily approve the transactions
  • Hostile takeover-This is very aggressive kind of takeover as it’s not friendly and totally unwelcomed. In this type of takeover, the acquirer company secretly tries to acquire the target company management who are unwilling to accept the offer of the acquirer company pertaining to the takeover. Usually, the acquiring company uses all unfavorable tactics like a , where it buys a substantial stake in the target company as soon as the markets open, due to which the target company loses control before it realizes what is happening. Management and board of directors strongly resist the takeover attempt by implementing tactics like a , which allows the target's shareholders to buy more shares at a discounted rate to dilute the acquirer's holdings and which makes a takeover more expensive.

Reasons for a Takeover

Takeover sounds very negative, but virtually it's same as an acquisition. This term indicates that the target company has been acquired forcefully and does not wish to be purchased. These are the reasons behind the takeover:

  • Acquiring companies target companies with unique service
  • Small companies are easy to target who have insufficient funds but viable products
  • Where both the companies mutually agreed for the agreement
  • Similar companies in very close geographic proximity, where combining forces can increase efficiency
  • Otherwise, viable companies that pays too much for debt that could be refinanced at lower cost if a larger company with better credit took over.

The procedure of NBFC takeover

Here I am going to provide a detailed procedure about NBFC takeover. We need to go through some process for takeover agreement like due diligence, RBI approval, etc.

Do the due diligence of the target company (optional) -

It is not compulsory to do a due diligence of the target company, but it's always advisable to do it as you will know full details about the target company by doing this. In layman language, it means inspection of documents, truth, facts, and background verifications and other report generation which can prove the authenticity of documents produced and facts gathered about the organization and such related transaction of the entity/ target company which is to be acquired/purchased. These things should be done during due diligence:

  • All documents shall be checked before submitting to the RBI and such other authorities
  • Need to check the records of last three year financial statements,
  • Need to check cases pending against the company 
  • It is necessary to inspect all important documents like incorporation certificate, GST, VAT;
  • Get the details of all the KYC about the directors and promoters left, added and at present working in the company.

NBFC can be takeover either by management takeover or takeover of shareholders.

Prior Approval from RBI

Prior approval of RBI is necessary in case of changes in management and control of the target company. These are the conditions which require prior approval of RBI:

  • Any takeover may or may not result in a change of management of the company.
  • At least 26% of the shareholding acquired or transferred in the process change in shareholding of the company which results in at least 26% of the selling or buying of paid-up capital
  • Any change in the management of the company

When Is Prior Approval of RBI not Required?

The approval from RBI is not required in the following conditions:

  • If the shareholding goes beyond 26% as a result of buyback of shares or shares reduction in the capital after the approval of competent court has been taken.
  • If there is a change in management by 30%, which includes the Independent Directors or by the rotation of directors in Board.

Publication of such NBFC takeover is required to be done and shall wait for 30days after approval of RBI.

Once obtained the RBI approval, public notice shall be published in 2 newspapers i.e one national and one local to invite any objection of the public regarding takeover within 30 days of such approval. It means that for further procedure acquirer will have to wait for 30 days.

After that, an application is required to be made to the RBI along with the required documents.

After the expiry of notice period, transfer of share agreement shall be signed and all the payment shall be done. Then No Objection Certificate from creditors is required before the ownership transfer from Target Company to Acquirer Company. Transfer of assets shall also be done if there is no objection received by any and RBI approved the scheme. Valuation shall be done in accordance with the rules prescribed by the RBI. Then application shall be submitted to regional office of RBI with all the required documents and the application shall be on letter head of the company. And it shall contain all the important information like directors, shareholders, assets, sources of funds etc…

Application scrutiny by the department

The regional office shall scrutinize the application and in case of any query raised, notice shall be served and details shall be mentioned in the notice. The whole procedure of takeover takes almost 3 months.

Impact of NBFC in development of economy

In the present scenerio, the NBFC sector is impacting overall economic development of the country. RBI is continuously taking essential steps regarding NBFC regulations. NBFC is playing an active role in the financial market of the Indian economy. Keeping the same in mind, the RBI has liberalized the compliances and governance requirements of NBFCs .

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Frequently Asked Questions

  • 1. What is NBFC Takeover?

    Any Change in shares of a NBFC by 26% or more or change in management of NBFC or both will considered as NBFC Takeover

  • 2. How much time it usually takes in complete process of takeover?

    It takes almost 6 months after approval of RBI.

  • 3. What should be minimum net owned fund during the time of NBFC takeover/

    Your current assets balance fund should be minimum 2 crores.

  • 4. Do I need income proof at the time of Takeover?

    Yes, you need to submit income tax of last 3 years.

  • 5. Does CIBIL score matters during NBFC Takeover?

    Yes, it matters a lot. Your CIBIL score should be 700+ and your name should not be in the list of Defaulters.

  • What’s the procedure of name change of NBFC while NBFC takeover is under process?

    For changing name of the company, one need to obtain name availability certificate from MCA and thereafter you can reach to RBI for NOD. Once NOD is granted, one can proceed for name change.

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