How to Takeover NBFC, Know Its Procedure

NBFC takeover means the purchase of a business entity by another. That is the acquirer Company will take over the target company which is being targeted to be acquired by the other company. It can be of two types either it is a kind of friendly takeover where the two companies mutually agree for the takeover or a secret takeover where the competitor companies try to take over another company without their consent or knowledge.

NBFC stands for Non-Banking Financial Company registered under the Companies Act, 1956 involved in the business of loans and advances, assets financing, investing. NBFCs are issued by the government of India or local authorities.  Many people think NBFCs same as that of banks. But NBFCs are somehow different from the banks. NBFCs cannot accept demand deposits.

• Deposit accepting NBFC
• Non-Deposit accepting NBFC

In today’s scenario, mergers and takeovers are strongly making its presence. NBFCs takeovers imply the purchase of one NBFC company by another company. Register NBFCs under the act can only undertake to acquire the control of other NBFCs. The takeover of NBFC is easier than the registration of NBFC.

Advantages of NBFC takeover

• There is an increase in the profitability of the target company results in a decrease in the competition.
• There is an increase in sales and revenues.
• The distribution network expands, and there is an increase in the scale of the economy.

Disadvantages of NBFC takeover

• Amount paid during the takeover is less than the actual prices in most cases.
• Conflicts in the new management.
• Due to the merger of the employees of the two different companies, things do not work easily.
• These clashes reduce the morale of employees.
• The target company’s hidden liabilities create further problems after the merger.

Documents checklist of NBFC takeover

Any NBFC who wants to take over another NBFC needs to have the RBI approval.

• Following are the necessary documents
• Proposed/Directors Information
• Details regarding sources of funds of the proposed shareholders required for acquiring shares in the NBFC.
• The directors/shareholders issue a statement stating their no- association with any entity accepting deposits and with any entity which has been denied of Certificate of Registration by the RBI.
• The proposed directors/shareholders issue a statement specifying their non-criminal background as well as non-conviction under section 138 of the Negotiable Instruments Act.
• All proposed directors/shareholders banker’s report.
• The application should be submitted to the regional office of the department of non-banking supervision. The RBI may arise queries or ask for clarifications regarding various points mentioned in the application for approval.  All the queries must be answered in the stipulated time in order to avoid undue delay in processing the application from the RBI. The time period of approval by RBI takes about 2-3 months depending upon the case.

Procedure for the NBFC takeover

Requirements of the prior approval of RBI

• The takeover of NBFC or the possession of the control, which may or may not results in the change in the management.  The acquirer of the NBFC will first go through the documents of the target company, and when the acquirer confirms the acquisition of the NBFC to be a takeover, Memorandum of Understanding (MOU) is signed with some token money.
• Various planning like KYC documents, Business plan, and projection are prepared in advance for three years with reference to the incoming directors as directed by the acquirer.
• Submission of documents to the RBI where the registered office of the company is located.
• All the queries of the RBI must be replied that were being raised for the purpose of a takeover.
• Public notice is being issued in two newspapers after getting RBI approval for 30 days prior to such sale of shares, or transfer of control, whether with or without transfer.
• Signing of the purchase agreement and handling over of change of management, remaining payments are carried on the 31st day of the newspaper notice.
• RBI approval is not required in case there is a change in shareholding for more than 26%  for the reason of reduction in the share capital. This reduction will be approved by the competent authority.
• If the change in the management due to the rotation of the directors goes beyond 30%,  prior RBI  consent in the form of written approval is required.

Requirements of the prior approval without the consent of RBI

• The competent court will approve the change of 26% in the share capital of the company, resulting from the buyback of shares or reduction in capital.
• The RBI approval is not required for the change of 30% in the management due to the change in the independent Directors or by the rotation of the directors on the board.
• NBFCs Impact on the Indian Economy

Scrutinization of the NBFC takeover Certificate

The regional office of the department of Non-Banking supervision will scrutinise the application, and if no query is found, the NBFC takeover will be approved. In case if a query is found, a notice will be served. It takes approx. 3-4 months for the scrutinisation process after an application is being filed. One can seek the help of agencies dealing in NBFC takeover, reach us at LawyerINC.

Conclusion

NBFCs takeover is primarily governed by the RBI. The NBFCs takeover usually takes 45-60 days, and RBI ensures that the process of takeover should be systematic and comprehensive. The NBFCs takeover is growing these days due to the competitive scenario. The acquirer must be well versed with all the information regarding the takeover in order to avoid any delay.