How to Takeover NBFC: A Complete Process

NBFC takeover
Neha Saxena
| Updated: Nov 08, 2018 | Category: NBFC

The RBI has loosened its strings pertaining to the procedure for the takeover of NBFC in order to meet the global competitiveness and standards. Now with new simplified rules and the RBI regulations, it takes not more than 50-65 working days for NBFC takeover. The NBFC takeover is nothing but a new registration of NBFC along with the RBI compliances. NBFC is very close to the bank kind of structure and management. Usually, the takeovers are either friendly (Acquirer obtains the prior consent of target) or hostile (Wherein the acquirer without prior consent, silently acquires the control over other entity).

NBFC Takeover Procedure in India

Mergers, amalgamation, and takeovers are the strong means of business expansion and takeover of NBFC is the latest corporate style of expansion. The Reserve Bank of India has laid down a very detailed procedure for the NBFC takeover procedure. The NBFC takeover should be preceded by NBFC due diligence report of Target Company; this will help the acquirer to make an informed decision.

Approval for NBFC takeover

To proceed for NBFC takeover, firstly check out, do you need prior approval for Takeover of NBFC from RBI? or you can proceed directly. The approval from RBI in certain cases are required to be taken before you initiate the process of NBFC takeover and in other cases, no such prior approval is required.

Prior approval –REQUIRED from the Reserve Bank of India

In the given below cases the RBI prior approval is a must:

  1. Any Takeover of NBFC or acquisition of control, which may or may not results in a change in management.
  2. Any variation in the shareholding of an NBFC, resulting in 26% acquisition/transfer of the paid-up equity capital, including progressive increases over time,
  3. Whenever the Takeover of Listed NBFC is required to be done.
  4. Wherein, it has led to a change in management in such a way that it is leading to a change of 30% of the number of directors.

Exception: – Where 30% change pertains to the 30% of the Independent directors or due to the rotation of directors then in such cases, the prior approval of RBI is not required.

  1. Whenever the Change in the Shareholding pattern is done in such a manner that it has caused the transfer of 26% of the Paid-up capital of the company to other, including progressive increases over time.

Exception: – The Buyback of the shares or reduction in capital by the approval of a competent court is out of the purview of and do not require prior approval of RBI.

Prior Approval –NOT REQUIRED from the Reserve Bank of India

In given below cases the RBI prior approval is not required:

  1. In case the shareholding goes beyond 26% due to the buyback of shares/reduction in capital by the approval of a competent court.
  2. Change in the management by 30 % inclusive of Independent Directors or by rotation of the directors in the Board.

Now, basis above decide in which category your case fall in and proceed for NBFC takeover.

Application for the Prior Approval

Make an application to the RBI for the purpose of grant of the aforesaid approval on the letterhead of the company and attaché and detail about the following:

  1. All the information about the Proposed directors/shareholders;
  2. Sources of funds required, which has been used for acquiring shares in the NBFC by the proposed shareholders;
  3. A declaration stating their non-association with any entity which has been denied a Certificate of Registration by the RBI[1] by all the proposed directors/shareholders;
  4. A declaration, statement, affidavit Non-criminal background as well as non-conviction under section 138 of the Negotiable Instruments Act by all the proposed directors/shareholders;
  5. The  declaration stating their non-association with any entity accepting deposits by all the proposed directors/shareholders;
  6. Bankers’ Report for proposed directors/ shareholders;

Keep in mind the following:

  1. The application for approval shall be submitted to the Regional Office of the Department of Non-Banking Supervision in whose control the Registered Office of the NBFC is located.
  2. To avoid any unforeseen delay in the approval all the queries aroused by the RBI in respect to the takeover of NBFC shall be timely answered.

Post Approval Steps for NBFC takeover:

Step 1: Formulate the Share Purchase Agreement get it duly signed and implement the terms as enumerated in the agreement.

Step 2: The management is required to be handed over.

Step 3: Pay up the remaining consideration if any, it shall be paid off within 31 days of the public notice in the newspaper or as mutually agreed upon by all the parties.

Step 4: The assets of the target company appearing in the balance sheet are required to be liquidated and liabilities shall be paid off.

Step 5: Calculate the net worth of the company as on the date of the takeover of NBFC for the new start.

Publication of Public Notice: (After)

Once the RBI approval has been obtained publish the Public Notice in two regional languages of which one should be English and other in vernacular language after 30 days of such approval from RBI and wait for objections, resolve those if any, before taking any further steps.

Publication of Public notice: (Before)

However, before 30 days of entering into an agreement to purchase share/transfer of shares/transfer of management or such interest for the takeover of NBFC, publish the Public Notice in two regional languages of which one should be English and other in vernacular language.

The Public Notice must indicate the following:

  1. The Intention to sell or transfer the ownership/ control;
  2. The particulars of the transferee and transferor;

Prescrutiny/Checklist before Takeover of NBFC:

Well, even before you initiate the NBFC takeover procedure, do conform to the following:

  1. Check the legal authenticity of all the documents to be submitted to the RBI previously and to such other authorities
  2. Pre Scrutinise all the previous records, such as indebtedness if any, last 3 year financial statements, cases pending against the company, legal suit pending against the company if any etc and any such other details which could impact the decision of takeover of NBFC.
  3. Inspect all such important documents such as incorporation certificate, VAT, GST; all other such registrations availed at the time of incorporation or during the ongoing tenure of the company.
  4. Check the KYC about the directors, promoters, investors added and at present working in the company.
NOTE: – While you gather the information about the company and verify it, you can simultaneously proceed and execute a formal memorandum of understanding agreement, get it signed along with the certain token of money.

Issuance of the NBFC takeover certificate:

On successful submission of the NBFC Takeover application the Regional Office of the Department of Non-Banking Supervision shall scrutinize the application and if all documents are proper the takeover of NBFC will be approved otherwise if any query found, the notice shall be served and accordingly reply has to be filed.

It takes around 3-4 month by the authorities to scrutinize the application; however, it undergoes a stringent compliance check. It is highly recommended to consult any consultancy which is highly expert in dealings with the RBI for NBFC takeover, and having an expert hand on it.

Swarit advisors have recently advised on the takeover of two listed NBFCs, which are the two most significant transactions in the span of last 6 months. NBFC takeover is well defined long process wherein the properly planned approach is a must adhering to the compliances and conforming to the rules and regulations pursuant to the applicable laws. Hence it requires a clear roadmap beforehand with respect to the takeover of NBFC. Only an NBFC which has obtained the NBFC registration under the RBI Act can acquire the control of another NBFC.  

FDI norms liberalized in the takeover of NBFC:

The Government in 2016 liberalized the foreign direct investment (FDI) norms and allowed for 100% FDI under the automatic route in regulated financial services activities. The minimum capitalization norms have also been removed for FDI in NBFCs.

The RBI has eliminated certain exemptions to Government-owned NBFCs with respect to compliance pertaining to the capital adequacy, corporate governance.


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