When individuals having common economic, social, and cultural interests voluntarily come together to form an association, it turns into the establishment of a co-operative society. The central motive of co-operative...
Non-Banking Financial Companies have emerged as an alternative for banks in terms of raising funds for individuals as well as businesses. NBFCs also deploy funds to MSMEs in India. These have become an important part of the vast financial industry in India.
These companies are the financial institution that neither hold Banking License nor they are governed by the National Banking Laws that are applicable on Banks and other financial institutions.
Due Diligence of Non-Banking Financial Companies
Due-Diligence is a process of Investigation, Enquiry, Inspection, and perusing various functions an entity thoroughly. It involves looking into the legal, financial & commercial aspects of an organization. Due Diligence is done by prospective buyers and investors before making an investment or entering into any contract to get a fair idea about the Company & to make informed decisions.
Due Diligence is a complete examination & appraisal assets & liabilities for discovering the Commercial value of an entity. The investors or buyers need to get a fair idea about an entity to confirm that their decision of investing or buying is correct & their money is in safe hands.
Due-Diligence is done by comparing an entity with similar organizations prevailing in the same market conditions. Due-Diligence is done based on the market & industry of which an organization is a part.
Types of Due-Diligence
An investor who is investing money in NBFC would like to know whether it is safe to invest in a particular organization. To be assured about an entity, the following types of diligence are undertaken by an investor:
- Legal Due Diligence
- Financial Due Diligence
- Commercial Due Diligence
- Miscellaneous Due Diligence
Legal Due Diligence
Under this, all the legal aspects & transactions of an entity are scrutinized. Following matters are considered primarily for legal due-diligence:
- Contracts entered into by the company
- Property acquired or sold
- Loans or any other form of credit availed
- Pending litigations or cases against the company or by the NBFC
- Cases relating to employment & the whole legal structure
- Registration of NBFC is as per the applicable laws
- Compliance with various mandatory compliances such as maintenance of books, filing of the return, etc.
- Status of assets & liabilities in terms of legal aspects
Financial Due Diligence
This due diligence includes an examination of the financial aspects of NBFCs such as:
- Accuracy of books of accounts maintained
- Cash flow statement of an entity
- Inspection of its assets & liability as per its Balance Sheet
- The credibility of the company
- Financial soundness & structure of the company
- Debts-Equity Ratio of the company
Commercial Due Diligence
This evaluation involves the analysis of NBFC as a part of the market in which it operates. It includes the following analysis such as:
- Comparison of NBFCs with the competitors who are operating in the same market conditions
- Analysis of the Goodwill of the NBFCs
- The expectation level of growth of NBFCs.
- Evaluation of marketing, advertising & sales strategies made by the NBFC under review & comparing the same with the business entity that is operating in the same market conditions.
- Reviewing the relationship framed by the NBFCs with its customer.
Miscellaneous due diligence
This due diligence includes the analysis of various other aspects those not covered above such as:
- Analysis of Taxation of NBFCs
- Review of matters related to Intellectual Property Rights
- Analysis of IT systems
- Management & its hierarchy
- Channels for communication in the organziation
Key-Points to be Checked for due diligence of NBFCs
A detailed checklist of the matters to be minutely audited & inspected while undergoing due diligence of NBFCs is mentioned below:
- Registered with Financial Intelligence Unit of India (FIU-IND): NBFCs have to get registered with FIU-IND on a compulsory basis. Financial Intelligence Unit is the central national agency that keeps the record of receiving, processing, analyzing information that’s related to any suspected financial transaction.
- Auditor Report: RBI vide its circular in 2008 made it compulsory for the company to give the auditor report & Statutory Auditor Certificate to all its directors.
- CIC Membership: NBFC has to obtain the membership of Credit Information Company. CIC is an independent third party organization whose main activity is to collect the financial information concerning loans, credit cards, etc. and share the same with its members. Banks, NBFCs are the customers of Credit Information Company.
- Reserve Creation: As per section 45-IC of Reserve Bank of India Act, every NBFCs have to create a Statutory Reserve at the rate of 20% of its annual profit.
- Public Notice: As per the RBI guidelines, if there is any change in control of NBFC, it has to publish a notice pertaining to the same. Releasing a public notice for change in control is a mandatory requirement for NBFCs.
- KYC documents: Obtain all the KYC documents of Directors, Promoters, and Investors especially big investors along with Corporate Accounts of the entity.
- Financial evaluation: Inspect the previous financial statements of the NBFC, at least for the preceding three financial years to get an idea about the indebtedness and financial standing of the entity.
- Compliances: It should be checked whether the concerned NBFC is properly complying with the provisions of the Companies Act, regulations of RBI, notifications issued by RBI from time to time and other related compliances. .
- Investments: All the investments made by NBFC such as FDI, overseas investments, etc.as well as investments made by the investors on the NBFC along with all the borrowings of NBFC from its promoters, should be duly inspected and examined.
- Legal Evaluation: An investor should evaluate the legal agreements executed by the NBFC. It is always advisable to check and confirm the legal ownership of the concerned NBFC, along with all the charges, mortgages or any encumbrance that might be there on its property.
- Insurance: Evaluate whether any insurance applies to the NBFC and whether such insurance has been taken.
- Human Resources: Check whether proper Human Resource Policies have been implemented and that the NBFC is compliant in terms of EPF, ESI and other applicable labor laws.
Inspection of Documents
Following documents are inspected for its legality & authenticity in the course of due diligence:
- Certificate of Incorporation issued by ROC
- VAT registration certificate
- GST registration certificate
- Company’s PAN & TAN
- All the documents that are required to be submitted before RBI, MCA or any other regulatory authority.
- Check the necessary documents that are required to be maintained by NBFC as a part of its statutory requirement for ongoing business:
- Minutes of Board Resolutions passed by the Company
- Minutes of other meetings such as EGM, AGM, etc
- Statutory Auditor Report that is prepared by NBFC.
- Financial statements indicating the total net worth of the Company.
As discussed above, NBFCs are financial institutions that operate as an alternative to banks and provide credit facilities, loans, investments, retirement planning, etc., to individuals as well as organizations. NBFCs are constantly emerging in the financial industry since they have come up as alternative sources of procuring finance. There contribution to the Indian GDP is huge and they are gradually becoming an integral part of the Indian financial market.
To get information on incorporation of NBFCS or performing due diligence on any NBFC, contact us.