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The Consequences of Taking over an NBFC
Dashmeet Kaur
| Updated: Apr 24, 2020 | Category: RBI Advisory

The Consequences of Taking over an NBFC

NBFCs are financial institutions that are registered under the Companies Act, 2013, and regulated under Section 45-I of the Reserve Bank of India Act, 1934. Such entities carry the business of loans and advances, acquisition of shares, stock/ bonds/ securities/ debentures issued by Government or local authorities. NBFCs cater to the needs of weaker sections, thereby stabilizing the economy. The principal mode of commencing an NBFC business is to get an NBFC License. However, its procedure is much complicated, and several financial entities fail to attain it. Thus, RBI provides an ideal get through in the form of NBFC Takeover. This write-up will unfold the advantages and disadvantages of Taking over an NBFC.

An insight into NBFC Takeover in India

NBFC can be incorporated either by registration or through taking over an existing NBFC. The Reserve Bank of India has loosened the reigns of provisions to takeover an NBFC, which has made the process much feasible. With minimal regulations and right legal assistance, it only takes about 45 to 60 working days to acquire an NBFC.

Mergers, Amalgamation, and Takeover are a potent means of business expansion. The concept of NBFC Takeover is a recent corporate style that helps budding entrepreneurs to establish the Non-Banking Financial Company. In simple terms, it refers to the purchase of one NBFC by the other company.

The primal step to takeover an NBFC is to take RBI approval. In some cases, RBI approval is required to be taken beforehand, while in the other cases, no such prior approval is required.

Conditions under which RBI prior approval is mandatory

A company must take prior approval from the RBI under the following cases:

  • If the NBFC takeover or acquisition of control may or may not results in the change in management.
  • Any change in the shareholding of an NBFC that results in a 26% acquisition or transfer of the paid-up capital.
  • When the takeover of a listed NBFC is required to be done.
  • When the takeover leads to a change in management, which results in a change of 30% number of directors. However, if any change incurs by the change in independent director or due to the rotation directors, then no approval is required.

Advantages and Disadvantages of NBFC Takeover

An acquirer company can yield several benefits by purchasing an NBFC, but it does have some drawbacks as well. Let’s take a look at the pros and cons of NBFC Takeover, individually.

Pros of taking over an NBFC

  • Increase in profitability of the target company
  • Decrease in competition
  • Increases sales or generate more revenue
  • Enlargement of the distribution network
  • Economies of scale

Cons of taking over an NBFC

  • The takeover amount paid is often less than the actual value of the company
  • There is more scope of conflicts in new management
  • Cultural clashes can arise amidst both the target and acquirer company
  • Sometimes it may reduce employee’s morale
  • The acquirer company may have to bear any hidden liabilities of the target company.

Checklist of documents required to Takeover an NBFC

Any company that seeks to avail the advantages of NBFC Takeover must file an application on the letterhead of the company to get RBI approval affixed with these set of documents:

  • Complete details of the proposed directors or shareholders;
  • Sources of funds deployed for acquiring shares in the target NBFC by the proposed shareholders;
  • Declaration by all the proposed directors/shareholders that states their non-association with any entity that has been denied of Certificate of Registration;
  • A statement, affidavit or declaration by all the proposed directors/shareholders that proves their non-criminal background and non-conviction under Section 138 of the Negotiable Instruments Act;
  • All  proposed directors or shareholders must provide a statement stating their non-corporation with any entity that accept deposits;
  • The Bankers’ Report of all the proposed directors or shareholders;
Note- The application shall be submitted to the Regional Office of the Department of Non-Banking Supervision in whose jurisdiction the Registered Office of the NBFC is located. Thereafter, the application goes under a processing, wherein the RBI raises various queries to validate the provided information. To avoid any further delay in the approval, one must timely address to all the queries aroused by the RBI.

Prerequisites for takeover of an NBFC

Before initiating the NBFC Takeover process, it is essential to ensure the following things:

  • Check on the authenticity of documents to be submitted with the application to RBI or other authorities.
  • Scrutinize all the records, such as financial statements of the last 3 years, legal suits or pending cases against the company, indebtedness (if any), etc. Also, inspect other details that could impact your decision of NBFC Takeover.
  • Assess all important documents like VAT, incorporation certificate, GST, and other such registrations made at the time of the company’s incorporation or during the tenure period.
  • Pre-check the KYC about the proposed and current promoters, investors, directors of the company.

While you accumulate and verify all the documents, it is indispensable to propose a formal Memorandum of Understanding Agreement to the target company. MOU must be signed by the directors of both acquirer and target companies. It must signify the fundamental responsibilities and requirements of each company. The acquirer company must pay the token amount to the target company while signing of MOU.

Step by Step procedure of NBFC Takeover

After perceiving the advantages and disadvantages of NBFC Takeover, you must be eager to take over an NBFC. To streamline the procedure, follow these simple steps:

  • Step 1- Call up a Board Meeting

Once Memorandum of Understanding is signed, both companies shall summon a Board Meeting for the following purposes:

  • Reply to the queries of RBI that may be raised in regard to the approval of the application.
  • Fix the time, date, and place to convene the Extra Ordinary General Meeting.
  • Pass the resolution of EGM.
  • Step 2- Public Notice

After obtaining the RBI approval, a Public Notice needs to be published in two newspapers within 30 days to invite any public objection regarding the NBFC Takeover. Thereon, resolve such objection (if any), before proceeding further. Public Notice must indicate:

  •  Intention to transfer or sell the ownership/ control;
  • The particulars of the transferor and transferee
  • Step 3- Share Transfer Agreement

At the expiry of the 31st day of publishing the public notice, both acquirer and target companies shall sign a Share Transfer Agreement. During signing, the balance consideration amount shall be paid by the acquirer to the target company.

  • Step 4- No Objection Certificate from the Creditors

Before transferring the business to the acquirer company, the target company must get a NOC from their creditors.

  • Step 5-Transferring of Assets

If no creditor raises an objection in regards to the NBFC Takeover, the assets shall be transferred from the target company to the acquirer company as approved by the RBI. However, the transfer must not contravene any clause of the Share Transfer Agreement.

  • Step 6- Evaluation of the entity as per RBI provisions

The Reserve Bank of India has laid rules for evaluation of the company. One such technique adopted to reckon company’s cost is Discounted Cash Flow. Thereby, the Chartered Accountant shall acquire a certificate briefing the method used for valuation.

  • Step 7- Notice to the Regional Office

After done with valuation and other prerequisites, the acquirer NBFC shall submit an application on the letterhead of the company to the concerned Regional Office of RBI. If any changes in the management are made post-takeover, then it should be intimated to the RBI.

The application made to Regional Office of RBI must include:

  • Sources of funds of the Acquirer Company.
  • Information about the proposed shareholders and directors.
  • Declaration by all the proposed directors and shareholders of their non-association with any entity accepting deposits.
  • Statement by all the proposed Directors and shareholders, which proves that no criminal proceedings were initiated against them in the past or are pending in any jurisdiction.

Subsequently, all the assets under the Balance Sheet of the target company shall be liquidated and their liabilities shall be paid off. The acquirer company shall then receive the balance of the target company’s bank account. The balance shall be calculated based on the net worth, as on the date of the NBFC Takeover.

  • Step 8- Issuance of the NBFC Takeover Certificate

On successful submission application to the Regional Office, the RBI shall scrutinize the application. When all documents are true and valid, the takeover of NBFC shall be approved. In case RBI raises a query through a notice and the newly formed NBFC needs to file a reply accordingly.

Conclusion

There are both advantages and disadvantages of NBFC Takeover; however, one can say that the benefit side is much more than the downside. The repercussions of taking over an NBFC are extensive resources and increased revenue.

RBI authorities scrutinize the application within a timeframe of 3 to 4 months. The application undergoes a stringent compliance check. Therefore, it is recommended to seek a reputed consultancy like Swarit Advisors. We hold expertise in dealings with the regulatory body of RBI for the matters of NBFC Takeover or NBFC Registration.

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Dashmeet Kaur

Dashmeet Kaur is an experienced content writer, having proficiency in writing Legitimate content with comprehensive research. She also has a keen eye to detail and incorporating accurate facts.

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