The Role of Due Diligence of NBFC for Sale

NBFC or Non-Banking Financial Company is a financial entity registered under Section 45-I of Reserve Bank of India Act. It is a perfect alternate of traditional lending institution servings various businesses, like micro and small-sized industries, for deploying funds. Catering the needs of weaker sections of the economy, NBFCs plays a significant part in restoring the financial position of India. When one considers the sale or purchase of an NBFC, it becomes utmost essential to assess its commercial potential. Due diligence of NBFC for sale is an extensive procedure. This blog will enlighten you about the entire subject of NBFC for sale.

Due Diligence of NBFC

In general, due diligence is an investigation that a person conducts before sealing a deal or signing a contract. During the sale of NBFC, a buyer must do thorough research and dig deeper to acquaint with all the functions, market size, and aspects of the concerned NBFC. In this regard, the due diligence of NBFC is a potent tool for appraisal of the business. It specifically helps the buyer to estimate the assets and liabilities that he will possess after purchasing the NBFC.

Types of Due Diligence of NBFC for Sale

Any buyer who intends to purchase an NBFC shall undertake a comprehensive assessment of the same in the form of due diligence. A buyer executes four types of due diligence of NBFC, namely:

Legal Due Diligence: The legal due diligence refers to the scrutiny of a company on a legal basis. Further, it implies to the inspection of the NBFC transactions, including property, contracts, impending litigation, loans, and employment under the legal structure.

Commercial Due Diligence: Before setting up a new company or business, one needs to comprehend its market value. Therefore, while taking hold of an NBFC for sale, the buyer must carefully analyze its business market. The commercial due diligence is a broad term that covers the reviewal of strategies, competitors, business plan, expected sales, relationship with customers, business popularity, and so forth.

Financial Due Diligence: As the name suggests, this due diligence is all about finances. It entails an examination of the financial information of an NBFC. The financial due diligence comprises of information relates to the assets, liabilities, cash flow, debts, capital, management, etc.

Other Due Diligence: The other due diligence is as important as legal, financial and commercial due diligence. It encompasses a quick assessment of various parts of an NBFC such as Intellectual Property, Taxation, Organizational Structure, Information Technology System, communication channels, hierarchy system of management, etc.

Collect the Relevant Information

Your efforts are all in vain if your collected data isn’t correct. So, the information in the process of due diligence must be authentic and reliable. Ensure that when you assess an NBFC for sale, your source of accumulating data is dependable as it can make or break your market stature.

If you want to undertake due diligence, then you need to follow a systematic approach to gathering information. Further, a pre-planned strategy will help to assure that all the relevant legal provisions get compiled within the process. The most credible sources of information of an NBFC are market data, a history of its financials, directors of the company, and business news.

An Ultimate Checklist for Due Diligence

Before purchasing an NBFC for sale, you should double-check on the following things:

• Minutes of the meetings of the NBFC
• Regulatory Matters, especially the compliance with RBI regulations
• Taxation Compliances
• Secretarial Compliance
• Material Agreements
• Litigation
• Corporate Matters
• Foreign Direct Investment
• Human Resource
• Taxation Compliance including Income tax return filed, an estimation of income tax liability by the NBFC, ESI / PF Returns Filed, Service Tax / VAT Returns Filed, and TDS Returns.
• Property
• Verify financing matters like bank statements, valuation of assets and liabilities, cash flow information, and financial statements against transaction details.
• Insurance

Regulations on Due Diligence of NBFC

An NBFC must comply with all the provisions on due diligence under the Reserve Bank of India Act, 1934. Here are some factors that you must look in an NBFC:

Registration with the Financial Information unit of India (FIU-IND): NBFCs must register itself with the FIU—IND. The biggest perk of doing so is that it keeps a record of the financial transactions of that NBFC.

Prepare Auditor Report: As per a circular via RBI introduced in 2008, an NBFC has to formulate the auditor report to the director. The report should be framed in line with the directions as issued in the notification and issue the statutory Auditor certificate.

NBFC Membership: It is indispensable for every Non-Banking Financial Company to acquire registration and membership of Information utility set up under IBC 2016 and Credit Information Company (CIC).

Statutory Reserve Creation: According to Section 45-IC of the RBI Act, an NBFC should create a reserve fund and transfer therein an amount not less than twenty per cent of its total net profit every year. 

Public Notice: Prior to finalizing an NBFC for sale, check whether that NBFC has published a Public Notice in line under the compliances of RBI in regards to 30 Days before the date of the change in control.

KYC Documents and Registration: Lastly, obtain the KYC of big investors, directors, promoters, and KYC status of the concerned NBFC. Since it is mandatory for an NBFC to register under KYC portal, so don’t overlook this aspect.

In case you, you find an ideal NBFC for purchase just verify on these points and make your decision accordingly.

Conclusion