Tips to Avoid Mistakes in NBFC for Sale in India

Several financial entities who failed to obtain an NBFC license have got a perfect get through in the form of NBFC sale. It is a simple process of purchasing some existing NBFC. Reportedly, the procedure of NBFC sale is more efficient and cost-effective as compared to NBFC registration. It renders an extensive range of services to buyer or acquirer for NBFC sale in India.

Moreover, there are various non-deposit accepting NBFCs which are available for purchase. If you seek to acquire an NBFC, it is essential to evaluate the assets and liabilities that will fall in your lap. This blog will enlighten you with the ways to avoid common mistakes in the process of NBFC sale.

Companies involved in NBFC for Sale

Principally, to commence the sale and purchase of NBFC requires the involvement of two companies:

The Target Company– It is the type of company which fits well to needs of the acquirer. In other words, it is the target of the acquirer company.

The Acquirer Company- It is the type of company which is ready to purchase the target company.

What are the ways of an NBFC Takeover?

An acquirer has the option to choose either a friendly mode or a hostile one. Have a look at the ways of NBFC sale in India:

Friendly Takeover- A friendly NBFC takeover is the one when both the target and acquirer companies have their mutual consent. In such a case, the Acquirer Company gives an offer to the Target Company to get acquired, and the target company accepts the offer willingly.

Hostile Takeover-It is that takeover where in, the Acquirer Company directly goes to the shareholder of the Target Company or fights to replace management to get approval for the acquisition. Further, the Target Company does not consent to accept the offer of the acquirer.

Procedure of NBFC for Sale in India

RBI has eased the process of NBFC takeover. Follow these simple steps to purchase a company:

• Sign Memorandum of Understanding
  The foremost step in the acquisition or sale of NBFC is to sign the MOU as it confirms that both acquirer and target companies are on a common line of action. After signing MOU, the Acquirer Company gives the token money to the Target Company. Also, it shall specify the requirements of each party.

• Prepare Important Documents
  Subsequent to MOU^[1], the acquirer has to frame documents like Business Plan, Projection, and KYC for three years concerning the incoming directors. Submit the prepared documents to the RBI.

• Issue a Public Notice
  After obtaining RBI approval letter; issue a public notice in two newspapers within 30 days of approval. The notice will indicate the change of management and invite objections from the public or other interested parties if any.

• Signing of Share Purchase Agreement
  Once the notice in the newspaper exceeds 31st days, the acquirer shall sign the share transfer agreement. The agreement will showcase the payment of remaining considerations and change of management.

• No Objection Certificate from Creditors
  The Target Company shall procure a NOC from its creditors before the Acquirer Company take over his business.

• Transferring Assets
  In addition to NOC, the transfer of assets shall take place. However, the transfer should not violate any clause of the agreement of NBFC sale in India.

• Valuation of the Target Company
  The assessment of the target entity will be done as per the rules of the Reserve Bank of India. The acquirer shall adopt the technique of Discounted Cash Flow (DCF) Method for valuation. It will represent the net present value of the Target Company. Further, after evaluation, the acquirer shall obtain the certificate from Chartered Accountant which briefs the method adopted for valuation.

• Send Application to the Regional Office
  Lastly, the newly formed NBFC shall submit an application to the Regional Office of the RBI. The application will be on behalf of the Company’s letterhead. Likewise, the acquirer has to intimate RBI continuously if there occur any changes in the management of the NBFC after the takeover.

Key Tips to mitigate mistakes during NBFC Sale in India

Here are the few things which you need to keep in mind before NBFC takeover:

• Get an approval of RBI if these conditions apply  
  • Whether there is a change in the management or not after sale.
  • If there is any change in the shareholding that result in at least 26% in sale and purchase of paid-up capital.
  • In case of transfer of shareholding for more than 10% than the prior approval during the sale.

• Any acquirer who intends to purchase an NBFC will undertake due diligence. Generally, the due diligence which the buyer undertakes is of four types, including, Legal Due Diligence, Financial Due Diligence, Commercial Due Diligence, and Other (Miscellaneous) Due Diligence. So make sure you perform a comprehensive assessment of the Target Company.
• Regardless of assets transfer, apprehend that all the assets in the Target Company’s balance sheet will get liquidated. Moreover, the liabilities will also get paid off.
• The acquirer will receive a clean bank balance in the name of his new company which will get reckoned as the net worth on the date of takeover.
• Note that the period for obtaining the RBI approval for the change in management shall take about 3 to 4 months.
• Prior approval of RBI is not needed in case:
  • When shareholding goes beyond 26% because of the reduction in capital or buyback of shares.
  • Change in the management by rotation of the Board of Directors or by 30% inclusive of Independent Directors.

Conclusion