How to Start a NBFC Due Diligence

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Overview of NBFC Due Diligence?

NBFC Due Diligence means an examination or an appraisal of an entity to get an idea of its assets and liabilities so that the commercial value of the entity can be ascertained. It is important, especially from the point of view of investors or purchaser, as they would want to know if it is safe to invest in a particular entity. Due diligence showcases reasonable care on the part of the individual/organization that is looking forward to invest or entering into an agreement with the other party.

NBFC Due diligence is done on the basis of the business market and industry of which the organization is a part. This makes the ascertainment of the actual value of the organization easier as a fair comparison with other organizations in the same market can be made.

What is Non-Banking Financial Companies (NBFC)?

Non-Banking Financial Companies (NBFC) are companies as per Section 45-I of the Reserve Bank of India Act. They are financial entities which do not hold a banking license or are not governed by the national banking laws and regulations. NBFCs are registered under the Companies Act while they are managed and regulated under the Reserve Bank of India. NBFCs have become an integral part of the financial industry now as they have emerged as an alternative to banks in terms of fund generation for individuals as well as businesses. NBFCs also engage in deployment of funds to micro and small-medium sized organizations in India.

NBFC Due Diligence means conducting assessment of the NBFC on various fronts such as financial aspects, legal aspects, business market aspects, operational aspects, etc. It is a detailed process and is undertaken by corporate professional who hold expertise in this matter.

What are the Aspects of Due Diligence of NBFC?

Due diligence of an NBFC would include the assessment of its business activities in order to ascertain its assets and liabilities for estimating its commercial potential.

Any investor planning on making investment in an NBFC would undertake a comprehensive appraisal of the same to be assured of the decision of investment on every aspect. The due diligence that the investors undertakes is of four types:

  • Legal Due Diligence

    This involves the scrutiny of the legal basis of all the transactions of the NBFC which includes contracts, property, loans, impending litigations and cases, employment and overall legal structure. It would take into consideration the following matters:

  1. If the NBFC has been incorporated correctly under the applicable laws;
  2. If the various compliances such as filing of returns, maintenance of accounts, etc. are being made;
  3. If there are any impending cases of the NBFC in a Court of Law;
  4. If legal status of the company in relation to its assets and liabilities;
  5. Such other related legal matters.
  • Financial Due Diligence

    This involves examination of the financial information of the NBFC, which includes information pertaining to the assets, liabilities, debts, cash flow, management, capital, etc. It would mainly include:

  1. Accuracy and genuineness with which the accounts of the company are maintained;
  2. Credibility and creditworthiness of the company;
  3. Overall financial soundness of the company.
  • Commercial Due Diligence

    This involves the evaluation of the NBFC as a unit of the business market of which it is a part. This includes a careful perusal of the competitors, customer relationship, business plan, expected sales, strategies taken by the company, popularity of business, etc. The analysis would include:

  1. How well the NBFC in comparison with its competitors as per the market conditions;
  2. The relationship of the NBFC with its customers;
  3. Goodwill of the NBFC;
  4. Marketing and sales strategies undertaken by the NBFC in a certain period;
  5. Expected chances of growth by the NBFC.
  • Other (Miscellaneous) Due Diligence

    This includes due diligence of other vital components that form part of an NBFC such as Taxation, Intellectual Property, Information Technology System, Organizational Structure of the NBFC, hierarchy system of management, communication channels followed by the organization, etc. It is apparent that due diligence of an NBFC would be a 360-degrees perusal of its performance in all the aspects- legal, financial, commercial and other things related to its working. Due diligence gives the investors a fair idea of where an NBFC stands from different point of views so that they can make a fair judgment on the decision of investment.

Collecting the Relevant Information pertaining to NBFC

It is vital that the information collected in the process of due diligence is reliable and accurate. The source collecting information during due diligence should be dependable as the decision of investment is based on it. The information is mostly gathered from the financials of the company, market data, business news and directors of the company.

The following points should be kept in mind when collecting information of an NBFC:

  • Making a checklist of all kinds of information that is required;
  • Locating the sources from where information can be collected;
  • Appointing professionals to collect complicated information or conducting the entire due diligence process.

Hiring professionals to conduct due diligence is vital since they have the relevant experience in undertaking the process, know how to extract hidden and complicated information, and are well-versed with the authenticity of the information. Hence, professionals can aid in ascertaining that the collected information is correct and a decision can be taken depending on this information.

Legal Regulations to be Checked in NFC Due Diligence

There are certain mandatory legal regulations that the NBFCs are required to comply with. These are:

  • Creation of statutory reserve @20% profit as a compliance with Section 45-IC of the Reserve Bank of India Act
  • Registration of the NBFC with KYC portal
  • Registration with Financial Intelligence Unit- India (FIU-IND)
  • Registration with Information Utility that has been set up under Insolvency and Bankruptcy Code, 2016
  • Appointment of nominated counsel in Delhi High Court
  • Membership of a Credit Information Company
  • Auditor Report to Directors as per Circular DNBS (PD) CC No. 129/03.02.82/2008-09 dated September 23, 2008 (now its 2016) & Statutory Auditor Certificate

Key Matters that form part of NBFC Due Diligence

When due diligence of NBFC as a target company is undertaken, the following information is checked:

  • Corporate Matters
  • Foreign Direct Investment and Overseas Direct Investment
  • Matters related to financing
  • Property held by the NBFC
  • Human Resources of the NBFC
  • Intellectual Property Rights
  • Minutes of the meetings held so far
  • Secretarial Compliances
  • Substantial Agreements
  • Matters related to regulations such as RBI compliance records
  • Litigation
  • Insurance
  • Taxation Compliances

Authenticity of the documents to be Checked

With rampant fraudulent activities in the business world, it is necessary that the authenticity of the key documents of the NBFC is established. If these documents turn out to be fake at a later stage, the investor can be held liable for undertaking business via illegal means, conducting fraudulent activities, etc. These documents include:

  • Certificate of Incorporation of the NBFC
  • VAT Registration
  • GST Registration
  • PAN and TAN
  • All the documents that have been submitted before RBI, MCA and other regulatory bodies that govern NBFCs

It is also important to check other relevant registrations and permissions obtained by the NBFC till the date due diligence is conducted.

The other vital document that the NBFC is supposed to maintain as a part of its ongoing business are:

  • Board Resolutions passed till date of due diligence
  • Minutes of all the meetings held
  • Statutory Auditor Reports
  • the total net worth of the company

Expert Opinion

Due Diligence of an NBFC is a detailed and time-consuming process. Yet, its importance cannot be looked over as one wrong investment decision can make lead to serious repercussions for the investor. Hence, it requires assessment by well qualified professionals who have an eye for minute details and have the relevant experience in conducting such tasks. Professionals certified to conduct due diligence are CA, CS, lawyers, who can prepare a well-formulated Due Diligence Report for the investor touching every aspect of compliance and finance of the NBFC. Our in-house team of professionals can aid you in formulating the Due Diligence Report as well as fetching the appropriate information on which you can base the investment decision.

For any further queries on takeover of NBFC, due diligence of NBFC, collection of relevant information or any assistance on NBFC takeover, contact us.

Frequently Asked Questions

The term “Checklist for NBFC Due Diligence” include Registration, with the FIU-IND, Auditor Report, NBFC Membership, Statutory Reserve Creation, Public Notice, KYC Documents and Registration, Check Legality, Financial Analysis, Status of Legal Matter, Maintenance of Documents, Investment, Legal Agreements, etc.

The different aspects of NBFC Due Diligence are Financial Due Diligence, Commercial Due Diligence, Legal Due Diligence, and others.

The term “Due Diligence of NBFC” denotes the appraisal of the business, particularly to determine its assets and liabilities and to evaluate its commercial potential.

The prospective buyers of an NBFC conducts the process of Due Diligence.

Yes, to take a fair idea of the business and to make an informed decision, an investor can conduct the process of NBFC Due Diligence.

The process of Due diligence is generally being conducted after the seller and buyer have agreed in-principle to a deal, but prior to a binding contract is signed.

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