NBFC for Sale in India
- Assets Valuation
- Follow-ups with RBI
- Application for Change in Management
- Underwriting and Risk Assessment Model Assistance
- Advisory on Compliances with Multiple Laws
NBFC or Non-Banking Financial Company is a company registered under the Companies Act, 1956 or 2013, and regulated by RBI. NBFC license is provided to a company engaged in activities very similar to the bank with some points of differences.
The principal business of NBFCs must be to provide loans, personal loans, working capital loans, leasing, insurance business, shared investments, other stocks, and debenture issued by the Government or the other local authorities. They may also provide the Market Place Lending Platform (P2P) for enterprises. They are known to render financial services and support to businesses and individuals.
Basically, NBFCs can be engaged in:
- The business of loans and advances
- Acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature,
- Insurance business
- Chit business
but cannot be engaged in business activities of:
- Agriculture activity
- Industrial activity
- Purchase or sale of any goods (excluding securities)
- Providing any services concerned with the sale/purchase/construction of immovable property.
NBFC Sale in India
In the financial sector all over the world, businesses are being sold, bought, taken over, merged, or collaborated. The number of banks that existed 8-10 years ago has reduced by around 30-40%, if not more. The smaller ones being taken over by the bigger ones or merged into another similar segmented one. The same is the case of NBFCs, which are also coming under the impact of these compromises and arrangements. Reserve Bank of India (RBI) has laid down the procedure to be followed, for all these buying, selling, and other dealings. NBFC for sale means that an NBFC is being sold to another company in India. Only a registered company can be sold an NBFC as per RBI provisions.
The sale of an NBFC serves to merge two companies into one. In such a case, the balance sheet of the seller company has to stand null and void to be able to transfer all its assets and liabilities to the buyer.
For the sale of your NBFC, you need a buyer company or an Acquirer Company. Your company or NBFC which is on sale is referred to as the Target Company.
Process of NBFC Sale
The complete process of sale and getting RBI approval for the change in management of the NBFC takes at least 2-3 months. Hence, you must examine the credentials of Acquirer Company whether it will be able to hold on during this period or not.
- The first step required for the sale of NBFC in India is that the Board of Directors of both, the Target and the Acquirer companies, are in favor of this sale.
- Once the Board has approved of the sale, you are to share with the Acquirer Company, the documents related to the business and administration. Once they confirm of buying and give you the go-ahead with closing down, an MOU (Memorandum of Understanding) will be signed by both of you. On this, you must take some token money as confirmation of buying, from the Acquirer
- Now you need to get KYC Documents, Business Plan and Projection prepared for the next 5-years for the Directors of the Acquirer.
- These documents would be submitted to the regional office of RBI nearest to the registered office of the company.
- Responding to all queries raised by RBI regarding the sale by answering them.
- Once the sale has been approved by RBI, a public notice is to be published. As per the guidelines, this must be published in one national daily and one local vernacular daily newspaper. It is to inform the general public that a change in management is forth-coming and invite objections, if any, from the public or some other party involved.
- After the 31 days have passed of the newspaper notice, both companies can sign the Share Purchase Agreement. The management etc. will be handed over. Along with receiving the balance payment. The day can be decided between you and the Acquirer, before-hand.
- Further, as per RBI regulations, all assets as shown in your balance sheet are to be liquidated and liabilities are to be paid off. So that the Acquirer gets a tidy bank balance in the name of your NBFC. And, thus, will help in calculating the net worth as on the date of sale. RBI has also set the method to determine this net worth.
Process to take RBI Approval for NBFC Sale in India
Sale, purchase, takeover, or making certain changes in the Board of Directors of an NBFC requires prior approval of RBI. All documents to be submitted to RBI must be filed with a mutual understanding of the Acquirer Company.
- Application, on the letterhead of the Company, is to be submitted to the regional office of RBI having jurisdiction. Along with a cover letter.
- Detailed information about the proposed Directors/shareholder members is to be enclosed with the application.
- Declaration by the proposed Directors/shareholders stating that they are not involved with any other entity which is engaged in the business of loans and accepting deposits, but is not registered with RBI.
- Statement by the proposed Directors/members that they are not involved with any such company, whose application for CoR (Certificate of Registration) was rejected by RBI.
- Declaration of the proposed Directors/shareholders that there is no criminal case, against them, including any offense u/s 138 of the Negotiable Instruments Act. Whether pending or convicted.
- The sources from where the Acquirer is arranging the funds are required to purchase your NBFC.
- Banker’s Report on the proposed Directors/members.
- Financial Statements and Annual Report for all the years your NBFC has been existing or the last three years, whichever is more.
- Other than the above, a public notice is to be given, either individually or jointly by the parties. At least 30 days before actualizing the sale of, or transfer of the ownership. Whether it is being done by the sale of shares, or transfer of control. This notice is to be published in a national daily and a local daily newspaper both.
When the above-mentioned steps have been taken, the application is to be submitted to the Regional Office of the Department of Non-Banking Supervision (DNBS), under whose region your registered NBFC office is located. RBI may enquire about points mentioned in the application or ask for some explanations before approving. All these must be replied to and clarified, well in time, to avoid any unnecessary delay for RBI to process your application.
Do You Need Prior Approval from RBI?
The proposed sale of your NBFC may require both parties to obtain prior approval from the RBI before initiating the process of the sale. This approval is required in specific cases only, as mentioned in RBI’s provisions for NBFCs.
It is necessary to take prior approval if any of the below conditions are being met. Moreover, if the required documents are not submitted for approval, on time, the application shall be considered null and the transaction will be considered canceled.
- Whenever an NBFC is sold/acquired/bought/taken-over, whether any changes in management occur or not.
- There are changes in the shareholding, resulting in at least 26% acquisition or transfer of the paid-up equity capital of NBFCs. This may have happened over time.
**Except when the buyback of the shares or reduction in the capital has been approved by a judicial body.
- When over 30% of the Directors have been replaced or the management has seen alterations.
**This 30% is excluding Independent Directors. If the change is due to a rotation of Directors, approval from RBI is not required.
How to Give Prior Public Notice about Changes
After getting RBI’s approval for initiating the sale, a public notice is to be given in one leading national and one leading local vernacular newspaper. The notice must be published at least 30 days before the date of actual sale agreed upon. The notice must mention that such a sale of shares, or transfer of control, is about to take place. Giving enough time for the public to object if any.
- The public notice is to be issued at least 30 days before the planned date when the actual sale or transfer of the ownership is to take place. Whether by the sale of shares, or transfer of control (whether with or without the sale of shares). Such public notice is to be given by all the parties concerned, either together or separately. After receiving prior approval of the RBI, for initiating the process.
- The plan of the NBFC sale or transfer of control in India. Details about your NBFC and the reasons for this transaction must be indicated clearly in the public notice.
- The notice shall be published in at least one leading daily national newspaper and another leading local language daily newspaper of the place of registered office.
Share Purchase & Transfer
At the time of NBFC sale in India, an essential requirement is signing the Share Purchase Agreement. The Share Purchase agreement is to be signed by both, the seller and the Acquirer, after the public notice of NBFC sale has been published. The liabilities of your NBFC will be paid off and the assets discharged in the balance sheet. The buyer gets only a clean bank balance, calculated as per the net worth as on the date of the sale.
This agreement is a deal between two businesses. A consent by you to sell a specific number of shares of your NBFC to the Acquirer at an estimated price. This agreement makes sure the conditions of the contract are agreed upon by both parties. It mentions the consideration and the sum of shares to be sold, any terms and conditions (for example, the approvals required), and an understanding by the parties. The portion of the share capital will be allocated depending on the terms in the agreement.
If some consideration is remaining to be paid by the Acquirer, it shall be paid off within 31 days of the public notice in the newspaper or as mutually accepted by all the parties.
Q. What is an NBFC?
NBFC, also known as Non-Banking Financial Company, is a company incorporated under the Indian Companies Act. Additionally, it is governed and needs to be registered under RBI. It provides finance, loans, and advances to the public. An NBFC can be in the business of acquiring shares, stocks, bonds, debentures, and securities from the Government as well as the local authorities or some other marketable securities. Its primary activity may be hire-purchase, leasing, insurance business, chit fund business. However, it should not be involved in agriculture activity, industrial activity, purchase or sale of any goods (other than securities), or providing any services and sale/purchase/construction of the immovable property.
An NBFC accepts deposits, in lump sum or installments, under different plans. Through its activities are similar to banks, yet there are differences between the 2 types of entities.
Q. What are is required for NBFC registration with RBI?
1. It should be a company established u/s 3 of the Companies Act, 1956 or 2013,
2. It should have a minimum NOF of Rs. 200 lakh. (The minimum NOF required for specialized NBFCs like NBFC-MFIs, NBFC-Factors, and CICs is different).
Q. What are the types of NBFCs?
1. Investment & Credit Company (NBFC-ICC): A company with the principal activity of Asset Finance (NBFC-AFC: financing physical assets), Loan Companies (NBFC-LC: providing finance and advances for activities other than asset financing), and Investment Companies (NBFC-IC: involved in the acquisition of securities). These 3 earlier categories of NBFCs were merged by RBI into this single type.
2. Infrastructure Finance Company (NBFC-IFC): Such entities are engaged in providing loans for infrastructure development, as their principal business. Minimum 75% of their total assets have to be invested in such loans.
3. Infrastructure debt Fund (NBFC-IDF): IDFs ensure the flow of long term finance into infrastructure projects. They raise funds by the issue of Rupee or Dollar denominated bonds that must have a maturity of at least 5-year. Only an IFC can sponsor IDFs.
4. Mortgage Guarantee Company (NBFC-MGC): At least 90% of the business turnover is mortgage guarantee business or at least 90% of the gross income is from mortgage guarantee business. Their NOF must be minimum Rs. 100 crore.
5. Non-Operative Financial Holding Company (NOFHC): Through these companies, the entities/groups are allowed to set up a new bank, which will hold the bank and all other financial services companies regulated by RBI or other financial sector regulators.
6. Micro-Finance Institutions (NBFC-MFI): The non-deposit taking financial institution with Minimum NOF of Rs.5 crore and above (for the North-Eastern States of India, the limit is Rs. 2 crores). A wide range of services like savings, remittance, credit, insurance, also non-financial services like training, counseling, etc., are covered by MFIs.
7. Factors (NBFC-FACTORS): An NBFC-ND has the principal business of factoring. Its financial assets in the factoring business should make at least 50% of its total assets and its income derived from factoring business should be at least 50% of its gross income.
8. Systematically Important Core Investment Company (NBFC-CIC-ND-SI): Financial institutions involved in the business of acquisition of securities and shares. Holding a minimum of 90% of its total assets in the form of investment in shares and equity. 60% of the total assets shall be compulsorily convertible into equity shares within a period not exceeding 10 years from the date of issue. It can accept public funds but not trade in its investments in shares, debt, or loans in group companies except through block sale for dilution or disinvestment. The asset size must be Rs. 100 crore minimum.
Q. What is the process of NBFC license?
1. Take the hard copies of the application and the documents, that were uploaded online to the Regional Office of RBI.
2. Once the regional office approves the application, it sends it to the Central office of RBI.
3. They examine the application and the documents thoroughly. If all the provisions and regulations u/s 45-I A of RBI Act, 1934 are being complied with then the NBFC certificate will be granted. And a CoR (certificate of registration) issued.
Q. What are the documents required to apply for an NBFC registration?
1. Documents related to the administration of the company.
2. Certificate of Incorporation (CoI) of the Company.
3. MoA and AoA.
4. Address proof of the company.
5. Detailed information about Directors or Partners of the Company.
6. Well-audited accounts of the company for at least the past 3-consecutive years.
7. Board Resolution approving the formation of NBFC.
8. Bank Account having the paid-up equity share capital of minimum Rs. 2 Crore.
9. Latest KYC.
10. Net worth certificate.
11. Clean banker’s report.
12. Other relevant documents on request.
Q. How are NBFCs different from banks?
i. NBFCs cannot take deposits that are repayable on demand and cannot issue cheques drawn on itself,
ii. They don’t form part of the payment and settlement system,
iii. The deposit insurance facility from Deposit Insurance and Credit Guarantee Corporation (DICGC) is not available to depositors of NBFCs.
iv. Banks must maintain minimum reserve ratios such as CRR (cash reserve ratio) or SLR (statutory liquidity ratio), whereas NBFCs do not have any such requirement.
v. NBFCs can accept/renew public deposits for a minimum period of 12 months and a maximum of 60 months. There is no condition for banks.
vi. NBFC can decide on the interest rates on their own. Subject to an upper limit set by RBI. The same is not the case with banks, whose interest rates are set by RBI.
Q. What is meant by “principal business”?
The principal business is when a company’s financial assets constitute more than 50% of the total assets and income from financial assets constitute more than 50% of the gross income. A company fulfilling both these conditions will be registered as NBFC by RBI. This test is popularly known as a 50-50 test.
Q. What if a financial institution does not register with RBI?
If it is found that a financial institution whose principal business is lending, investment, or accepting deposits, that must be registered with RBI as NBFC, does not have such a license, RBI can impose a penalty or fine on them. The company and its members can even be prosecuted in a court of law. Members of the public are encouraged to report such businesses to the nearest Regional Office of the Reserve Bank. So that suitable action can be taken for violation of the provisions of the RBI Act, 1934.
Q. What are the powers of RBI on NBFCs?
RBI is the registration authority for NBFCs. It lays down policy, issues directions, monitors, governs, inspects, and exercises surveillance over NBFCs in India. It can sentence NBFCs for breaching the provisions of the RBI Act or the directions issued under it. The penalty can also result in the repeal of the CoR (Certificate of Registration) issued, or ban them from accepting deposits and their assets can be detached or a winding-up petition can be filed.
Q. Does RBI regulate all financial companies?
Q. What are the regulations applicable to ND-NBFCs with asset size of less than Rs. 500 crore?
The provisions are as under:
a) They shall not be subject to any statutes, either prudential or conduct of business regulations. These are the Fair Practices Code, KYC, etc., if they have not accessed any public funds and do not have a customer interface.
b) Those with a customer interface are subject to only conduct of business regulations including FPC, KYC, etc., if they are not accessing public funds.
c) If public funds are accepted, NBFCs will be subjected to limited prudential regulations but not conduct of business regulations if they do not have a customer interface.
d) When both public funds are accepted and the customer interface is there, those companies are subject to both the limited prudential regulations and the conduct of business regulations.subject to both the limited prudential regulations and the conduct of business regulations.
Q. What is meant by NOF?
First, let’s understand the meaning of “Owned Funds”. It means the aggregate of the paid-up equity capital, preference shares which are compulsorily convertible into equity, free reserves, and balance in share premium account and capital reserves representing surplus arising out of sale proceeds of assets. Exclude reserves created by revaluation of assets. Now, deduct the accumulated balance of loss, deferred revenue expenditure, and other intangible assets. NOF or “Net Owned Fund” is determined after deducting from the above amount, the number of investments of such company in shares of its subsidiaries, companies in the same group, and all other NBFCs. And the book value of bonds, debentures, outstanding loans, or advances including hire purchase and lease finance made to and deposits with subsidiaries and companies in the same group. To the extent, it is more than 10% of the owned fund.
Q. What does the term public funds mean? Is it the same as public deposits?
Q. What compliances are required by the NBFCs?
I. Returns to be submitted by NBFC-Deposit Accepting are:
1. NBS-1 Quarterly returns on deposits in First Schedule.
2. NBS-2 Quarterly returns on Prudential Norms.
3. NBS-3 Quarterly returns on Liquid Assets.
4. NBS-4 Annual returns of critical parameters by a rejected company holding public deposits.
5. NBS-6 Monthly returns on exposure to capital market institutions with total assets of Rs. 100 crore and above.
6. Half-yearly ALM returns with companies having public deposits of over Rs. 20 crore or asset size of over Rs. 100 crore
7. Audited Balance sheet and Auditor’s Report.
8. Branch Info Returns.
II. Returns to be submitted by NBFCs-ND-SI
1. NBS-7 Quarterly statement of capital funds, risk-weighted assets, risk asset ratio, etc.
2. Monthly Returns on Important Financial Parameters.
3. ALM returns:
a) Monthly statement of short term dynamic liquidity in format ALM [NBS-ALM1],
b) Half-yearly statement of structural liquidity in format ALM [NBS-ALM2],
c) Half-yearly Statement of Interest Rate Sensitivity in format ALM -[NBS-ALM3].
4. Branch Info returns.
5. Quarterly returns on important financial values & basic information like name of the company, address, NOF, profit/loss during the last 3-years of NBFC-NDs with assets between Rs. 50 crore and Rs. 100 crore.ith assets between Rs. 50 crore and Rs. 100 crore.
Q. What is RNBC?
RNBD or Residuary Non-Banking Company is a class of NBFC which is a company and has the principal business of receiving of deposits, under any scheme or arrangement or some other manner and not being an Investment, Asset Financing, or Loan Company. They are required to maintain investments and liquid assets as per the regulations of RBI. Their functioning is different from those of NBFCs in terms of the method of mobilization of deposits and requirement of deployment of depositor’s funds as per Directions. Besides, Prudential Norms Directions apply to them also.
Q. Can all NBFCs accept deposits?
Q. NBFC can accept a deposit for what duration?
NBFCs can accept/renew public deposits for a minimum of 12 months and a maximum of 60 months. They cannot accept demand deposits or deposits that are payable on demand.