Great Offers for NBFC Takeover

  • Business Plan
  • Careful Market Search
  • Profile Assessment
  • Re-Structuring
  • Change in Object & Name
  • Thorough Probe into Target Company
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NBFC Takeover

You can own an NBFC business in India by either (a) Getting a New Registration with RBI, or (b) Taking-over an existing one.

Starting anything from scratch takes time and effort. Similarly, starting a new NBFC takes approximately 3-5 months of registration process only. On the other hand, acquiring an NBFC takes around 2-3 months. And you save time required to design and formulate the framework of the organization.

The term Takeover of an NBFC means purchasing an existing NBFC by another company or NBFC. The takeover takes place only when both, the Target as well as the Acquirer, are already registered under the Companies Act.

However, the takeover of an NBFC may be on mutually agreed terms, where the seller has put his company on sale. This would be a case of a friendly takeover.

Or it may be deliberately planned by the Acquirer to take control of the other entity. Working without its knowledge. Generally, it takes place when the management of the Target Company is unwilling to accept the offer of the takeover.

In both situations, the balance sheet of the NBFC on sale stands null after all its assets and liabilities are taken over by the acquirer.

Is Prior Approval from RBI Required?

To buy an NBFC, first, check whether the conditions need prior approval from the RBI? Or the transaction of taking the NBFC over is exempt from such approval? RBI has specified certain situations when the Acquirer needs its approval, before initiating the process of buying an NBFC. And for the rest of the cases, no such prior approval is required.

Following situations of NBFCs arrangements have been mentioned as requiring RBI’s approval before proceeding. When required documents have not been submitted, the application shall be considered null and void.

The situations are:

  • Whenever an NBFC is taken-over. Whether any management changes have been made or not.
  • Changes have occurred in the shareholding. When at least 26% of the paid-up equity capital of NBFC has been acquired or transferred. This may have happened over a period of time. 
  • Except a competent court has approved the buyback of the shares or reduction in the capital.
  • The management structure has been modified. By changing more than 30% of the Directors.

30% is excluding Independent Directors. Approval from RBI is not required if the change is due to a rotation of Directors.

To Apply for Prior Approval, You Need

If your NBFC takeover is meeting any of the above circumstances, then you need to apply to RBI for its approval. This application is to be made on the letterhead of the company and the following documents are to be attached:
  1. Sources of funds used for acquiring shares of the Target NBFC by the Acquirer,
  2. Information about the proposed Directors/shareholders, such as their ID proof, Address proof, Education, Qualifications and Experience proof, 
  3. Declaration by all the proposed Directors/shareholders declaring their non-association with any organization that has been denied a Certificate of Registration by the RBI,
  4. Declaration of not having a criminal background and Non-conviction under Section 138 of the Negotiable Instruments Act by all the proposed Directors/shareholders,
  5. Declaration by all the proposed Directors/shareholders affirming their non-association with any entity accepting deposits,
  6. Banker’s Report for the proposed Directors/ shareholders.

Once the above documents are ready, the application is to be submitted to the Regional Office of the DNBS (Department of Non-Banking Supervision), of the district where the Registered Office of the NBFC is located. RBI may pose some queries or ask for clarifications or proofs on points mentioned in the application for approval. All such queries must be answered, well in time, so that your application with RBI doesn’t get delayed.

Generally, approval from RBI takes about 2-3 months, depending on the case.

Prior Public Notice About Changes

On getting the approval from RBI approval for the takeover, a public notice is to be given in one leading national and one leading local newspaper at least 30 days before such sale of shares, or transfer of control, is to take place. Whether it is with or without share transfer.
The stipulations are:

  • Public notice is to be issued at least 30 days before effecting the sale of, or transfer of the ownership by sale of shares, or transfer of control (whether with or without the sale of shares). Such public notice shall be given by the NBFCs and all other parties involved, after obtaining the permission of the RBI.
  • The proposal of selling or transferring ownership or control, the particulars of transferee and the reasons for such sale or transfer, must be indicated clearly in the public notice. 
  • The public must be notified by getting this notice published in at least one leading national newspaper and another leading newspaper in the local language of the place of registered office.

Procedure for NBFC Takeover

On getting the approval from RBI approval for the takeover, a public notice is to be given in one leading national and one leading local newspaper at least 30 days before such sale of shares, or transfer of control, is to take place. Whether it is with or without share transfer.
  • MOU (Memorandum of Understanding): For taking over an NBFC, at first, an MOU is signed with the Target Company. It specifies that both the companies are entering into an agreement of takeover. It is signed by the Directors of both the companies i.e. Acquirer Company and Target Company. At the time of endorsing MOU, token money is handed to the Target Company by the Acquirer. MOU defines the responsibilities and requirements of each party.
  • Convening of Board Meeting: After the MOU has been signed, a Board Meeting shall be convened in both the companies to discuss the following matters;
  1. Date, timing, place of convening Extra Ordinary General Meeting (EGM).
  2. For passing required resolutions to take over an NBFC, in the EGM.
  3. Replying to the queries from RBI about the takeover scheme.
  • Public Notice: After the application for takeover has been approved by the RBI, a public notice to invite any objection of the public on the takeover. This notice is to be published in two leading newspapers within 30 days of such approval.
  • Share Transfer Agreement: After 31 days have been passed of the newspaper notice being published, the Share Transfer Agreement is to be signed and the remaining consideration paid by the acquired company.
  • NOC from Creditors: An NOC (No Objection Certificate) from the creditors of the Target Company is to be taken before the sale of business or transfer of business.
  • Assets Transfer: If no objections have been received and the RBI has approved the takeover then the transfer of assets shall take place. But the transfer should not be in violation of any clause of the agreement.
  • Evaluation: The Target Company gets evaluated. This shall be in accordance with the rules provided by RBI. The approved technique for evaluation is DCF i.e. Discounted Cash Flow Method. This determines the net present value of the entity. Afterward, a certificate shall be obtained by a Chartered Accountant briefing the method adopted for valuation.
  • Notice to Regional Office: Now an application is to be submitted to the Regional Office of RBI. It must be on the letterhead of the company. All changes in the management structure of the NBFC after the takeover is also to be intimated on a continuous basis to RBI. The application contains details about:
  1. ID, address and qualifications of the proposed directors and shareholders.
  2. Shareholders who are acquiring the NBFC and their source of funds.
  3. Declaration by the Directors and the shareholders that they are not associated with any unincorporated entity which is accepting the deposit.
  4. Declaration by the Directors that no criminal proceedings have been initiated against them in the past or are pending against them in any court of law.

Benefits of NBFC Takeover

Taking over an NBFC saves you time that is essential for setting up any new business when compared to getting a new one registered. Besides avoiding the starting troubles faced with erecting a business, below are a few more advantages of an NBFC takeover:
  1. Increase in profitability.
  2. Reduction in competition.
  3. Rise in sales/revenue.
  4. Business expansion with more distribution network and customer base.
  5. Economies of scale.

How NBFCLicenseIndia Helps

RBI has laid down a systematic and step-wise procedure for a NBFCs takeover. All the NBFCs are under strict regulations by the RBI. Therefore, compliances must be completed thoroughly. And if the parties, especially the Acquirer Company is not well-versed with the Target Company as well as all the compliances to be met, it becomes difficult to complete the process successfully.

Buying an NBFC is quite a long process for which a properly planned approach is quite necessary to adhere to the compliances of the applicable laws.

NBFC License India will assist you at all steps of NBFC takeover. Whether it is RBI regulations, accounting, and reporting. We also have listings of NBFCs on sale in the region you want to expand your business to.

You can take our help in:

  • Mergers/Demergers
  • Takeovers
  • Business Re-structuring
  • Contract Drafting
  • Approval for Management Change from RBI
  • Designing Financial Services
  • Marketing Digital Loan Products
  • Meeting RBI Compliance
  • Internal Audit Services

Useful Tips for NBFC Takeover

Before the NBFC takeover procedure is initiated, it is advised you have:

  1. Checked that all the documents that are to be submitted to the RBI and other authorities are genuine legally.
  2. Examined all previous records, such as liabilities, last 3-years financial statements, cases pending against the company (if any), legal suit pending against the company (if any), etc. Or other such details that may affect the decision of NBFC takeover.
  3. Inspected all the important documents such as Certificate of Incorporation (COI), PAN, GST, and other such registrations availed during the ongoing tenure of the company.
  4. Checked the KYC about the Directors, investors, promoters, presently associated with the company.

Frequently Asked Questions

Q. What is NBFC?
An NBFC or Non-Banking Financial Company is a financial institution that facilitates financial services but does not have a full banking license. It refers to:

i. a financial firm that is a company.

ii. a non-banking organization that is a company with the principal business of loan/advances, receiving deposits in some form, etc.

iii. such other organization registered under RBI with prior approval of the government.

NBFCs cater to the regions and clients, belonging to rural and semi-urban areas, not being served by the more organized banking sector. The requirements by NBFCs for customers are flexible to meet their financial needs. NBFCs may specialize in a certain sector and develop a data advantage.

Q. What is required for NBFC registration with RBI?
A firm desiring to start a business of non-banking financial activities as outlined u/s 45 I (a) of the RBI Act, 1934 should:

i. It should be a company recognized as per Section 3 of the Companies Act, 1956 or 2013,

ii. It should have a minimum NOF of Rs. 2 crore. (The minimum NOF required for specialized NBFCs like CICs, NBFC-MFIs, and NBFC-Factors is different).

Q. What is meant by NBFC takeover?
Takeover of an NBFC means buying an existing NBFC by another company or NBFC. The takeover takes place only when both, the Target as well as the Acquirer, are already registered under the Companies Act.

Takeover could be on mutually agreed terms, where the seller has put his company on sale. This is a friendly takeover.

Or it could be deliberately planned by the Acquirer to take control of the other entity. Acquiring without its knowledge.

Q. What is the process of NBFC takeover?

1) Do the due diligence of the Target NBFC. (optional).

2) Choose the manner of NBFC takeover – it can be done either by way of taking over the management or the shareholding.

3) Publication of the takeover is to be done.

4) Apply to RBI along with the required documents.

5) Publish again & resolve the queries if any.

Q. What are the conditions for buying an NBFC?
To take over an NBFC, first, check whether the purchase needs prior approval from the RBI? Or is the transaction exempt from such approval? RBI has identified certain situations when the Acquirer needs its approval, before initiating the process of taking over.

Following are those situations:

i. Whenever an NBFC is taken over. Whether management changes have been made or not.

ii. Changes have occurred in the shareholding. When over 26% of the paid-up equity capital of NBFC has been acquired or transferred. This may have happened over a period of time.

(Except if a competent court has approved the buyback of the shares or reduction in the capital.)

iii. The management structure has been altered. By changing at least 30% of the Directors.

(30% is excluding Independent Directors. Approval from RBI is not needed if the change is due to a rotation of Directors.)

Q. How to get prior approval from RBI to takeover an NBFC?
The application for takeover is to be made on the letterhead of the company to Regional Office of the DNBS (Department of Non-Banking Supervision), of the district where the Registered Office of the NBFC is located. It is to be enclosed with the below documents:

1. Acquirer’s sources of funds used for acquiring shares of the Target NBFC,

2. Information about the proposed Directors/shareholders. Such as their ID/Address proof, Education, Qualifications and Experience proof,

3. Declaration by all the proposed Directors/shareholders about their non-association with any organization that was denied a CoR by the RBI,

4. Declaration of not having a criminal background and Non-conviction u/s 138 of the Negotiable Instruments Act by all the proposed Directors/shareholders,

5. Declaration by all the proposed Directors/shareholders declaring their non-association with any entity accepting deposits,

6. Banker’s Report for the proposed Directors/ shareholders.

Q. What is the maximum interest an NBFC can pay on deposits?

The maximum interest an NBFC can offer is 12.5% annuallyly. The interest may be compounded or paid at rests of one month or over.

Q. What is the duration for which an NBFC can accept a deposit?
NBFCs can accept or renew public deposits for a minimum 12 months up to a maximum of 60 months. They cannot accept demand deposits.
Q. What are the various prudential regulations applicable to NBFCs?
RBI has issued detailed directives for prudential norms. These directions prescribe guidelines on income recognition, asset classification and provisioning requirements applicable to NBFCs, exposure norms, disclosures in the balance sheet, requirement of capital adequacy, restrictions on investments in land and building and unquoted shares, loan to value (LTV) ratio for NBFCs predominantly engaged in business of lending against gold jewellery, and so on. Deposit accepting NBFCs also have to comply with the statutory liquidity requirements. The regulations applicable to NBFCs holding deposits or those not holding deposits are available on the RBI website.
Q. Does acquisition/transfer of shareholding of 26% or more of the paid-up equity capital of an NBFC within the same group require prior approval of RBI?
Yes. Prior approval from RBI is necessary in all acquisition/transfer of shareholding of 26% or more of the paid-up equity capital of an NBFC. In case of such intra-group transfers, NBFCs are to apply, on a letterhead of the company, for obtaining this prior approval. RBI will decide, on a case to case basis, whether the NBFC requires to submit any other documents for processing this application. If the approval is granted without the documents, the NBFC would be required to submit them after the transfer is complete.
Q. What is an RNBC? How is it different from other NBFCs?
Residuary Non-Banking Company is that NBFC which is a company and has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner and not being Investment (IC), Asset Financing (AFC), Loan Company (LC). They are required to maintain investments as required by RBI, in addition to liquid assets. Their functioning is different from those of NBFCs in terms of method of mobilizing deposits and requirement of deployment of depositors’ funds as per Prudential Norms Directions. These directions apply to these companies also.
Q. Can NBFCs accept deposits from NRIs?
NBFCs cannot accept deposits from NRIs other than deposits by debit to NRO account of NRI provided such amount does not represent inward remittance or transfer from NRE/FCNR (B) account. However, NRI deposits existing from before 2004 can be renewed.
Q. What are the compliance requirements for the NBFCs?
Compliance requirements differ according to the type of NBFC.

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. ALM: Half-yearly 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:

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 and basic information such as the 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.

Q. What powers does RBI have over NBFCs?
RBI is the legal authority entitled to lay down policy, license, direct, regulate, supervise, inspect, and exercise surveillance over NBFCs that meet the 50-50 rule of principal business. It can penalize an NBFC on violation of any regulation or direction or order issued for NBFCs. The Certificate of Registration may get cancelled, or the company may be prohibited from accepting deposits and their assets alienated or it may be wound-up.
Q. What is RNBC?
RNBC or Residuary Non-Banking Company is an NBFC which is a company and has the principal business of receiving of deposits, by any scheme or arrangement or some other manner and not being Investment, Asset Financing (AFC) or Loan Company (LC). They must maintain investments and liquid assets as required by RBI. Prudential Norms Directions apply to them also. Their functioning is different from other NBFCs in terms of method of mobilization of deposits and requirement of deployment of depositor’s funds as per the directives.
Q. Can all NBFCs accept deposits?
All NBFCs are not permitted to accept public deposits. Only those NBFCs which have taken permission from RBI can accept/hold public deposits. To qualify for the permission, they must have an investment-grade rating to a limit of 1.5 times of its NOF.