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Takeover of NBFC

Process of taking over the Non Banking Finance Company has been simplified by the Reserve Bank of India and which can be completed within a period of 45 to 60 days.

Process Included:

  • Target company’s properly Due Diligence.
  • Changing the Name and Object of the Company.
  • Assets in company Valuation.
  • Assistance in filing application for change in management
  • Planning of Business including the Market research
  • Complete Guidance regarding the related to annual compliance
  • Guidance in developing the Underwriting and Risk assessment model

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What does Non Banking Finance Company takeover mean?

NBFC's obtainer is required to conduct the depth investigation and must provide a summary of the target company's finances. Once the NBFC aims to procure the said NBFC, a Memorandum of Understanding with some advance resources will be agreed to sign.

The definition of acquisition in financial terms includes the acquiring of one business entity by another which can be done by two methods i.e. a mutual acquisition in which the right to transfer the property to the acquirer party is granted by the selling party or through hostile takeovers in which the purchasing group intentionally as well as illegally acquires ownership of the other entity. After transferring all its assets and liabilities to the acquirer, the total of the balance sheet under both the terms becomes zero.

For the financial world, the concept of mergers and acquisitions is not new. After these reforms, many corporate houses experienced either a tremendous success or a dishonest failure. Also, NBFCs, considered to be almost substitutes for traditional banks, and were not left untouched by movements of merger and acquisition. The Indian Reserve Bank has evolved a protocol for the acquisition of NBFCs to recommend an organized process to eliminate any discrimination or ambiguity.

In case of friendly takeover of the Non banking Finance Company, the first step includes the signing of Memorandum of Understanding (MOU) of the proposed company after obtaining the approval from the Board of Directors of both the companies related to NBFC takeover and the second step is to obtain the RBI’s approval.

What steps are included in Non Banking Finance Company Takeover?

Prior approval from the Reserve Bank of India is required under the below mentioned conditions, otherwise, the entire process shall be considered as null and void:

  • Where NBFC takes over or acquires control whether the management changes or not.
  • When there is any change in the shareholding of the company which is resulting in 26% acquisition/ transfer of the paid up equity capital of Non Banking Finance Companies, Including any progressive increases over time.
  • Where there is any change in the management by the way of change in more than 30 per cent of the directors, excluding independent directors, of the NBFC.

Prior approval of RBI will not be required in following circumstances:

  • Where there is a change of 26% in the share capital of the company either from buyback of shares/ or reduction in capital by the  approval of a competent Court
  • Where there is a change in the Independent Directors or rotation of the directors resulting in the change in 30% of its management in the Board.

Which documents are required for Non Banking Finance Company takeover?

Approval from Reserve Bank of India is required to be obtained while taking over the Non banking Finance Company. Moreover the purpose / objective of takeover is also need to be justified. Below mentioned documents are required to be submitted along with the application filed with Reserve Bank of India:

  • Details of Proposed directors/shareholders are required to be disclosed;
  • In order to acquire the Details regarding sources of funds of the proposed shareholders are required to specify for acquiring shares in the NBFC;
  • A declaration by all prospective directors / shareholders indicating that they are not affiliated with any company receiving deposits;
  • Claim by all prospective directors / shareholders that they are not affiliated with any company that has been refused a Certificate of Registration by the RBI;
  • A legal statement regarding their non-criminal background and non-conviction under section 138 of the Negotiable Instruments Act by all proposed directors and shareholders;
  • All proposed directors/ shareholder’s Bank Statement.

Subsequently, the request shall be forwarded to the Regional Office of the Department of Non-Banking Supervision, under whose jurisdiction the NBFC Registered Office is housed, for prior approval prior to implementing these arrangements. The Reserve Bank can make a number of inquiries or seek clarifications on the various points posed in the application for approval. All such questions shall be replied in a timely manner in order to prevent unnecessary pause in the processing of the petition by the RBIs. Approximate period of approximately two to three months is required to obtain authorization on a case-by-case basis.

What is the need of Prior Public Notice where the management/control gets changed?

Upon obtaining the RBI's approval for the acquisition in question, a public notice shall be given in one of the leading national and one of the leading local newspapers at least 30 days prior to such selling of shares or transfer of power.

The public notice shall indicate the following information in comprehensive language:

  • Moving the ownership/ control shall be the main purpose of the transferee company;
  • the description of the transferee business in terms of its assets and liabilities in the balance sheet; and
  • the reasons for such sale or transfer of its ownership/ control must be stated by such transferee company.

What is the need to prepare the Share Purchase Agreement?

On public announcement of the acquisition, the Stock Purchase Agreement shall be drawn up and signed by the acquirer and the transferor, the administration of the transferor shall be turned over to the acquirer and the residual interest, if any, shall be paid out within 31 days of public notice in the newspaper or as decided by all the parties.

Transfer of all assets and liabilities of Transferee Company to the Transferor Co

Upon the signature of the Stock Purchase Agreement, the property of the transferor entity contained in the balance sheet will be forgiven and the debt will be written off and the buyer will only collect a simple bank balance in the company's name measured on the basis of the net value as of the acquisition date.

What are the Impacts of NBFC on Indian Economy

In the current scenario, the NBFC market is serving as a driver for the country's overall economic growth. In order to provide the required regulatory help for the sector and also to maintain financial stability over the long term, the RBI is constantly trying to bring about the necessary changes in the NBFC regulatory zone. As a consequence of the constructive position of the financial market in the Indian economy, several improvements in their activities, management and compliance have been experienced by NBFCs. With the same in mind, the RBI has liberalized enforcement and governance criteria for NBFCs, especially non-deposit taking NBFCs without public funds and without a customer interface.

What is the end conclusion of above discussion?

The entire process of privatization of NBFCs is controlled by the RBI Regulations and the guidelines it has provided in this regard from time to time. Although the idea of NBFC takeovers is still in its infancy, the RBI has guaranteed that the procedure to be implemented is rigorous and detailed. All compliances, as stipulated in this title, shall be properly fulfilled. In order to avoid any interruption in the phase, the acquirer shall be well-versed with all information relating to the transferor.

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