NBFC Takeover

The non-banking financial companies, commonly referred to as NBFCs, are essential to India’s financial system.  However they have quite bit of compliances that they need to undertake. Once established, NBFCs are required to periodically abide by the regulatory authority’s numerous compliance criteria. Given how numerous and wide-ranging NBFC Compliances are, it could be difficult for a business owner to stay on top of compliance obligations.

What does NBFC stand for?

The RBI regulates NBFCs, also known as non-banking financial companies, which are registered under the Companies Act of 2013. In addition to providing loans and advances, NBFCs also finance assets and invest in shares, debentures, and other marketable instruments. A non-banking institution, which is a business, receives deposits under any scheme or arrangement in one lump sum or in instalments as its primary activity.

The different types of NBFCs

The NBFCs can be categorised under two broad heads:

  1. On the nature of their activity
  2. On the basis of deposits

The different types of Non-Banking Financial Corporations or NBFCs are as follows:

On the nature of their activity:

    1. Asset Finance Company
    2. Loan Company
    3. Mortgage Guarantee Company
    4. Investment Company
    5. Core Investment Company
    6. Infrastructure Finance Company
    7. Micro Finance Company
    8. Housing Finance Company

On the basis of deposits:

      1. Deposit accepting Non-Banking Financial Corporations
      2. Non-deposit accepting Non-Banking Financial Corporations

Reason for NBFC takeover

NBFC takeover refers to the process of acquiring an active, RBI-registered NBFC without first completing the registration process. Takeover of an NBFC is a viable but difficult process.

This procedure is appropriate for people or businesses who want to choose a quick and reliable operation of their financial business.

The greatest level of professionalism and careful labour are required for this process because it is intricate and involves several stages.

How NBFC Takeover works?

The Takeover of a Non-Banking Financial Company Is Centered on Two Entities

Target Company

A company that plans to be bought, known as the Target Company, is being monitored by an acquiring company.

Acquirer Company

An organisation known as an acquirer company is one that has the capacity to purchase the target company.

Following the proper procedure, the acquirer company buys the target company, and shares of the current owners are transferred to the proposed shareholders or entity. Along with the target firm’s market position, the acquiring company benefits from the target company’s pre-existing RBI registration.

The Process involves the following steps:

  • Due Diligence

Before buying a firm, do rigorous research and background checks. There should be a list made of the things that need to be looked at. Establish business objectives and determine whether the prospective business can meet them.

  • Examine The Suitability

The list of qualified applicants must be carefully considered by the acquirer before making an acquisition offer to any company. A company will choose people who fit well with their company and accomplish the acquirer’s main objective during the process.

  • Evaluate The Financial Position

It’s important to carefully evaluate the company’s financial condition before purchasing it. Determine the optimal financing strategy by calculating the maximum amount payable for the takeover as well as cash flows.

Types of NBFC Takeover

Hostile Takeover

The word is already implied by the designation “hostile takeover.” A hostile takeover is a form of takeover in which the acquirer or acquiring business employs a variety of strategies to acquire control of the target company without the approval of the target company’s board of directors.

In these types of takeovers, companies engage in shareholder outreach by presenting a tender offer, and they even don’t think twice to engage in a proxy fight to remove the management in order to get the purchase approved. The support and permission of the target company’s board of directors are completely irrelevant to acquirers.

Friendly Takeover

A friendly takeover is a scenario in which a target NBFC company is amicably acquired by another company, subject to the support and permission of the management and board of directors. Only if they believe the price per share is higher than the current market price will the target company’s shareholders approve the deal.

The advantages of the friendly takeover go above and beyond simply having a higher per-share price. The targeted businesses are given chances to jumpstart their commercial expansion. Additionally, they have the option of investigating several market segments. To put it briefly, mutual consent is the key to a friendly takeover.

Pros and Cons of NBFC Takeover

Pros

  • Can provide loans and credit facilities
  • Can trade in money market instruments
  • Can do wealth management such as managing portfolios of stocks and shares
  • Can underwrite stock and shares and other obligations
  • NBFCs are the last resorts of borrowing; NBFCs are there where banks are not there
  • NBFCs are the largest propellants of ushering finance into the country
  • Agility is very important for NBFCs as it sets the banks apart. Banks function slower as compared to the NBFCs
  • The use of modern methods by NBFCs has overcome key challenges that had overwhelmed conventional lending. NBFCS have made great use of technological advancements like the use of mobile phones and the internet which has helped in making information easily accessible anytime anywhere. It has reduced the demand and reliance on bank branches
  • Technology is not only at the head of banking and financial services, but also an increasingly digitized India has underpinned the rise of NBFCs. Digitalization has given NBFCs the ability to present multiple choices and reach the larger audience at quicker pace. This indirectly gives rise to larger NBFCs
  • Combination of partnership and database helps in increasing penetration of financial inclusion. To reach large numbers of customers successfully, and minimize risks, NBFCs have forged partnerships including the government to use their database and identify customer worthiness. Thus lending has been productive

NBFC drawbacks include:

  • Demand deposits are not accepted by NBFCs because they fall under the purview of commercial banks.
  • An NBFC cannot issue checks drawn on itself because it is not a part of the payment and settlement system, unlike banks. NBFC depositors also do not have access to deposit insurance.
  • Only some NBFCs can accept deposits; the majority cannot. Only NBFCs authorised to accept public deposits by a current Certificate of Registration may receive and hold public deposits.
  • The NBFC regulatory framework is strict.

 NBFC Takeover Procedure in India:

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The Memorandum of Understanding (MOU)

The procedure for acquiring a non-banking financial organization begins with the signing of a Memorandum of Understanding (MOU) with the potential company.

It indicates that both companies are prepared to enter a takeover agreement. The target company’s director and the acquirer company’s director both come on board and sign the MOU.

The Memorandum of Understanding covers all of the firms’ needs and responsibilities. When the MOU is accepted, the acquirer business pays the target company the token money.

Prior Approval from RBI

Prior Approval Requirement of RBI is the Most Crucial Step if Required.

Publish the public notice bilingually

Two regional languages should be included in the public notification. The first language should be English, and the second should be released within 30 days of gaining RBI approval in a regional language.

Step into the Formal Contract

From here, two interested parties can consider forming a formal agreement, and they can now purchase shares/transfer of administration/transfer of shares/or the previously indicated concerns for takeover.

Second Public Notice should be published

The second public notice must be published in two different regional languages. The first language should be English, with the second being published in a regional language. For the purchase of a share/transfer of authority/transfer of shares or before-divulged worries for takeover, a public notice shall be posted before 30 days.

Things to be included in Public Notice

  • Intention to sell or transfer ownership or direction.
  • The transferee’s specifics are to the point.
  • The reason for the sale or transfer of authority or ownership.

The Liquidation Process Begins.

This step entails the liquidation of all of the target company’s assets. Furthermore, all liabilities are likely to be paid off.

The purchaser will be able to see a reasonable bank balance in the company’s name. This section’s calculations use net worth as the starting point, as it was on the day of the takeover.

Obtain a letter of authorization from the creditors.

The Target Company must obtain NOC from the creditors prior to the transfer of business.

Assets are transferred

The transfer of assets would take place once the scheme has been approved by the Reserve Bank of India without any objections.

Valuation of an entity in accordance with RBI guidelines.

Because the RBI has established a set of norms and regulations, the entity’s valuation can be carried out in accordance with them. The discounted cash flow (DCF) approach is a valuation tool that aids in the process. It’s a well-known approach for displaying an entity’s net present value.

 What are the specified RBI Regulations concerning to NBFC Takeover?

RBI has set the following norms which are required to be followed by NBFC’s in case of acquisition or takeover:

  • Whether there is a change in management or not, the RBI must first give its prior clearance before a takeover or acquisition of control of an NBFC.
  • The approval must be given in writing.
  • If a repurchase or reduction in share capital results in a change in shareholding of more than 26%, no RBI permission is necessary. However, this decrease or buyback should have received approval from the appropriate authority. However, the RBI must be notified of the same no later than one month after it occurs.
  • A prior written consent is necessary for any management changes that might result in more than 30% of the company’s directors.
  • A public notice must be sent at least 30 days prior to the company’s direction changes.

Prior Approval of RBI is not required under the following circumstances:

  • If the shareholding exceeds 26% as a result of a capital reduction or share buyback that has the consent of the appropriate court.
  • 30% of the management, including Independent Directors, will change, or the Board of Directors will be rotated.

Application for RBI’s prior approval

The next step in this respect is to submit applications to the regional office of the Department of Non-Banking Supervision, whose jurisdiction includes the NBFC’s Registered Office. In the normal course of business, it takes three to four months to process an application for an NBFC sale. The following necessary paperwork must be delivered to the RBI office with business letterhead:

  • Details on the prospective Directors and Shareholders.
  • Information about the sources of money that the proposed shareholders will need to buy shares in the NBFC.
  • All proposed directors and shareholders have signed a statement saying that they are not affiliated with any organisation that accepts deposits.
  • All proposed directors and shareholders must make a declaration confirming that they have no connections to any organisation to whom the RBI has denied a certificate of Registration.
  • All proposed directors and shareholders have made a declaration that they have no criminal history and have never been convicted under Section 138 of the Negotiable Instruments Act.
  • Report from bankers on prospective shareholders and directors

The Requirement of Prior Public Notice in Case of Change in Management or Control during Takeover Procedure:

  • First, RBI permission in accordance with the aforementioned regulations is required.
  • A public notice must be published in one major national newspaper and one local newspaper whenever there is a change in administration or control.
  • At least 30 days before any such sale of shares or transfer of control that is whether with or without a share transfer, the public must be informed.

The indicators of public notification are as follows:

  • Desires to sell, give up, or change control.
  • Information on the transferee.
  • The justifications for such a sale or transfer of control or ownership.

What happens once a public Notice is issued?

  • All of the target company’s assets, as listed on the balance sheet, will be sold off, and all of the liabilities will be settled.
  • The acquirer will be given a clear bank balance in the company’s name, computed according to net value as of the takeover date.

What is the name change procedure while the NBFC Takeover is in progress?

The acquirer company must get a name availability certificate from the Ministry of Corporate Affairs in order to change the name of the company. Following that, the acquirer must contact RBI to request a NOD, or Notice of Default. The corporation can move forward with a name change after receiving a NOD.

Conclusion

Because of changes made by the RBI, taking over an existing NBFC company is simpler than registering a new NBFC. The RBI has ensured that the process for registering and purchasing an NBFC is rigorous and thorough, despite the fact that it is still in its early stages in India. In order to prevent delays on the procedure, the acquirer must be well-versed in all the information related to the transferor. Takeover has a bad reputation, although it’s essentially the same as an acquisition. The NBFC is actively participating in the financial industry. The RBI has relaxed the compliance and governance criteria of the NBFC Takeover process in light of this.

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