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Due Diligence of NBFC

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Introduction

The due diligence is mainly an instrument to inquire and look into the insides of an entity in all aspects. It closely looks into the legal, financial, commercial insights of an entity. The Due diligence of the Non Banking Financial Company is taken up by the potential buyers. It is also done by investors to take a clued-up decision and get a just idea of the business of the Non Banking Financial Company.

The NBFC Registration is done under section 45-I of the RBI Act 1934. An NBFC is involved in financial services, deals in fund generation and deployments for small-medium sized, micro-sized industries in India. However, although RBI regulates NBFC, an NBFC is firstly required to be registered under the Companies Act 2013 (or previously 1956). Non banking Financial Company (NBFC) is the company which works on similar lines of a traditional bank with certain exceptions. Due diligence report of NBFC is an important report and the remark about NBFC in report forms an important document, to take a decision relating to takeover, or investment or such related analysis about the NBFC.

Checklist for Due –diligence of NBFC

While proceeding with the procedure of due diligence the below mentioned things have to be kept in mind:

  • Registration with the FIU-IND (Financial Information unit of India): It is mandatory for the NBFCs to register itself with the FIU—IND, which keeps records of the transactions of the NBFC.
  • Auditor report: It was mandated via circular of RBI introduced in 2008 to formulate the auditor report to the director. It must be made in line with the directions provided in the notification and issue the statutory Auditor certificate.
  • NBFC Membership: NBFC is required to obtain the registration and membership of Credit Information Company (CIC) and Information utility set up under IBC 2016.
  • Statutory Reserve creation: NBFC Compliance checklist in line with the section 45-IC of the RBI Act.
  • Public Notice: As a statutory requirement, NBFC is required to Publish the Public Notice in line with the compliances of RBI regarding 30 Days prior to the date of Change in control.
  • KYC Documents and registration: Obtain the KYC relating to Directors, promoters, big investors and KYC status pertaining to corporate accounts of the company.
  • Check the legality and authenticity of the following documents:
  • Incorporation certificate of the NBFC
  • VAT registration,
  • GST registration,
  • PAN and TAN,
  • Publishment if any made by the company,
  • All documents submitted before RBI, MCA portal, other concerned departments.
  • Other Registrations or Permissions obtained since inception to until the date of conducting due diligence of NBFC.
  • Financial analysis: Review the previous records pertaining to the last 3 year financial statements, indebtedness if any.
  • Legal Matter status: Legal litigations civil /criminal if any pending against the company, the case went against company arising any new liability of payment, cases in favor of the company and indicating any inflow or such benefit to the NBFC.
  • Check the documents to be maintained by the NBFC during its ongoing business as given below:
  • Board resolutions passed
  • Minutes of the meetings
  • Statutory Auditor reports
  • The net worth of the company
  • Secretarial Compliances and Regulatory compliances: Compliances pertaining to the RBI Regulations, The Companies Act 2013 compliances and such other applicable notifications issued by the RBI time to time.
  • Investments and borrowings: Borrowings from promoters and its investment, FDI, Overseas investments if any.
  • Legal Agreements: Such legal agreements executed by the NBFC which are of importance in legal, financial, management prospectus.
  •  Property documents: Do confirm the ownership, Loan, Mortgage, rental, encumbrance if any over the property.
  • Insurances: Do whether certain mandatory insurances including insurances for employees (if applicable) has been taken or not? This also in one way gives the idea about the management of the company.
  • Human resource: Check the HR policy, EPF files and records and related timely compliances filed or not?
  • Intellectual property rights certifications: An NBFC may have obtained the trademark certifications, or patent or copyright certifications, confirm to the validity of the same and renewal dates and fees involved in such, as this will be an upcoming liability for the potential buyer.
  • Income tax compliances: Timely Income tax payment, Income tax returns, disclosures required before the Income-tax
  • Others: Such other details crucial from the point of view of the buyer.

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Author
Vinay Singh
Vinay Thakur is Managing Partner in Corpseed. He focused on payments, digital transformation, and financial technology for over 15 years and holds strong expertise on fintech startups, banking innovation, and investors with a keen understanding of the trends and activities of startups, banks, and investors in the space.