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NBFC TAKEOVER PROCEDURE

Mani Dahiya Mani Dahiya | Fintech Compliance Professional | Updated

NBFC stands for NON BANKING FINANCIAL COMPANY which is registered under the Companies Act, 2013. The main business activity of NBFC is giving loans and advances, asset financing, investing in shares, debentures and other marketable securities.

 

While commissioning the basic compliance requirement, RBI at the same time is making the business of NBFCs smoother. The smaller NBFCs have been liberalized from the RBI regulations whereas the larger NBFCS are still in the clutches of RBI. It is continuously monitoring them so that they could be brought up on a par with global standards.

 

NBFC TYPES

  • Deposit accepting
  • Non Deposit Accepting

 

In this whole dynamic corporate world, the concept of merger and takeover is taking a roll. And now NBFCs are also a part of these arrangements and compromises. The procedure for taking over an NBFC is being laid down by the RBI. Takeover of an NBFC refers to purchase of one NBFC by another company. Only registered NBFC under the Act shall undertake to acquire the control of another NBFC.

 

Companies involved in the process of takeover

  • Target Company: It is the company which targeted by the other companies to acquire.
  • Acquirer Company: It is the company that acquires the other company. It is prudent for the acquirer company to gather all the information regarding the target company in order to prevent any ambiguity in future.

 

Takeover can be done in two different ways

  • Friendly Takeover: It is a kind of takeover that takes place between the companies with their mutual consent. The acquirer company offers the target company to be acquired and the same offer is being accepted by the target company.

  • Hostile takeover: In this kind of takeover the acquirer company furtively tries to acquire the target company. This scenario develops when the target company is not interested in the takeover offer of the acquirer company.

 

Highlights and Challenges of NBFC Takeover

 

Highlights

  • Increase in profitability of Target Company.
  • The decrease in competition.
  • Increase in sales/revenue.
  • Expansion of a distribution network.
  • Economies of scale.

 

Challenges

  • Amount paid for goodwill is often less as compared to its actual price.
  • Conflict in new management.
  • Cultural clashes between two companies.
  • Reduce employee’s morale.
  • Hidden liabilities of Target Company.

 

The Requirement of Prior RBI Approval

If there are negligible changes in the management then it is outside the ambit of takeover whereas in case if there are some major changes in either the control or the management then the prior approval of RBI is required.

The following are the conditions where the prior approval of RBI is required –

  • The takeover of NBFC may or may not bring a change in the management.
  • In case there is a variation in the shareholding of the NBFC that results in 26%acquisation or transfer of paid-up capital including progressive increase over a period of time.
  • If in case there is a change of more than 30% of the directors of the NBFC.

 

RBI Regulations in Regards To NBFC Takeover

RBI has specified certain regulations that are to be followed by NBFCs

  • Whether there is change in management or not the RBI approval is required in case of acquisition or takeover of NBFC.
  • The approval must be in writing.
  • If in case of acquisition or transfer of shareholding for more than 10% then prior approval of RBI will be required.
  • If in case there is a change in shareholding for more than 26% for the reason of buyback/reduction in share capital but this reduction/buyback should have been approved by the competent authority then in that case no RBI approval shall be required.
  • If in case there is more than 30% of change in the directors of the company then the prior written approval of RBI is required.
  • If in case there is a change in direction of the company then it requires a prior public notice at least 30 days prior to the announcement of such change.

 

In the following conditions the prior approval of RBI is not required

  • In case shareholding goes beyond 26% due to the buyback of shares or reduction in capital by obtaining the approval of a competent court.
  • Change in the management by 30 % inclusive of Independent Directors or by rotation of the directors on Board.

 

Application for Prior Approval of RBI

The next step involves making an application to the RBI for approval on the letterhead of the company along with the following documents.

  • Information regarding proposed directors and shareholders
  • Information regarding sources of funds required for acquiring shares in the NBFC by the proposed shareholders.
  • Declaration by all the proposed directors and shareholders stating their non-association with any entity accepting deposits.
  • Declaration by all the proposed directors and shareholders stating their non-association with any entity to whom Certificate of Registration is denied by the RBI.
  • Statement regarding non-criminal background as well as non-conviction under section 138 of the Negotiable Instruments Act by all the proposed directors as well as shareholders.
  • Bankers’ Report with regard to proposed directors and shareholders.

 

An application has to be submitted to the Regional Office of the Department of Non-Banking Supervision in whose clutches the Registered Office of the NBFC is located. The queries raised by the RBI regarding the takeover must be answered timely so as to avoid any unforeseen delay in the approval. Usually it takes three to four months in normal course of business for an NBFC takeover application to process.

 

The prerequisite of Prior Public Notice in Case of Change in Management/Control

In case of transfer of ownership or control by the sale of shares or whether with or without transfer of shares a public notice shall be given in one of the leading national and one of the local newspapers, it shall be given at least 30 days prior to effecting such sale or transfer.

 

Following are the indications of the public notice:

  • There has to be an intention to transfer the control /ownership.
  • It shall contain the particulars of the transferee
  • In case there are any other remaining considerations then it shall be paid off within 31 days of the public notice in the newspaper or as mutually agreed upon by all the parties.

 

Eventually, all the assets of the targeted company shall be liquidated and the liabilities shall be paid off and the acquirer company will receive a clean balance in the bank on the name of the company that will be calculated on the basis of net worth as on the date of takeover.

 

NBFC Takeover Procedure

 

1. Memorandum of Understanding

The very first step involves the signing of the MOU i.e. Memorandum of Understanding with the projected company specifies that both the companies agree to come into an agreement of the takeover. It is signed by both the directors of the Acquirer Company as well as the Target Company. While signing the MOU, token money is given by Acquirer Company to the target company. It shall also specify the responsibilities and requisite of each company.

 

2. Convene Board Meeting

Following the signing of the MOU, Board Meeting shall be convened in both the companies to discuss following matters:

  • To fix day, date, time and place of convening Extra Ordinary General Meeting.
  • For passing a resolution in EGM.
  • In relation to takeover scheme, reply to the query of RBI.

 

3. Public Notice

After obtaining the RBI sanction, public notice shall be made to invite any objection of the public which is taking place due to take over in two newspaper within 30 days of such approval.

 

4. The signing of Share Transfer agreement

After the termination of the 31st day of the notice in the newspaper, share transfer agreement shall be signed and outstanding consideration shall be paid by the acquired company.

 

5. NOC from Creditors

Target Company shall acquire NOC from its creditors before the transfer of business from Target Company to Acquirer Company.

 

6. Transfer of Assets

After this, transfer of assets shall take place in case no objections have been received and RBI permitted the scheme. But the transfer should not breach any clause of the agreement.

 

7. Valuation the entity

The Valuation shall be done in accord with the rules provided by the RBI. The procedure adopted for valuation shall be Discounted Cash Flow (DCF) Method, this will represent the net present value of the entity. Subsequent to the evaluation, a certificate shall be obtained by the Chartered Accountant briefing the method adopted for valuation.

 

8. Notice to Regional Office

After the process of valuation and authorization of the takeover scheme, NBFC shall submit an application to the Regional Office of RBI. The application must be on the letterhead of the company. Any change in management of the NBFC after the takeover should also be communicated on a constant basis to RBI.

 

Application made to the Regional Office shall include the following details:

  • Information about the anticipated directors and shareholders.
  • Source of funds of Acquirer.
  • Declaration by the shareholders and directors regarding their association with any unincorporated entity which is accepting deposit.
  • Declaration by the directors concerning no criminal proceedings has been initiated against them in past or are pending against them in any court of law.
  •  

 

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