Introduction

Non-banking finance company (NBFC) is a company incorporated in India under the provision of the Companies Act, 2013 with the object to do finance business, regulated and licensed by the Reserve Bank of India (RBI). Incorporation may be easier but getting the license from RBI is always a tough and time taking process, however, India has witnessed successful licensing from RBI around 12k entities across India for a long till date. Its been long for a few market players in the sector and a few of them on a serious note want to leave the market. During the period, many surrendered their license and on the other hand, again RBI also issued the cancellation order of issued licenses due to severe violations and non-compliance of prescribed guidelines and set of regulations thereon.

In this article, we will be more focused on the seller's perspective while executing the sale of NBFC business or transfer of control. Sellers being regulated by RBI, need to put special cautions to transact such sale of business or transfer of control things.

Precautions:

It is imperial to note before hanging with any interested party to buy the entity. An entity should do internal due diligence in terms of financial, human resources, assets and liabilities thereon. As on the date of negotiating the entity is operating in the eyes of RBI and obviously do have some sort of ongoing business. So, it may cause the deterioration of the fair value of shares to be transferred, assets and liabilities thereon. Further, being a regulated entity such an entity needs to make various reports and submission of documents/information monthly, quarterly and annually either to RBI, MCA or other external agencies as per the nature of business. When internal compliance and clearance are been done then obviously the selling entity can do more negotiation as far as deal closure is concerned. 

Identifying the Buyer:

Selling the NBFC business is not an easy task as it involves a good amount of investment and time, therefore seller entity can have a consultant to keep them posted on the eligible buyers as like us. We do facilitate the existing NBFC to get a good premium for exit from a business if existing promoters are not ready to run this business any more. Over and out, we do keep them posted on regular compliance, due diligence and operating support for their NBFC business, so any of NBFC-related matter you can connect with us without any hesitation. We are happy to serve this segment institution. Once a buyer is been identified and long tripartite discussion and negotiation then obviously major terms sheet are finalized and then the process of RBI application is prepared and submitted to RBI for their review and observation, if any in order to provide prior approval for the asked changeover in the board and shareholding suggested by guidelines issued by RBI dated 9th July 2015. Buyers should have a clean image and people of integrity and positive financial strength. They should possess the required experience of financial business and its operation guidelines along with a strong financial position to serve the public at large.

Process:

Once precautions are been cleared and the initial buyer discussion and terms sheet are been finalized then the selling entity needs to put an application for change in control. Before that entity needs to put the matter on Board and conduct a board meeting to pass the agenda and present the same for shareholders' approval either in Annual General Meeting or Extra Ordinary General Meeting, as the case may be. After that selling entity needs to put an application with RBI along with other documents, forms and information as per the guidelines given by RBI. Thereafter, upon the RBI observation, the applicant needs to respond on time till the RBI is not fully satisfied and makes a decision. Before the final decision, RBI will ask to make 30 days' public notice regarding the ongoing process of change in control or sale of the business. Once prior approval is received from RBI then the process comes to end with few pending activities like again conduct of board meetings, appointment of directors, filing forms in MCA, share transfer certificate and transfer of share consideration to old shareholders by new shareholders.
Read Our Blog: RBI Proposes Regulatory Changes for NBFCs. Here's All You Need to Know.

Documents Checklist:

The documents initially asked by RBI for this approval is not lengthy but the things asked by RBI once initial submission need to be clear on top priority within the given time frame.

1. Information and documents asked as per the given format for both Directors/shareholders
2. Declaration
3. Sources of funds by new shareholders
4. Banker report of shareholders/directors

Other than the above, it is conditional and observation based on RBI officer, for the submission of information and documents thereon to close the process from RBI. Further to remove their query from first submission, the basic know your customer (KYC) documents, academic qualification, CIBIL report, financial statements and experience certificate can be enclosed in advance. Precisely often they asked for the submission of a business plan too. So, either providing it in advance helps you to speed up the process or you can wait and watch for their query and list of requirements from the RBI officer observation. Choice primarily depends on a consultant or selling team on it.

Conclusion:

Seller being a regulated entity first needs to diagnose its health and then further understand the buyer well enough so that the application can be placed well enough. A seller should not have any non-compliance regarding share transfer compliance in earlier years, its investment and assets are well presented and recovery are there instead of NPA or provisioning required for same. Other than that, the regular reporting of its transaction needs to be done to other external agencies on time. Accordingly, RBI and MCA reporting and filing should be up to date. After all, the Seller entity should diagnose well enough for the buyer party too. Buyer party due diligence in terms of financial health, managing capability, experience, integrity, education, and good track record as far as the financial transaction is concerned should be there on topmost for processing the application else the negative results on the application can be hazardous to both the party. Therefore, before proceeding further, need to have good interactive team negotiation and discussion to proceed ahead and each move for the process need to be highly calculative in the hands of legal provision and its consequences. Of course, corpseed can help you out to process out the entire assignment from day one to end date. For any support, guidance and requirements, do remember corpseed.