Overview on NBFC Takeover
Do you want to start your own finance company? If interested, then we can guide you with the best feasible ways to begin a Finance/Loan company. The takeover of NBFC means the purchase of one NBFC by other company. Only the registered NBFC’s under the act can acquire another NBFC.
What do you understand by the term NBFC?
NBFC or Non-Banking Financial Company is registered under the Companies Act, 2013 and is regulated by the RBI. NBFC’s offer Financial services such as giving loans and advances, assets financing, investing in shares, debentures and other marketable securities. A Non-Banking Institution which is a company has principal business of receiving deposits under any scheme or arrangement in one lump sum or installments.
How many types of NBFC’S are there?
There are mainly two types of NBFC’S:
- Deposit Accepting NBFC
- Non Deposit Accepting NBFC
Why the need for NBFC Takeover emerged?
Mergers and Takeovers are actively making their presence in the whole corporate scenario. NBFC’s are also coming under the impact of these compromises and arrangements. Reserve Bank of India lays down the procedure and regulations for takeover of NBFC’s. NBFC’s sale process/takeover process involves two types of companies:
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Target Company
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The company which is being targeted to be acquired by another company is a Target company.
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Acquirer Company
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The type of company acquiring the targeted company is Acquirer Company.
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NBFC Takeover Types
NBFC Takeover can be done in two different ways:
- Friendly Takeover
It is a type of takeover which takes place between the companies with their mutual consent. Acquirer Company offers the target company for being acquired and the same offer is being accepted by the target company.
- Hostile Takeover
Acquisition of the target company by the acquirer by going directly to the company's shareholders or fighting to replace management to get the acquisition approved. Usually this kind of takeover occurs when an entity attempts to take control of a firm without the consent or cooperation of the target company's Board of Directors.
Pros and Cons of NBFC Takeover
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Pros
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Cons
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Increase in profitability of Target Company.
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Amount paid during the takeover is less than the actual price in most cases.
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The decrease in competition.
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Conflicts in the new management.
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Increase in sales and revenues.
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Cultural clashes due to the merger of the two different companies
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Expansion of the distribution market.
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These cultural clashes reduce the morale of employees.
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Increase in the scale of economy.
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The target company’s hidden liabilities create further problems after the merger.
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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:
- Takeover or acquisition of control of an NBFC requires prior approval of RBI whether there is a change in management or not.
- Approval is to be in written form.
- No RBI approval is required in case there is a change in shareholding for more than 26% for the reason of buyback or reduction in the share capital. Still, the competent authority should have approved this reduction or buyback. The same is however required to be reported to the RBI not later than one month from its occurrence.
- In case of any change in the management of the company which would result in more than 30% director than prior written approval is required.
- Change in the direction of the company requires a prior public notice at least 30 days prior to the announcement if change.
Prior Approval of RBI is not required under the following circumstances:
- In case the shareholding goes beyond 26% due to the buyback of shares or reduction in capital by obtaining the approval of the competent court.
- Change in the management by 30% inclusive of Independent Directors or by the rotation of Directors on Board.
Application for prior approval of RBI
The next step in this regard is to submit Applications in this regard to the Regional Office of the Department of Non-Banking Supervision in whose jurisdiction the Registered Office of the NBFC located. Usually, an application for NBFC sale goes through a processing time of three to four months in the ordinary course of business. The following required documents need to be submitted in the RBI office with the company’s letterhead:
- Information on 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 the RBI denies a certificate of Registration.
- 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.
The Requirement of Prior Public Notice in Case of Change in Management or Control during Takeover Procedure
- First of all approval of RBI as per the rules mentioned above is needed.
- If there is a change in management or control, a public notice shall be given in one leading national newspaper and one local newspaper.
- The public notice is to be given at least 30 days prior to such sale of shares, or transfer of control, whether with or without share transfer.
Following are the indications of public notice:
- Intention to sell or transfer ownership or control.
- Particulars of the transferee.
- Reasons for such sale or transfer of ownership or control.
What is the next step after making a public Notice?
- All the assets of the target company, as shown in the balance sheet will be liquidated, and all the liabilities will be paid off.
- The acquirer will receive a clean balance in the bank on the name of the company which will be calculated on the basis of net worth as on the date of takeover.
NBFC Takeover Procedure in sequence!
Memorandum of Understanding(MOU)
Signing of Share Transfer Agreement
Notice to Regional Office
Memorandum of Understanding
The first step is the signing of the Memorandum of Understanding (MOU) with the proposed Company. It specifies that both the companies agree to enter into an agreement of takeover. It is signed by the Directors of both the Acquire Company and the Target Company. The MOU also mentions the responsibilities and requirement of each company. During the signing of MOU token money is paid by the Acquirer Company to the target company.
Convene Board Meeting
The next step after the signing of the MOU is to convene a Board meeting. Both the Companies in this Board meeting will discuss on the following matters:
Public Notice
After receiving the approval from RBI, a public notice shall be made within 30 days of the approval in two newspapers. The Public notice is made to check if there is any objection of the public in regard to the takeover.
The Signing of the Share Transfer Agreement
After the expiry of the 31st day of the notice in the newspaper, share transfer agreement shall be signed, and the acquired company shall pay the remaining amount.
NOC from Creditors
Before the transfer of business from the Target Company to the Acquirer Company, NOC is to be obtained by the Target Company.
Transfer of Assets
In case no objections are received from the public, transfer of assets will take place. But the transfer should not contravene any clause of the agreement.
Valuation the entity
RBI has set up rules for assessment. The technique adopted for cost assessment is Discounted Cash Flow (DCF) Method. This will present the net present value of the entity. After the evaluation, the Chartered Accountant shall obtain a certificate briefing the method adopted for valuation.
Notice to Regional Office
After the process of valuation and approval of the Takeover scheme, NBFC shall apply to the Regional Office of RBI. The application shall be on the letterhead of the company.RBI should also be continuously notified.
Application made to the Regional Office shall contain following details:
- Information about the proposed Directors and shareholders.
- Sources of Funds of Acquirer.
- Declaration by the shareholders and directors regarding their association with any unincorporated entity which is accepting deposit.
- Declarations by the directors regarding no criminal proceedings have been initiated against them in the Court of Law.
What is the procedure for name change while NBFC Takeover is under process?
For changing the name of the company the acquirer company needs to obtain name availability certificate from the Ministry of Corporate Affairs. After that the acquirer needs to reach RBI for NOD or Notice of Default. Once NOD is granted the company can proceed for name change.
Conclusion
The Takeover of NBFC Company is easier than the Registration of a new NBFC Company as RBI has made takeover procedure simpler than before. Although the NBFC takeover procedure is in its starting stage in India RBI has made sure that the procedure for registering and acquiring an NBFC is systematic and comprehensive. The acquirer should be well versed with all the information connected with the transferor in order to avoid delay in the process. Takeover sounds very negative, but virtually it's same as an acquisition. NBFC is playing an active role in the financial market. Keeping the same in mind, the RBI has liberalized the compliances and governance requirements of the process of NBFC Takeover.
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