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Investment Company

In modern approach, NBFCs are classified into three categories:

  • Asset Finance Company
  • Investment Company
  • Loan Company

Investment Company is a type of financial institution whose principal business is related to acquisition of securities. Reserve Bank of India regulates a company engaged in acquisition of shares, stock, bonds, debentures or securities as well as a company engaged in the business of loans and advances as a non-banking finance company (NBFC). It is a type of company which deals with the acquisition of stocks, shares, debentures, bonds, debentures or securities as well as a company engaged in loans and advances business as an NBFC.

Now come to the takeover process of Investment Company, here are the following takeover requirements:

Takeover process requires prior approval of the Reserve Bank of India whereas minor changes in the management or control are outside the purview of the approval but in case of significant changes, prior approval of RBI is required to be obtained.

In the following circumstances, prior approval of Reserve Bank of India is required:

  • Takeover of NBFC or acquisition of control, which may or may not results in the change in management.
  • Variation in the shareholding of an NBFC, which is resulting in 26% acquisition or transfer of the paid up capital including progressive increases over the period of time.
  • Change in the management by way of change in more than 30% of the directors of the NBFC.
  • Prior approval of RBI will be required in case of acquisition or transfer of shareholding for more than 10%.
  • 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, no RBI approval will be required.
  • No RBI approval will be required in case of change in the management by 30 % inclusive of Independent Directors or by rotation of the directors in Board.
  • Change in direction of the company requires a prior public notice at least 30 days prior to the announcement of such change.

APPLICATION FOR PRIOR APPROVAL OF RBI

The next step is to make an application to the RBI for the approval on the letterhead of the company along with the following required documents:

  • Information of 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 shall be submitted to the Regional Office of the Department of Non-Banking Supervision in whose control the Registered Office of the NBFC is located. All the queries raised by the RBI shall be timely answered in respect of the takeover so as to avoid any unforeseen delay in the approval. Usually an application for NBFC takeover goes through a processing time of three to four months in the normal course of business.

Takeover Process in Chart form

Now let’s talk about the requirements which are required to be considered by acquirer before acquiring the target company.

Before acquiring target company, acquirer must verify that target company has complied with all reporting requirements of the Registrar of Companies, Taxation authorities and Reserve Bank of India, with no tax obligations.

Here are the following documents required for due-diligence process:

  • Memorandum of Association
  • Articles of Association
  • Certificate of Incorporation
  • Shareholding Pattern
  • Financial Statements
  • Income Tax Returns
  • Bank Statements
  • Tax Registration Certificates
  • Tax Payment Receipts
  • Statutory Registers
  • Property Documents
  • Intellectual Property Registration or Application Documents
  • Utility Bills
  • Employee Records
  • Operational Records

After this, information must be verified from the company master data on the website of the Ministry of Corporate Affairs and inspection can be done.

Here is a due diligence investigation checklist for the reference of acquirer:

  • Financial Information

Acquirer will be concerned with the financial statements of the target company with the reasonableness of the target company’s projections of its future performance.

  1. Company’s financial statements of the last three years reveals its financial condition together with Auditor’s Reports.
  2. Verification of bank statements.
  3. Verification and valuation of all assets and liabilities.
  4. Verification of cash flow information.
  5. Verification of all financial statements against transactional information.
  6. Company’s general ledger.
  7. A description of the Company’s internal control procedures.
  • Organization Related Information
  1. Company Incorporation documents.
  2. Company’s Bylaws, and all related amendments.
  3. Company’s minute book, including all minutes and resolutions of shareholders and directors, executive committees, and other governing groups.
  4. Company’s organizational chart.
  5. Company’s list of shareholders and number of shares held by each.
  6. A list of all states where the Company is authorized to do business and annual reports for the last three years.
  7. A list of all states, provinces, or countries where the Company owns or leases property, maintains employees, or conducts business.
  • Legal Compliance Information
  1. Details regarding company has not defaulted in filing its annual return with the registrar of companies and complied with all laws.
  2. No objection from the secured creditor will be obtained.
  3. Details regarding company has not defaulted in submitting returns with RBI and filed all the necessary forms with the RBI.
  • Issuances of Securities Previously
  1. All applications and permits for issuance/transfer of securities.
  2. Sample copy of stock certificates, warrants and options.
  3. Stockholder information, indicating number of shares held, dates of issuance, andconsideration paid.
  4. All stock option, stock purchase and other employee benefit plans and forms ofagreements.
  5. List of any outstanding stock options and warrants.
  6. Any voting trust agreements, buy/sell agreements, stockholder agreements,warrant agreements, proxies, or right of first refusal agreements.
  7. Any registration rights or pre-emptive rights agreements.
  8. Powers of attorney on any matter.
  9. Convertible debt instruments.
  10. Other contracts, arrangements, or public or private documents or commitmentsrelating to the stock of the Company.
  11. Any debt arrangements, guarantees or indemnification between officers, directorsor the shareholder and the Company.
  • Review Statutory Registers of Company

Every company is required to maintain various statutory registers such as share allotment, share transfer, board meetings, board of directors, etc., therefore, the statutory registers of a company must be reviewed to obtain and validate information pertaining to directorship and shareholding.

  • Employee Related Information
  1. List of employees including positions, salaries, and bonuses paid during last three years, and years of service.
  2. All employment, consulting, non-disclosure, noncompetition agreements between the Company and any of its employees.
  3. Resumes of key employees.
  4. A schedule of all employee benefits and holiday, vacation, and sick leave policies.
  5. Summary plan descriptions of qualified and nonqualified retirement plans.
  6. A description of all employee problems within the last three years, including alleged wrongful termination, harassment, and discrimination.
  7. A description of any labor disputes, requests for arbitration, or grievance procedures currently pending or settled within the last three years.
  8. A list and description of benefits of all employee health and welfare insurance policies or self-funded arrangements.
  • Licenses
  1. Copies of any governmental licenses, permits, or consents.
  • Information of Material Contracts
  1. List of banks or other lenders with whom Company has a financial relationship.
  2. Credit agreements, debt instruments, security agreements, mortgages, financial orperformance guaranties, indemnifications, liens, equipment leases or other agreements evidencing outstanding loans to which the Company is a party or was a party within the past two years.
  3. All material correspondence with lenders during the last three years, including allcompliance reports submitted by the Company or its accountants.
  4. List of major clients and their locations.
  5. Any other material contracts.
  • Information regarding taxed paid by the company
  1. Income tax return filed
  2. Income tax paid
  3. Calculation of income tax liability by the company.
  4. Obtain Tax clearance certificate from the target company regarding no tax obligation.
  • Customer Information
    1. Details of the Company’s largest customers.
    2. Any supply or service agreements.
    3. A description or copy of the Company’s purchasing policies.
    4. A description or copy of the Company’s credit policy.
    5. All surveys and market research reports relevant to the Company.
    6. Description of the Company’s major competitors.
  • Litigation
    1. Details of filed or pending litigation, together with all complaints and other pleadings.
    2. Litigation settled and the terms of settlement.
    3. Consent decrees, injunctions, judgments, or orders against the company
  • Information related to articles and press releases relating to the company within the past three years.
  • Insurance

In the process of acquisition, the buyer should review key insurance policies of the target company’s business:

  1. General liability insurance
  2. Intellectual property insurance
  3. Car insurance
  4. Health insurance
  5. Employee liability insurance
  6. Worker’s compensation insurance
  7. Other insurances.

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