NBFC Takeover

Takeover of NBFC implies purchase of one NBFC by the other company. Only registered NBFC under the Act shall undertake to acquire the control of another NBFC

What do you understand by term NBFC?

The term NBFC stands for Non-Banking Financial Company registered under the Companies Act. Its main business activity is giving loans and advances, assets financing, investing in shares, debentures and other marketable securities. It also provides working capital loans and credit facilities.

How many types of NBFC’S are there?

There are two types of NBFC:

  1. Deposit accepting NBFC.
  2. Non-Deposit accepting NBFC.

What do you mean by the term takeover?

The word takeover means the purchase of one business entity by another. In this two kinds of entities are involved: a) Target Company means a company which is being targeted to be acquired by the other company b) Acquirer company means a company which is acquiring the target company.It can be done either as a friendly takeover wherein the takeover take place between the companies with their mutual consent or a hostile takeover wherein acquirer Company secretly tries to acquire the acquired company.

Emerging need of NBFC Takeover?

In the whole corporate scenario around the world mergers and takeovers are strongly making its presence. NBFCs, being considered as near substitute to the conventional banks are also coming under the impact of these compromises and arrangements. For this, Reserve Bank of India lays down the procedure for the takeover of NBFCs. Takeover of NBFC implies purchase of one NBFC by the other company. Only registered NBFC under the Act shall undertake to acquire the control of another NBFC.

What is the procedure for the takeover of NBFC?

Step-1

  1. Requirements of the prior approval of RBI during NBFC takeover
  • In terms of prior approval we understand that when there is significant changes in the management or acquisition of control of NBFC whereas minor is kept outside the purview
  • Following conditions are required to be satisfied for obtaining the prior written permission of RBI for acquisition or transfer of control of NBFCs:
  • A) Takeover of NBFC or acquisition of control, which may or may not results in the change in management
  • B) There is acquisition or transfer of more than 26% shareholding in the NBFC’s paid-up equity capital however it would  not be required in case of any shareholding going beyond 26% due to buyback of shares/ reduction in capital where it has approval of a competent court,”
  • C) There is acquisition or transfer of more than 10% shareholding in the NBFC.
  • D) Change in the management by way of change in more than 30% of the directors of the NBFC but if there is change due to change in independent director or by rotation of directors in the board no approval is required.

Step-2

when the above conditions as mentioned in step -1  are satisfied then next step is to make the application to the RBI for the approval on the letterhead of the company along with the following documents as described below:

  1. Information of Proposed directors/shareholders;
  2. Details regarding sources of funds of the proposed shareholders required for acquiring shares in the NBFC;
  3. A statement by all the proposed directors/shareholders stating  their non-association with any entity accepting deposits
  4. A statement by all the proposed directors/shareholders stating  their non-association with any entity which has been denied of Certificate of Registration  by the RBI;
  5. A statement by all the proposed directors/shareholders , specifying their non-criminal background as well as non-conviction under section 138 of the Negotiable Instruments Act;
  6. Bankers’ Report of all proposed directors/ shareholders

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 for obtaining the prior approval before undertaking such arrangements. The Reserve Bank may arouse various queries and all such queries shall be answered with the time frame in order to avoid undue delay in processing the application from RBI side. Approximately around two to three months is required for getting the approval depending upon case to case basis.

Step-3

PRIOR PUBLIC NOTICE IN CASE OF CHANGE IN MANAGEMENT / CONTOL

After getting approval from RBI in  accordance with step-2  if there is change in management/ control a public notice shall be given in one leading national and one leading local newspaper 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 the public notice:

  • Intention to sell or transfer ownership/control
  • Particulars of the transferee
  • Reasons for such sale or transfer of ownership/ control

Step-4

PREPRATION OF SHARE PURCHASE AGREEMENT :

After the public notice of NBFC Takeover the shareholding agreement is made between the acquirer and transferor, the management of the transferor company is handed over to the acquirer and if any consideration remaining shall be paid off within 31 days of the public notice in the newspaper as mutually agreed by all the parties.

Step-5

TRANSFER OF ALL ASSETS AND LIABILITIES OF THE TRANSFEROR COMPANY TO TRANSFEREE COMPANY:

After the signing of share purchase agreement, the assets of Transferor Company present in balance sheet will be discharged and liabilities will be paid off and acquirer will just receive a clean balance in the bank on the name of company which will be calculated on the basis of net worth as on the date of the takeover.