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RBI Guidelines on NBFC

As merger and acquisition are increasing day by day in whole corporate world similarly NBFCs are also playing a major role in compromise and arrangement so after considering the industry demand RBI has laid down the procedure for the takeoverof NBFCS


This procedure is for NBFC Takeover or change in the management or control whereas in terms of changes we can say that only significant changes requires the prior approval of RBI

STEP-1 Acquirer of NBFC can first view the documents of the company which want to takeover i.e Target company and ones if satisfied then confirms the acquisition of the said NBFCby signing the MOU with some token money.

Step-2 As per RBI Notification No.DNBR.(PD).029/CGM (CDS)-2015 dated July 9, 2015 in the following scenario as discussed below  we need to take first rbi written permission :

  1. any takeover or acquisition of control of an NBFC, which may or may not result in change of management;
  2. If there is any variation in the shareholding of an NBFC which  results  in acquisition / transfer of shareholding 26 per cent or more of the paid up equitycapital including progressive increases over time;

Whereas when shareholding going beyond 26% because of buyback of shares / reduction in capital as per the approval of a competent Court. Then it is to be reported to the Bank within one month from its occurrence;

  1. Any change in the management of the NBFC which would result in change in more than 30 per cent of the directors, excluding independent directors.

Whereas it is not required in case when directors got re-elected through retirement by rotation.

This circular will not make any changes in the requirement of informing to rbi regarding changes in management / directors in the following rules a) Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998,b) Non-Systemically Important Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2015 and Systemically Important Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2015.

Step-3 NBFC company has to make application to rbion its company’s letterheadfor its approval along with the following documents as described below :

  1. Proposed directors / shareholders information
  2. Sources of funds required for purchasing shares  ofNBFC byshareholders:
  3. A declaration by all the proposed directors/ shareholders stating that they are not connected with any entity accepting deposits.
  4. Bankers report regarding proposed shareholder and directors
  5. A statement or declaration by the proposed director and shareholder that against them there is no criminal case including offence under sec 138 of the negotiable instrument.
  6. Declaration from proposed director and shareholder that they are not associated with any company whose application has been rejected by the RBI for certificate registration.

Application must be submitted to the Regional office of the department               Non Banking Supervision in which registered office of the company is situated. All queries raised by RBI should be answered timely in order to avoid further delay application of nbfc normally take 3to 4 months in normal course of business.

Step-4   Requirement of Prior Public Notice when there is change in control / management

In regard to the transfer of ownership through sale of shares or transfer of control whether share transfer will or will not be there that notice should be given publically through one leading national and one leading local newspaper at least 30 days before effecting such sale or transfer.

The notice shall indicate following points:

  1. Purpose to sell or transfer control/ ownership
  2. The details of transferee
  3. Reason for such sale or transfer of ownership/control

Step-5 Once above conditions are satisfied and approval from RBI has been given then share purchase agreement is prepared and signedand the management is handed over to the acquired company and if any  consideration remaining , shall be paid off within 31 days of the public notice in the newspaper or as mutually decided between  the parties. After that, all assets of the target company as shown in the balance sheet will be liquidated and liabilities will be paid off, and the acquirer will receive a clean bank balance in the name of a company which will be calculated on the basis of net worth as on the date of the takeover.

In order to conclude we can say that although it’s a lengthy process but systematically approach is needed for timely completion.

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